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CHAPTER 5 Competitiveness in the International Contents

Page Overview .**O. ..** .**. ... *.*. **. .*ma*** *.** e.. **. .*** *. .*0.*...*.*.*** 163 Comparative Advantage and Competitiveness ...... 164 The Economics of Competitiveness ...... 164 Market Distortions and Nonmarket Factors ...... 168 The Role of ...... 169

Other Perspectives on Competitiveness .0.0.., ● .0.,...... 00... .0.. 171 Productivity ...... 171 Market Share ...... 173 Indicators Based on Technology ...... 175

International Competition in Electronics ● 0.0..0 ● .**...* ....0.0...... ● ., 177 Evaluating Competitiveness ...... 177 International Business Strategies ...... 179

Strategies in ,.0.0.0 .*.....* ....*.*. ● ....,.. ..0...0 180 Japan ...... 180 The American Response ...... 182 Foreign Markets ...... 184 Other Consumer Electronic Products ...... 186

Semiconductors ...... ● ..*...... 0,. ● ...0... .,**..*. ● ..**.** ...**... 187 United States ...... 188 Japan ...... 196

Computers ..*.**.. .*..*.,.* ● 9*.*.*.* .**.*..** ● .**.**** ● **..*.*. ● .**.** 200 The Environment for U.S. Suppliers ...... 200 Japan ...... 206 Summary and Conclusions .....*O .,.,.0.. .*.*...... 0..0.. 212

List of Tables Table No, Page 43. U.S. Gross Domestic Product (GDP), Exports, and Imports ...... 175 44, Imports of Color as a Percentage of Total US. ...... 183 45. Proportion of Sales Accounted for by Products...... 198 46. Expenditures of Several U.S. Manufacturers, 1981 ...... 209

List of Figures Figure No. Page 32. of Economic Activity in Several Countries ...... 173 33. World Exports of Manufactured ...... 174 34. Distribution of U.S. Semiconductor Sales by End Market...... 188 35. Market Segmentation of U.S. Computer Sales by Value ...... 202 CHAPTER 5 Competitiveness in the International Electronics Industry

Overview

According to numerous American business promises to improve. One danger was illus- and political leaders, other nations are over- trated by the course of discussions over U.S. taking the United States in trade competitive- industrial policy during 1980, which were dom- ness. Growing import penetration in such in- inated by the issue of “winners” as opposed dustries as automobiles, steel, and electronics— to “losers,” or “sunrise industries” and “sunset including high-technology products like com- industries ”-a debate that hindsight shows to puter memory chips-has led to discouraging be beside the point. commentaries and a variety of diagnoses. But from their statements, international competi- This chapter begins by sorting through per- tiveness clearly means different things to differ- spectives on competitiveness, primarily in the ent people. Some see the United States losing context of electronics. Discussion then turns competitiveness as a nation relative to econom- to the practical problem of evaluating com- ic rivals like Japan or West Germany; to such petitiveness and attempting to isolate factors observers, the declining U.S. share of global that have affected the ability of American elec- trade in manufactured products—from 25 per- tronics firms to compete internationally. At- cent in 1960 to 18 percent in 1980—is prima tempts to measure [competitiveness in an indus- facie evidence that the Nation is losing com- try with rapidly evolving technology are at best petitive vigor. On the other hand, OTA in its indicative. From the viewpoint of Government past has evaluated competitiveness on a policy, choices then hinge on dynamics—direc- sector-by-sector basis—believing this to be tions and rates of change, their causes. Projec- more meaningful than attempts to generalize tions always carry uncertainty. It may not be about the economy as a whole, easy to discriminate short-term competitive shifts from the longer term secular trends of That multiple views on international compet- most concern to policy makers. Some portions itiveness coexist would be of little moment if of an industry may be in competitive decline similar policy remedies followed. But they do while others prosper; a few years later posi- not. Viewing competitiveness from an aggre- tions may reverse, Within a single firm, various gate perspective directs attention toward pol- divisions will differ in their ability to compete, icies affecting the economy as a whole, and Within a division, some product lines may fare perhaps toward measures intended to promote better than others. Because technical change, exports. Policies aimed at improving overall itself not very predictable, is central to com- productivity, encouraging capital investment, petition in electronics, “measuring” competi- reducing inflation rates, or stimulating eco- tiveness in any simple sense is impossible. In nomic growth may have little or no impact on order to link the technological elements with patterns of trade. In contrast, viewing compet- other business, economic, and policy variables, itiveness in the context of individual sectors the chapter concludes with an examination of —such as steel—is more likely to suggest rem- business strategies, edies tailored to the problems of these sectors. Alternatively, the sectoral perspective might Comparing strategies pursued in various suggest that Government support be directed parts of the world—how firms in several coun- to industries whose international trade position tries have taken advantage of the

163 164 International Competitiveness in Electronics available to them—yields insights into competi- Japanese firms now seem likely to take the tive shifts. Corporate planners have options in lead in future generations of consumer elec- deciding how to utilize existing technologies. tronic products. In part, this competitive At the same time, corporate strategies affect success—including the massive inroads into the course of technological development itself, the U.S. market for color televisions summa- as firms decide how to allocate resources for rized in the previous chapter—was fueled by research and product development. In elec- low costs and supportive gov- tronics, strategic patterns vary across national ernment policies. But compared to the aid industries and among countries. In contrast to Japan’s Government has channeled to micro- manufacturers of semiconductor devices and electronics and the information industries, , U.S. consumer electronics firms assistance for consumer electronics has been have seldom approached their markets on a relatively small: low costs and prices (including world scale; while taking advantage of offshore proven instances of dumping), good products, production sites and exporting technology and aggressive led the way. Technol- when they could, they have otherwise been ogy is a more potent competitive weapon in content with the large and formerly lucrative or computers than in consum- domestic market, On the other hand, Japanese er electronics—one of the reasons American entrants in consumer electronics-and to some firms, with their proven ability to turn technol- extent the Dutch multinational —pro- ogy into successful commercial products— duce and sell all over the world. In microelec- have been able to preserve many of their tradi- tronics and computers, the situation is re- tional markets. Low costs are still important, versed; here it is American firms that led— but a unique or a better per- investing overseas and exporting long before computer system offer advantages of Japanese firms were factors in this part of the a kind that can seldom be achieved in con- industry, sumer products.

Comparative Advantage and Competitiveness

The Economics of Competitiveness Definitions of competitiveness in terms of comparative advantage—with roots going back Is Comparative Advantage Still to the origins of social science--state in essence a Meaningful Concept? that nations tend to export goods (or services) that best utilize their available resources, and To some, the traditional explanation of inter- to import other items; i.e., they export goods national trade flows in terms of comparative in which they have comparative advantage. advantage is a relic—made obsolete by national This is not so obvious as it first appears. For industrial policies. Still, without denying the instance, it follows that any nation engaging reality of government interventions and their in international trade must have comparative effects—whether these be nontariff barriers re- advantage in some products. Except for finan- stricting inflows of goods and funds for invest- cial flows of one type or another, imports must ment, or incentives to attract foreign capi- be paid for by the proceeds from exports. tal—comparative advantage provides a useful Therefore, from the viewpoint of comparative backdrop for more detailed analyses of trade 1 advantage, it is meaningless to speak in terms and competition. of a nation being uncompetitive. If a country I For one view of the limitations of the comparative advantage trades at all, it must be competitive in some- perspective in a context of rapid technological and industrial thing. change, see M. F. Cantley and J. A. Buzacott, “Industry Scale, Free Trade, and Protection,” Scale in I+oduction Systems, 1lASA The word “comparative” plays dual roles in Proceedings Series, vol. 15, J. A. Buzacott, M. F. Cantley, V. N. Glagolev, and R. C. Tomlinson (eds.) (Oxford: Pergamon Press, the definition. First, how do industries relate 1982), p. 193. one to another within a country on their effi- Ch. 5—Competitiveness in the International Electronics Industry 165 ciency in using resources? In principle, this While U.S. exports have often been based on comparison should yield a list of industries technological leads, in other cases trading ad- ordered from most to least efficient. (The pre- vantages may stem from en- cise meaning attached to efficiency is not criti- dowments. This country’s exports of land- cal, but it refers essentially to costs.) All else based products—food, fiber, timber, paper— equal, nations would be expected to export are the consequence of an abundance of arable goods that appeared near the top of their effi- land combined with high-technology inputs. ciency listing, import those closer to the bot- Conversely, Japan would be hard-pressed to tom. Such an outcome does not depend on how develop agricultural advantages–regardless of these efficiencies compare to the efficiencies technological expertise—because of her scar- of the same industries in other countries. It de- city of good land. pends only on the relative standing of domestic Nations may also be able to maintain market- industries. The fact is that industries at the top based advantages in particular industries, ad- of one country’s list can have ‘‘efficiency” lev- vantages that can persist over long time peri- els below those of the same industries abroad ods. The American lead in commercial aircraft, and still export. The first characteristic of an or some types of capital equipment—e.g., gear export industry, therefore, is that it be efficient cutting machines—may not have resulted from in its use of resources relative to other domestic unique technological skills so much as that cer- industries. tain kinds of products first found large markets The second comparison adds the interna- in the diversified and affluent U.S. economy. tional dimension. Here, the efficiency structure Likewise, the Japanese lead in VCRs is now so of one nation’s industries is compared with great in terms of production scale and develop- those of its potential trading partners. Where mental experience that it would be very diffi- the efficiency structures of two countries differ cult to overcome. —the usual case—trade can be advantageous None of these examples detracts from the pri- to both. The United States might in principle macy of relative costs of production and distri- be just as efficient in the production of video bution in determining international trade cassette recorders (VCRs) as Japan; but if U.S. flows. When a nation has comparative advan- efficiency is greater in, say, , it tage in a given product, that advantage is usual- would pay both countries to trade—the United ly visible as lower costs and prices, Sometimes States shipping agricultural goods to Japan manufacturing costs themselves may be the while importing VCRS, Even given identical chief indicator—this has generally been the cost structures, trade might be advantageous case in consumer electronic products. Some- where demand conditions differ between two times price/performance ratios must be exam- countries. Of course, such a discussion leaves ined—the more typical situation for computer out a host of other forces—ranging from tariff systems. In an industry like steel, where it has levels to export subsidies—that can affect trade been clear for more than a decade that Japan patterns. Still, comparative advantage provides has a comparative advantage in production a starting point for examining these. costs with respect to the United States, the

Technology plays a central role in electron- crucial questions—particularly for public pol- ics. Some countries may possess technological icy—then concern sources of advantage or dis- expertise unmatched elsewhere, hence be able advantage, from the national perspective how to export products that no one else can make. to capitalize on the former while minimizing More often, technology is a route to lower cost the latter. manufacturing or to products that perform bet- As the discussion above suggests, most cost- ter. A number of nations that could manufac- based comparative advantages can be explained, ture computers do not because countries like at least to first order, in terms of resource the United States can make better computers availability and technology, Countries with am- cheaper. ple supplies of capital relative to labor can ex- 166 ● International Competitiveness in Electronics pect to excel in industries that rely on capital- advantage may leave the United States less intensive production methods—e.g., synthetic competitive in industries that once were lead- fibers or primary metals. On the other hand, ing exporters. where production methods call for large num- bers of unskilled workers, nations with abun- Some observers argue that the competitive- dant supplies of such labor—hence low labor ness of the United States has declined because costs—are likely to be the more efficient pro- its percentage of total world exports of indus- ducers. Clothing and apparel, where much of trial products has fallen relative to nations like the output is still hand-stitched, are well-known West Germany or Japan. Such changes, how- examples. In consumer electronics, low labor ever, are virtually inevitable in a world where costs have helped Asian nations such as Japan, industries in other countries have been grow- South Korea, and Taiwan achieve strong com- ing much faster than those in the United States petitive positions; although automation has in- —overseas growth built in many cases on tech- creased, assembly remains labor-intensive. Sev- nologies painstakingly developed here. Similar eral American industries that have been los- fates are likely to befall the countries that today ing competitiveness depend on substantial in- are experiencing the highest rates of economic puts of both labor and capital. To make either expansion. Such nations as Brazil, South Ko- steel or automobiles requires large capital in- rea, Mexico, and Taiwan are steadily increas- vestments (in most but not all cases), while ing their share of world trade in manufactures. labor content is also high. Labor is expensive As these and other economies continue to in- in the United States, while the Nation’s advan- dustrialize, the current leaders are likely to find tages in technology and capital are not so great themselves losing ground in sectors that might as 25 years ago. These long-term shifts are now be mainstays. Certainly Japan’s relative creating difficult problems for this pair of tradi- advantages in steel or consumer electronics are tionally important American industries. not nearly so great as they once were.

Consequences 2. If a nation overall rate of productivity growth—however productivity be defined and For every comparative advantage, such as measured—is lower than in other countries, the United States has had in computer systems, this need not result in losses of competitiveness there must be a comparative disadvantage, as for all that nation’s industries, provided ex- now found in steel. Given flexible exchange change rates are free to adjust. Instead, real per rates, the value of a country’s exports will nor- capita income will decline relative to other mally counterbalance its imports almost exact- countries, This may be a serious consequence, ly, since in a very real sense nations must use but should not be confused with impacts on the proceeds from exports to purchase their im- competitiveness. Productivity growth does af- ports. While this may seem straightforward, the fect international trade flows, but again in a consequences are not so obvious, Listed below relative way: firms and industries where produc- are four general conclusions that follow from tivity growth is lower than average can expect the earlier discussion, to find themselves moving downward in a na- tion’s efficiency ordering. 1. If a nation engages in international trade, some of its industries are by definition competi- Nothing has yet been said about U.S. levels tive, but some are also uncompetitive. It is, to of productivity, cost, or efficiency compared reiterate, impossible for a trading economy to to other countries, The comparisons have been lose competitiveness overall, since the very ex- internal. But it does follow that, if U.S. per istence of trade implies that some sectors are capita income is to remain high, productivity price competitive while others are not. From levels must keep pace with those of our trading a comparative advantage perspective, it makes partners. At the same time, the sad fact is that no sense to state that the United States is los- an American firm or industry might be more ing its ability to compete. What can happen is productive—or otherwise efficient in its use of that, over time, shifting patterns of comparative resources—than its overseas rivals and still not Ch. 5—Competitiveness in the International Electronics Industry ● 167 —

be competitive. The examples drawn on earlier ● responses to the investments by both can illustrate the point. In American industries domestic and foreign competitors, and like steel, apparel, consumer electronics—even ● the opportunities. . available to other trading shoes—labor productivity is as high or higher sectors both here and abroad—far from than in most foreign countries, yet these indus- last in importance. tries are in competitive difficulty. (The primary exceptions to this statement come when reces- It is an unpleasant fact that the realities of glob- sions in the United States are out of phase with al comparative advantage may leave no simple those in other parts of the world; productivity remedies for a firm or industry bent on regain- levels depend on capacity utilization and can ing its competitiveness. Substantial capital in- drop rapidly during downturns.) While these vestment might be necessary to maintain the industries may be more efficient than their in- status quo but insufficient for improving com- ternational rivals, other domestic sectors do petitive ability. better still. U.S. manufacturers of color TVs A brief example will illustrate: American have not been sufficiently more productive automobile firms have been undertaking exten- than the average U.S. company to maintain sive programs of product redesign, accom- their competitiveness; other American goods panied by investments in new manufacturing are more attractive to our trading partners, im- facilities, intended to restore price competitive- port competition in TVs stiffer, The first com- ness and profitability. The investments are parison for domestic industries is then their huge, and clearly necessary if the industry is performance with respect to the rest of the to again be competitive. Still, to succeed, these domestic economy, again leaving aside distort- spending programs must do more than keep ing factors such as trade barriers or subsidies. the U.S. industry on a par with productivity levels in Japanese automobile firms–if only 3. This conclusion follows: When industries because wages here are considerably higher. experience relatively rising costs in world mar- These wage levels reflect, not only the high pro- kets, and lose market share both at home and ductivity levels attained by U.S. automakers abroad, the price system may be signaling that over the years, but also the lead in aggregate resources should be reallocated internally—i. e., labor productivity that the United States still that domestic restructuring is necessary. To maintains with respect to Japan. To be compet- restore the competitiveness of declining indus- itive, the U.S. automobile industry must find tries would often require productivity improve- ways to exceed the productivity levels in the ments—for instance, through improved manu- factories of its overseas rivals—the same prob- facturing technologies—greater than experi- lem American steelmaker have faced since the enced elsewhere in the economy. 1960’s. Given the available production tech- nologies, this might not in fact be possible; cer- This may seem an especially harsh reality. tainly the steel industry has not found the key. It implies that a firm can take advantage of the, latest developments in product technologies, 4. A further conclusion, relating to Govern- manufacturing processes, or both—but still not ment initiatives aimed at improving overall improve its ability to compete. Whether or not productivity: if such policies succeed—that is, it can strengthen its position will depend on if average productivity across all industrial sec- factors such as: tors were to increase faster here than in other countries—then some formerly competitive ● the attributes of the technologies the com- American industries might become uncompeti- pany invests in (or the other investments tive, Productivity improvements do not occur it makes), uniformly across an economy; some firms and ● the subsequent impacts on productivity industries improve faster than others. In terms compared with the rest of the domestic of competitiveness, when some improve others economy, will decline—even if the declining firms or in- 168 ● International Competitiveness in Electronics dustries experience productivity improvements within the economy—is a theoretical outcome of their own, and even if they improve faster that is seldom very closely approached. On the than their rivals overseas. other hand, differential effects can rarely be quantified with much precision—and if they This is a nontrivial conclusion. Phrases such could, political choices among alternatives as “getting the economy moving again” or “re- might be more difficult than they are now. industrializing America” often seem to suggest that all industries can begin to compete inter- The essential lesson is that any policy nationally once new policies—whether changes adopted by Government will result in winners in Government regulations, a revised tax struc- and losers, In an open economy, it is not possi- ture, encouragements for exporting—are put ble to simultaneously help all sectors compete into place. Unfortunately, this is highly improb- with foreign enterprises, The nature of the eco- able, if not impossible. The actual outcomes nomic process dictates that choices be made will depend on relative impacts—for instance, when formulating public policies—choices that on how changes in tax law affect capital invest- discriminate implicitly if not explicitly among ment decisions and hence manufacturing ef- sectors, and sometimes among firms. ficiency across industries. Likewise, Govern- ment programs aimed at encouraging exports —removing disincentives, promoting Ameri- Market Distortions and can goods overseas, even providing subsidies Nonmarket Factors such as tax benefits or low-interest loans—are unlikely, by themselves, to have more than mar- In assuming that prices in world markets de- ginal effects on competitiveness. Export incen- pend only on costs and on the qualitative char- tives are puny weapons for combating struc- acteristics of goods that lead customers to per- tural problems, and—as experiences in several ceive value in them, the previous section left European countries show—even massive sub- aside many of the forces affecting competitive sidies may be little help to an industry whose events. In reality, market distortions of several costs are too far out of line. types can affect prices, as well as resource allo- cations and other economic decisions. One ex- Many of these points apply across firms ample occurs when governments provide within an industry as well as across industries. otherwise uncompetitive industries with sub- Manufacturing sectors are typically populated sidies—direct payments, preferential alloca- by a spectrum of companies ranging from most tions of , tax benefits, protection from im- to least efficient. In a relative price sense, some port competition, As such a list suggests, dis- of the producers in a given country maybe ful- tortions can be introduced by policies having ly competitive while others face difficulties. A targets—whether direct or indirect—quite apart particular Government policy might help all from international trade, Several European firms in a given industry; an alternative meas- countries openly subsidize industries in order ure might help some firms but not others; still to maintain employment levels, Some of these other policies might hinder all uniformly. In same countries point to the alleged advantages electronics, tax for research and devel- American high-technology firms get from R&D opment (R&D) are more likely to aid semicon- expenditures by the U.S. Department of De- ductor firms intent on being at the leading edge fense. of the technology than those that concentrate on low-cost production of standard devices, In Pricing practices can also create distortions a complex economy like that of the United —e.g., dumping, normally defined as selling ex- States, it is not easy to determine a priori the ports at prices less than charged domestical- outcomes of any particular set of policies. Even ly. Dumping is considered an unfair tactic if the objective is to aid all firms, this may be under the rules of GATT (the General Agree- impossible, A neutral policy—either among ment on Tariffs and Trade, ch. 11); govern- firms within an industry, or among industries ments typically attempt to counter such distor- Ch. 5—Competitiveness in the International Electronics Industry 169 tions in rather direct , aiming to im- ican firms time to recover from recession and prove the operation of the price system. At least adjust to rapidly shifting market conditions; in principle, dumping margins can be offset by this step was taken even though there were few added tariffs, subsidies by countervailing indications that trade restrictions would be a duties. Remedies are less straightforward when significant aid to recovery. In consumer elec- the sources of impacts on pricing decisions are tronics, orderly Marketing Agreements have remote from the marketplace. The Tokyo been negotiated to soften the impacts of rising Round Multilateral Trade Negotiations, com- import levels. In these and other cases, political pleted in 1979, addressed one of the more com- pressures—here and abroad—often carry more plicated of these: implicit subsidies to ex- weight than economic indicators. The latter, porters. Examples include government pay- for example, might instead suggest a need to ments for R&D directed at domestic objectives shift resources to more competitive sectors. It —such as military —which also, pos- is precisely when political pressures are most sibly as a side-effect, improve international intense that the benefits of alternative policies competitiveness. In the United States, technol- should be widely aired before decisions are ogies such as semiconductors and computers reached; the travails of the American steel in- (in their early days), jet engines, and nuclear dustry have been aggravated by refusals, span- powerplants have benefited from such expend- ning many years, to directly confront the fact itures, All have been strong export sectors for of shifting comparative advantage. the U.S. economy. In recent years, countries like Japan and France have targeted commer- The Role of Technology cial technologies and commercial industries quite overtly (ch. 10). While the Tokyo Round Any given technological development—a negotiations resulted in a new subsidies code new or improved product, a more efficient to be implemented through GATT, this is only manufacturing process—is likely to make some a small step toward resolving such issues. countries more competitive, others less com- petitive. For example, user-friendly software In other cases the problem may not be dis- for numerically controlled (NC) machine tools torted price signals, but market outcomes would improve productivity most in countries judged unacceptable. The most common in- that have a large base of NC machines coupled stance—at least in terms of the frequency with with a shortage of skilled parts programmers. which the argument is invoked—has probably More generally, even if the technology is wide- been the uncompetitive industry claimed es- ly available and all nations are able to imple- sential for national security. A number of coun- ment it, some economies will benefit more than tries have refused to allow open competition others. If a new manufacturing process reduces in computers because they believe domestic labor intensity, the competitive gain will be manufacturing is vital to their military greatest for countries with high labor costs, strength. In the United States, spokesmen for least for those with large numbers of available the machine tool, steel, and automobile in- workers. Even the most sophisticated new con- dustries have advanced the national security sumer electronic products may continue to be argument, manufactured largely in the Far East so long At other times, unfettered competition is op- as production requires sizable labor inputs. The posed for social or political reasons, The U.S. effects of new technologies on international textile and apparel industry receives trade pro- competitiveness depend, therefore, on attri- tection partly because it employs large num- butes which must be related on a case-by-case bers of low-skilled minority workers who might basis to the resources available in each coun- have difficulty finding jobs elsewhere. When, try and their costs, the mix of products manu- in early 1981, the Japanese were persuaded to factured and sold, and existing patterns of limit exports of automobiles to the United trade, Impacts of R&D projects—developments States, the ostensible reason was to give Amer- in both products and processes—are inherently 170 ● International Competitiveness in Electronics difficult to predict. This can be troublesome for of individual firms at product development policymakers. When, if ever, does it make sense have more direct consequences for competi- for government to select promising research tiveness than do government R&D policies, al- areas for generalized support? To provide di- though the latter help shape and direct tech- rect funding intended to maintain existing nical progress. technological leads or foster new competitive enterprises? To support the development of Today, it is difficult to maintain purely tech- avowedly commercial products? Different nological leads. Unless knowledge of the tech- countries give different answers at different nology is coupled with unusual resource re- times. Even when the thrust of an R&D strat- quirements—large capital investments, sophis- egy might seem sensible, the consequences can ticated research facilities—diffusion among in- be other than anticipated, It is entirely possi- dustrialized nations will be rapid. Moreover, ble that a program sponsored by the U.S. Gov- the flow of technical information is no longer ernment could result in new products or proc- so one-sidedly from the United States overseas esses better suited to the economic environ- as during the 1950’s and 1960’s. Firms in many ments of our competitors. countries now have the ability to locate and license the technologies they need, or to quick- “Technology gaps” have been an important ly duplicate products and processes developed source of U.S. comparative advantage in the elsewhere. past—notably in computers and semiconduc- In essence, this means that gaps in technol- tors. Europeans tended to believe, as recently ogy should be viewed as largely self-closing, as the late 1960’s, that technology gaps favor- if only because it is easier to catch up by im- ing the United States would be a permanent itation than to create new knowledge. While —and undesirable—feature of international some Americans continue to lament the pass- trade, z These technological advantages have ing of clear-cut leadership by the United States, never resided so much in fundamental knowl- there is little to be done except to work hard edge—whether of the sciences or engineer- on our own technical abilities; it is plain that ing—as in the abilities of American firms to other countries can make a great deal of prog- build on the existing knowledge base. Apply- ress with imported technologies provided they ing new technical knowledge can be a greater have capable people and adequate capital for challenge—a different kind of challenge—than investment. virtually all the nations that com- generating that knowledge in the first place; pete with the United States have taken advan- the guideposts are seldom so clear, the skills tage of this avenue. Japan consciously followed differ. In sectors as dissimilar as agriculture a strategy of purchasing technology from Euro- and electronics, the United States has been at 3 pean and American companies. Importing for- the forefront in R&D and its applications; in eign technology has, in fact, been a central ele- both, exports by U.S. multinationals have been ment in Japanese economic development since characterized by continual product/process de- the late 19th century. velopments. Even so, in , these commercial developments have often pro- Although Japan has recently been the most ceeded without a well-established foundation conspicuous in adapting foreign technologies, in the physics and chemistry of electron virtually all countries lean in one way or devices. Such patterns are not uncommon; another on more advanced economies to foster computer software, which has very sketchy development. Nations such as Taiwan and Ko- theoretical foundations, is another case. Under rea are doing so today. During the 19th cen- such circumstances, the successes and failures tury, and earlier in the 20th, the United States

3T. Ozawa, Japan Technological Challenge to the West, ‘See, for example, J. J. Servan-Schreiber, The Americ~n Chal- 19501974: Motivation and Accomplishment(Cambridge, Mass.: lenge (New York: Atheneum Press, 1968). MIT Press, 1974). Ch. 5—Competitiveness in the International Electronics Industry 171 —

imported a good deal of technology—e.g., for From the standpoint of the individual firm, making iron and steel. In the postwar period, that technology transfers take place so rapid- German expertise in rocketry helped build the ly makes R&D more rather than less essential. U.S. space program. When the United States Companies that are leading try to stay ahead. develops a synthetic fuels industry, it will de- Those that are behind must do their best to pend to considerable extent on the technology utilize the technologies available to them. The base developed earlier by countries without our United States still maintains technological petroleum reserves. leads in electronics—computer software, mini- computers, , In essence, flows of knowledge among de- automat ion equipment such as word proces- veloped countries have returned to a situation sors. These leads are not as large, nor as broad- more like that before World War II; diffusion ly based, as a few years ago. Because commer- of technology has also been accelerated by the cial advantages are short-lived, continuous ef- activities of multinational corporations. Par- fort is required; in today’s economy, cutting ticularly in electronics, foreign investments by R&D expenditures is often tantamount to ac- U.S. firms have aided infrastructure] develop- cepting a position of dependency on technol- ment in many countries, industrial as well as ogy developed elsewhere, Nations without the industrializing. Even in the absence of joint resources to stay at the leading edge may have ventures or other corporate connections, elec- no alternative. On the other hand, economies tronics firms in many parts of the world now now at the forefront have evolved industrial have the ability to monitor and learn from de- structures adapted to a leadership position. To velopments elsewhere, taking advantage of the slip back means a painful adjustment-not only multiple pathways by which technology moves technical stagnation, but marked shifts in trade inter nation ally. patterns.

Other Perspectives on Competitiveness

Productivity tion between aggregate productivity, or GDP, and economic competition, This relation is not Some commentators hold that an industrial a close one; as pointed out in the previous sec- economy is losing competitiveness if its ag- tion, even countries with very high rates of pro- gregate productivity-i,e., gross domestic prod- ductivity growth cannot be competitive in all uct (GDP) per capita—is growing more slowly industries. Japan’s agricultural sector is inef- than the GDPs of its rivals. The United States, ficient and unable to compete internationally– by this definition, would be declining in com- as a result of which farmers have used their petitiveness relative to most other industrial political power to exact trade protection from nations. Q Great Britain is the obvious example the Japanese Government. Nor do rapid in- of a nation losing competitiveness, in this view, creases in productivity necessarily correlate over several decades. with technical leadership. Japan, with un- matched productivity improvements over the To what extent are definitions of competi- postwar period, has depended on the United tiveness based on relative productivity levels States and Europe for much of its technology. meaningful? The question hinges on the rela- Early applications of robots—an area where Japan has lately gained a justified reputation ‘S[;e [ ,’, S In(fu,itrial (,’{)rrjpf:tltl~t:rlf:5.s, ,4 [,’c)mj)arisor] Of Sfeel, for leadership (ch. 6)–were based on equip- Itt]ef’tror)ic s, and ,\ utornoh~)e.s (wash ington, D,(; .: ( 1,S (Jongrcss, ment imported from the United States. In elec- (j ffi[.e of ‘l’ef,hnologj” Asse\\ment, (jTA-lSC-I 35, July 1981 ], p. b2, for t rends i n gro~s domf;stlc produ{.t I n four (:{)U nt ries (.om- tronics, Japanese companies have only recently ~)arl!fi to the LJ nlted St.ites. begun to compete in product lines character- 172 International Competitiveness in Electronics ized by the newest technology; for the most petition is crucial to their continued healths part, inroads have been in such products as This is an attitude long reflected in U.S. anti- , TVs, and standard semiconductor de- trust law. vices. As Japanese firms move into high-tech- One reason for slow productivity growth in nology product lines, these patterns change; the United States is simply this Nation’s greater still, they belie the significance of aggregate industrial maturity compared with many of its trends in productivity or GDP by themselves. rivals—shown, for instance, by the much great- Indeed, for many years other countries ex- er proportion of economic activity devoted to pressed little concern over Japan’s competitive- services than manufacturing. As figure 32 in- ness despite the growth of that na- dicates, by 1980 two-thirds of the American tion’s economy—some even continued to deni- work force was employed in the sec- grate Japanese products as the cheap and tor. Other industrial countries continue to shoddy output of low-cost labor. employ more of their people in industry, fewer Nevertheless, relative productivity gains— in services; even in the United Kingdom, serv- considered either in the aggregate or on a ices account for only a little over 55 percent, sector-by-sector basis—are central to the Productivity improvements in the service sec- dynamics of any nation’s economy. Differing tor are more difficult to achieve—or at least to rates of productivity growth will, over time, measure. Despite the much lamented decline manufactur- lead to shifts in the structure of international in U.S. productivity growth, the ing trade and thus the competitive positions of portion of the American economy con- firms and industries throughout the world, In tinued to increase its productivity about as fast during the 1970’s as over the preceding 20 the United States, sectors where the pace of 6 technological change has been modest—steel, years. Even if productivity improvements have automobiles, shoes, consumer electronics— lagged in the service sector, the shift has have borne the brunt of restructuring; penetra- brought compensations internationally. Reve- tion of American markets varies considerably nues to American firms for such services as the among these industries, but in each the Federal and of public works Government has resorted to trade restrictions projects—airports, , —have in- to control imports and blunt competitive pres- creased rapidly. As one result, other portions sures. At the same time, even in such indus- of the economy have moved downward in the tries, the stronger U.S. firms have often main- rank ordering of U.S. comparative advantage, tained their ability to compete with overseas In other words, the United States is substituting rivals; most often, the companies displaced exports of services for shipments of industrial were in trouble before imports became a fac- products, importing more of the latter. The sub- tor. In consumer electronics, Zenith and RCA stitution need not imply either rise or decline have lost little in the way of market share, in competitiveness, though imports and U.S. investments by for- Of course, greater aggregate productivity in eign corporations have driven others from the the United States as measured by GDP per cap- business. In steel, domestic minimills have ital—one of the fundamental indicators of liv- steadily won sales in selected product lines ing standards—is a desirable goal wholly apart from larger American steelmaker; they have from its possible influence on competitiveness, done so in the face of stiff import competition, But public policy instruments directed at the Thus, the primary effect of import competition may be to accelerate processes of industrial ad- justment already underway. Market penetra- — sFor a well-known statement of this view, see B, Klein, Dy- tion by imports in such industries need not namic EcorIomics (Cambridge, Mass: Harvard Press, imply that an economy is in overall decline. 1977). These same industries may eventually find ‘U. S. Industrial Cornpetjtjveness: A Comparison of S’teel, Elec- tronics, and Automobiles, op. cit., table 10, p, 61. Annual ~ro- themselves revitalized; indeed, many econo- ductivity growth in manufacturing was 2,4 percent from 1950 mists contend that exposing industries to com- to 1970, 2.3 per-cent from 1970 to 1979, Ch. 5—Competitiveness in the International Electronics Industry ● 173

Figure 32.— Distribution of Economic Activity in Several Countries AgricuIture Industry Services

I I I I — — — —

— — — — — — 1960 u1980 1960 1980 1960 1980 1960 1980 1960 1980 United Japan West France United States Germany Kingdom

SOURCE Wor/d Development Report 1982 (Washington D C World , 1982) general dilemma—i.e., macroeconomic and be reflected in shifting exchange rates, which market promotion policies—would be more in turn will increase the price competitiveness likely to achieve such objectives than measures of some industries while decreasing that of aimed at improving the positions of particular others, industries. The tax reductions and savings stimuli embodied in the Economic Recovery Market Share Tax Act of 1981 are examples of steps that should help improve productivity. Still, even Another common perspective on competi- if they lead to greater productivity growth, tiveness starts with market shares of different there may be little change in the competitive countries. In this view, a drop in the U.S. share positions of many American firms. All else of world manufacturing exports could indicate equal, aggregate productivity improvement will a loss in competitiveness. The popularity of 174 ● International Competitiveness in Electronics market share as a measure of corporate per- of trade; to some extent, market share is noth- formance helps account for the application to ing more than a surrogate for comparing eco- international competitiveness. For measure- nomic growth rates. ment purposes, markets can be defined global- Rather than worldwide exports, would ly, nationally, or regionally. Figure 33 com- shares of the U.S. domestic market or par- pares the U.S. share of world trade in manufac- ticular third country markets make better in- tures to the shares of several other countries. dicators of competitiveness? If the U.S. market Perhaps the most striking point made by the is the basis for comparison, the expansion of figure is the huge expansion in total world trade as a percentage of GDP must be con- trade: a sixteenfold increase between 1960 and sidered. Growth in trade—exports as well as 1980; changes in country market shares, in con- imports—has exceeded income growth in the trast, are matters of a few percentage points. United States, as table 43 indicates. That The United States is now less prominent growth in imports exceeded that for national among exporting nations, but to transfer a pa- income does not, by itself, imply a loss of com- rameter such as market share—with real though petitiveness; indeed, the growth rate for ex- limited meaning in a corporate setting–to the ports over the period in the table is a bit higher, arena of trade between nations risks misunder- standing. Losses in the U.S. share of world If the intent were to evaluate competitiveness markets are virtually inevitable as other nations by examining the exports of advanced econ- progress economically. Starting from a lower omies to nations in the developing world— postwar base, growth rates elsewhere have fre- where the United States has, on the whole, quently exceeded those here. As a result, the declined—the question is then whether Amer- United States has been left with a smaller por- ican corporations have slipped in their ability tion of total world output, and a smaller share to compete with foreign exporters. Is this so?

Figure 33.—World Exports of Manufactured Goodsa

1960 1980 Total $55 billion Total. $880 billion a Exports o f 14 major industrial nations exclud[ng exports to the L-Jntted States Total export f[gures are approximate

SOURCE /nternafforra/ Economic /rtdlcafOrS, Department of COmmerCe, lnternatlOnal Trade Administration, March 1978, p 59 and December 1981, p 34 Ch. 5—Competitiveness in the International Electronics Industry ● 175

Table 43.– U.S. Gross Domestic Product (GDP), ish firms spent $5.8 billion.7 Overseas manufac- Exports, and Imports turing by subsidiaries of American multina- Value in billions of tionals may substitute for goods earlier shipped constant 1972 dollars from the United States. Furthermore, subsidi- 1960 1980 aries may themselves export, adding to the GDP ., ...... : ...... $732.0 $1452.4 shipments of countries with which the United Total U.S. exports . . . . 38.4 161,1 States competes. Does this diminish U.S. com- Total U.S. imports . . . 30,7 109.1 SOURCE De-partment of Com-merce, Bureau of Ec;nomtc A;alysls petitiveness? It would be hard to argue for such a conclusion in the common case of subsidi- aries that owe much of their competitive ad- Not necessarily, and for several reasons—the vantage to technology and skills developed by first being rates of economic growth in par- the American parent. ticular markets. Long- established ties still link traditional trading The point is not to slight the significance of partners-e. g., France and her former colonies. relative market shares, but to note that trade Such patterns tend to be rather stable; the pro- statistics reflect economic currents that may portion of U.S. trade with Canada and Latin be unrelated to competitive ability. Further- America remains high, European firms tend more, wholly exogenous events can have great to have a greater presence in African markets, impact on comparative trade figures. Virtual- Japan has high export shares in the Far East. ly all the countries with which the United If market position in the developing world States competes depend far more heavily on were to be treated as an indicator of compet- imported energy. Changes in oil prices have itiveness, relative shifts in the position of a much greater effects on the trade positions of country such as the United States might sim- such countries; when energy costs jumped in ply reflect the economic growth rates of tradi- the mid-1970’s, European and Japanese im- tional trading partners relative to other devel- ports swiftly rose in value terms, creating sud- oping nations. Moreover, changes in the Amer- den trade deficits. Among the consequences, ican share of exports might indicate nothing exchange rates eventually adjusted to bring ex- more than a varying mix of goods and services ports more closely in line with new levels of sent abroad. If the United States is moving imports (while many countries were able to cut toward increased exports of technologically quantities of energy imports, the value of these sophisticated products and services—and if the imports still tended to increase). One result was imports of developing countries tend to be a reduction in the U.S. share of world exports. lower in technology–then U.S. market share Again, there is no reason why this should im- might decline for this reason alone. Should it ply a shift in competitiveness. be taken as a sign of reduced competitive abili- ty that Japan replaces the United States in ex- Indicators Based on Technology ports of automobiles to, say, Canada at a time when American exports of computers to both According to yet another view, U.S. compet- Canada and Japan are rising? Finally, U.S. itiveness has declined because other nations trade performance on a relative basis could slip have gained ground in technical ability--i.e., because of the activities of multinational cor- the technology gaps that once benefited the porations. American firms have invested heavi- United States have narrowed or vanished. ly abroad compared to their counterparts in other countries, Foreign direct investment by 71nkrnational Economic in dka tors, Ilepa rt mIIII t [jf [Jon] mer{:e, U.S. corporations averaged $15.5 billion an- Int(~rnational ‘1’ra(ie A{irnir]istration, june 198z, p. ~~. The figurw nually over the period 1977-81; in contrast, for the [Jnited Kingdom exclude int’estments by oil companie~, Investment Ie\els fluctuate nlarkedly from year to year; for in- 1 West German companies invested an average stan~e, [ ,S. foreign ln~’estrnents f(~ll by. more than half from I Y8(I of $3.9 billion, Japanese $2,8 billion, while Brit- to 1981, 176 . International Competitiveness in Electronics

While often true in particular cases, such con- and product cycles can move more quickly clusions can only be substantiated by careful than the patenting process. Again, there is no examination on a technology-specific basis; substitute for case-by-case analysis. In semi- generalizations about technological capability conductors, American companies are generally are often suspect. Moreover the implications still the first to introduce new or improved for competitiveness are not always straightfor- designs for or more special- ward; many Japanese companies have followed ized memory circuits—static random access behind and benefited from the experience—in- memories (RAMs), various types of read-only cluding mistakes—of innovators in the United memories (ROMs)—but today their lead is brief. States. Where new products from American firms win acceptance in the marketplace, Japanese man- Attempts to develop indicators of technolog- ufacturers have been quick to follow with ical competitiveness founded on some basis cheap, reliable devices of their own. They ap- other than case-by-case evaluations have gen- pear to have taken the lead in dynamic RAMs, erally focused on patents, occasionally on dates a product where the path of technical evolu- of introduction of new products or processes. tion is well marked, with little uncertainty over By such measures, the relative position of the 10 what the market wants. United States has been declining in many in- dustries.8 Yet patent statistics or product/proc- Likewise in the computer sector, several ess introductions are highly imperfect meas- countries can match American capabilities ures of technical competence, particularly if over a range of hardware. This rough tech- used in isolation. There are simply too many nological parity does not so readily translate factors other than the characteristics of the into competitive ability. Selling computers de- technology that affect them. In some portions mands much more than hardware; commercial of electronics-semiconductors for one-firms success depends heavily on software—a field tend to view patenting as a routine tool of in which American companies maintain a use- business. Rather than a means of “protecting” ful lead, even more so as software costs con- technology, or capitalizing on it in any con- tinue to rise compared to hardware. Also im- certed fashion, a patent may be something to portant are service, a good appreciation of user be bartered. Under such circumstances, cor- needs, and other customer support functions. relations between patent statistics and techno- Although prospective mainframe purchasers logical ability have little meaning. Some observ- tend to have a relatively sophisticated under- ers point to the high rates of patenting by Japa- standing of the technologies offered by com- nese electronics firms (see ch. 10, table 77) as peting manufacturers, customers for small a foreboding sign; however, it seems clear that business or home systems may know less about reward systems in Japanese firms encourage computers than about the family car. Selling patenting regardless of the value of the tech- nology patented.9 Even in the United States, lopi]ot production of 256K RAMs by the major Japanese man- only a small fraction of the patents granted ufacturers began at the end of 1982—evidently well ahead of the could be considered meaningful advances in plans of American merchant manufacturers, though Western the state of the art. Electric announced a 256K chip in mid-1983. See “Recent De- velopments in Japanese 256K DRAM Production, ” japan Report, Patents or similar indicators give an especial- Joint Publications Research Service JPRS L/11128, Feb. 8, 1983, p. 39. Nonetheless, introduction dates do not tell the whole story, ly oversimplified picture in industries like elec- Hitachi was the first to announce a 64K RAM for the merchant tronics where technological change is rapid market, early in 1978. (IB M’s 64K chip entered volume produc- tion the previous year.) However, Hitachi’s required two supply voltages, was rapidly superseded by singlesupply designs ‘Science Indicators 1980 (Washington, D. C,: National Science from other manufacturers, and never mass produced. See “64K Board, National Science Foundation, NSB-81-1, 1981), pp. 16-22. RAM Sweepstakes: Round 4 Winner Is . . . ,“ Morgan Stanley ‘A number of other factors act to encourage patent registra- .?Hectronics Letter, June 29, 1979, p. 1; E. W. Pugh, D. L. Chritch- tions in Japan, including very low fees. See S. Fleming, ‘LIFO 10W, R. A. Henle, and L. A. Russell, “Solid State Memory De- offers View of Rise in Japanese Patents, ” Financial Times, May velopment in IBM, ” IBM Journal of Research and Development, 7, 1982. VO]. 25, 1981, p. 585. Ch. 5—Competitiveness in the International Electronics Industry 177 in such markets is just as much an art as de- Other aspects of the U.S. environment for signing the system in the first place. But the technology development, several discussed main point is that even in rapidly evolving tech- more thoroughly in subsequent chapters, do nologies, the United States cannot expect to give cause for concern. As one example, this maintain the kind of technological leads that country has been lagging in the of existed in the 1950’s and early 1960’s. Other the technically trained people upon whom countries can now keep close—perhaps abreast technological progress depends.13 Japan, with —in fields they choose to emphasize, if not half the population, now graduates more elec- across the board. trical engineers than the United States. And, far more than here, the people occupying lead- While there is no need for pessimism, it ership positions—whether in business or gov- should be clear that the United States cannot ernment—in Japan, West Germany, or France live off its past achievements. U.S. R&D ex- tend to have technical backgrounds, These penditures fell as a proportion of GDP for 15 signs suggest that other nations may be better years before beginning to turn back up at the placed to understand and exploit future tech- end of the 1970’s. Meanwhile countries like nological opportunities. West Germany and Japan have been stepping up their research spending, at the same time Furthermore, the United States allocates as devoting far smaller fractions to military R&D. many as 25 percent of its best technical peo- Still, the United States continues to spend sub- ple to defense-related R&D and production, a stantially more on R&D than any other coun- higher percentage than most other countries try. ” Furthermore, if the United States is able except for the Soviet Union and its allies. While to borrow from other countries as they have it is true that military research sometimes spills borrowed from us, increased R&D spending in over into commercial products, with benefits other nations could help U.S. competitiveness. for technological competitiveness—as hap- In any event, figures on royalty and license pened with computers, aircraft, semiconduc- payments continue to show the United States tors, and nuclear power—it is also true that maintaining a large and growing surplus these are the exceptions, Certainly the fears ex- against other industrial nations; although tech- pressed by Europeans in the “technology gap” nology gaps may be shrinking, the United debate of the 1960’s proved exaggerated: U.S. States is still predominately a source of knowl- spending for defense and space has by no edge rather than a user of skills developed else- means allowed American firms to continue where. 12 dominating high-technology markets. 11 ~r.s !nc]ustrja] COrnpetltjVeneSS: A Comparison of Steel, Elec- tronics, and Automobiles, op. cit., pp. 62-64, See aIso ch, 10 of the present report. Iach, B; See also J. A. i41iC, M, Cal~well, and R. R. Miller, ‘“1’he 12 U.~7, Industrial Competitiveness: A Comparison of Steel, Elec- Role of Engineering Education in ]ndustrial (.:ompetiti~eness, ” tronics, and Automobiles, op. cit., pp. 64-65. Engineering Education, January 1982, p. 269.

International Competition in Electronics

Evaluating Competitiveness importance of the technology and its rate of change means among other things that produc- tion costs—often the primary determinant of Assessing the competitiveness of the United a nation’s ability to compete—are less central. States is more difficult in electronics than in Certainly this is true compared to, say, agricul- most industrial sectors. This is partly a mat- ture or steel. But if cost is less critical in com- ter of the diversity of the industry; few parallels puter manufacture than for color TVs, it is exist between the current situation in con- never irrelevant—certainly not for firms trying sumer electronics and that in computers. The to compete with IBM. 178 International Competitiveness in Electronics

Manufacturing costs in electronics are close- Technological advance also means that many ly tied to a firm’s ability to utilize product as products selling in large volume today did not well as process developments. In most parts exist a few years ago—thus productivity gains of the industry, the advantages of incorporating cannot be calculated at all. How can produc- new product technologies as a means to lower tivity improvements be evaluated for integrated costs—more generally of providing greater val- circuits (ICs) with a lifetime of 4 or 5 years from ue per dollar—far outweigh those of simply large-scale production to obsolescence? Can manufacturing conventional designs more ef- measures of productivity such as value-added ficiently. Even in mature segments of the in- or output per worker-hour for a 64K RAM man- dustry such as color TV, advances in micro- ufactured in 1983 be compared to those for the electronics may lead to new product features 4K RAMs of 1975? What does labor productivi- or simpler and cheaper design approaches not ty mean for pocket —where this feasible earlier.14 Companies that fail to keep year’s offering may be twice as powerful as last pace find their vulnerability heightened, par- year’s? Although manufacturing costs can be ticularly at the low-priced end of the market a vital ingredient in determining sales volumes where import competition is stiffest. for all these products, conventional approaches to international competitiveness must be ap- Because of the changing technology, trends plied with care. in the usual indicators of competitiveness— such as labor productivity (output per hour)— Regardless of the pitfalls and uncertainties, are either unavailable or of little relevance to policy guidance demands insights into whether electronics .15 While chapter 9 examines pro- the United States is gaining or losing ground. ductivity in electronics for insights into im- Electronics is a high-technology field par ex- pacts on employment, output per man-hour or cellence, one in which this country has been value-added per man-hour has less to tell about a leader for decades, If U.S. competitiveness competitiveness. Today’s TV set is a different declines here, there is more to worry about product than those of 10 years ago. Labor pro- than the shifting patterns of comparative ad- ductivity statistics ordinarily assume that goods vantage that affect textiles or even steel. The remain qualitatively the same—a ton of steel, concerns extend beyond declining productivity a bushel of wheat. The more their characteris- growth, beyond the possibility of relative losses tics change over time, the less meaning pro- in per capita income; while these are far from ductivity trends convey. The problem extends trivial matters, it is fair to say that a loss of to many economic sectors, Even steel or wheat technical leadership in electronics would do change; the physical properties of steel im- much greater harm. The Nation’s military secu- prove with better control of chemical composi- rity depends in many ways on electronics tech- tion and processing, the nutritional value of nology. Even more, decline would have dire wheat increases as hybrid varieties are intro- implications for the future vitality of the en- duced, But the rates of change are slow com- tire economy. If the United States were dis- pared to electronics. placed as the primary technical innovator in electronics it would be a symptom that this - 14 For examp]e, ~i~ita] rather than analog Circuitry for Process country was following Great Britain on the ing incoming TV signals carries the potential for greatly reduc- path to industrial decay, ing numbers of chassis parts, thereby cutting assembly costs. In addition, many of the adjustments needed during manufac- turing could be eliminated. See T. Fischer, “Digital VLSI Breeds But is this the case? Much that has been said Next-Generation TV Receivers, ” Electronic.~, Aug. 11, 1981, p. on such matters is impressionistic and emo- 97. Ch. 6 outlines reductions in parts counts in TV chassis over tional—all the more reason to collect and the past decade. “1’hese reductions have helped keep prices stable despite inflation. evaluate the evidence with care. The remainder lscomparatlve shifts in labor productivity over time are one of this chapter examines the question of U.S. of the more useful measures of changes in the competitiveness competitiveness in electronics primarily of a nat ion’s industries, See U. S’. lndustria) Competitiveness; A Comparison of Steel, Electronics, and Automobiles. op. cit., ch. through examination of business strategies. 4, especially pp. 54-58. While consumer electronics, semiconductors, Ch. 5—Competitiveness in the International Electronics Industry 179 and computers are treated separately, some of facturing; success depends on effective ap- the distinctions risk becoming artificial; semi- proaches to markets, approaches that take ac- conductor manufacturers, following their earli- count of a particular firm’s strengths and er attempts to enter consumer markets with weaknesses. As Texas Instruments’ experi- products such as watches and calculators, are ences with digital watches and small comput- busy designing “systems on a chip” to help ers exemplify, state-of-the-art technology is no them move into markets for industrial end- guarantee of ability to bring to market prod- products. Meanwhile, computer firms inte- ucts that consumers will purchase. grate backward to make ICs. Desktop comput- ers sold at blur the line between con- The following pages review some of the sumer and original equipment markets. Are moves and countermoves by participants in personal computers a product of the consumer world markets for electronic products. That electronics sector or the computer sector? The strategic considerations are vital comes as no microcomputer market was developed first by surprise: explications of corporate strategy are entrepreneurial firms, later by companies like a staple of the business press; they provide fod- Tandy Corp.—largely consumer oriented. Now der for professors of business administration, that Digital Equipment and IBM have entered, handsome fees for consulting vastly different enterprises-in size, style, firms, And for good reason. A not inconse- market power—are competing with one anoth- quential part of U.S. economic growth can be er. I B M’s tactics, involving heavy reliance on traced to the ability of American firms to move outside suppliers (including imports of in- rapidly into emerging markets, to commercial- dustrial robots from Japan to be controlled by ize evolving technologies—ability embodied in the company’s ) mark a turn- the managers, technical staffs, and other em- ing point for a firm that in the past has de- ployees of these companies. The success record signed and produced virtually all its own hard- of American corporations extends to technol- ware and software-evidence of the flux within ogies originating in other countries. The tech- this part of the industry. nical underpinnings for digital computers have While many industries go through periods of been fed by the efforts of engineers and scien- rapid expansion and change, evaluations of tists in many parts of the world. One aspect of competitiveness are more problematic in the the American genius has been turning arcane midst of such a process. The marketplace will developments such as the computer into thriv- eventually sort out the winners and losers in ing commercial industries. The skills needed desktop computers, but no one can predict for success in the marketplace can be quite dif- with much confidence which firms will survive ferent from those called on in basic research. and prosper, Because in the end a nation’s in- The British built the first jet plane, ternational trade position is built on the suc- but are no longer much of a factor in the in- cesses and failures of individual business en- dustry; today, the Comet is remembered chiefly terprises—the competitive tactics and strategies for its lessons in metal fatigue. pursued, here and abroad—the remainder of the chapter discusses competitiveness from the Most privately funded R&D—in the United strategic perspective. While such an approach States as elsewhere—is directed toward prod- does not result in direct indicators of competi- uct development. Marketing strategies based tiveness, it leads to an understanding of the on product differential ion have a place even dynamics of trade and competition not possi- at the leading edge of microelectronics or com- ble by other means. puter technologies. Bell Laboratories devotes around 90 percent of its efforts to development, International Business Strategies 10 percent to basic research (a considerably higher proportion of basic research than found Corporations compete on much more than in most electronics firms), That an R&D orga- product technologies and efficiency in manu- nization known best for its more fundamental 180 ● International Competitiveness in Electronics work—including research that provided much process developments, remains a of the foundation for solid-state electronics—in source of U.S. competitive advantage, but other fact gives most of its attention to development countries have become more active in intro- points to the central importance of such activ- ducing new products, as well as new manufac- ities. As the focus on development suggests, turing techniques. This has been one cause of many of the “technology gaps” separating the slipping U.S. competitiveness in industries like United States from its competitors have been steel and automobiles; while innovation in the associated with product design rather than un- electronics industry has certainly not stag- derlying differences in technical capability. nated, the U.S. lead is no longer unchallenged. The microprocessor was an innovation in the Executives of American firms have repeated- semiconductor design; it did not depend on ly found themselves responding to competitive new manufacturing technology, still less on im- thrusts from foreign firms rather than taking proved understanding of the physics of elec- the initiative. These thrusts have involved im- tron devices, aginative, well-researched, and well-designed products, In electronics, new competitive pres- More recently, American electronics firms sures have come most notably from the Japa- have sometimes found themselves in reactive nese, but in some cases also from countries that positions rather than leading in product and are still industrializing.

Strategies in Consumer Electronics

More than in any other industry, Japanese included three parallel strands, First, the ex- companies have come to dominate world mar- port drive began with a focus on market niches kets for consumer electronics, Beginning with that appeared to be served inadequately or not portable radios, the Japanese moved succes- at all by American manufacturers—the kind of sively into a broad range of other products: opportunity that firms anywhere look for when monochrome TV, high-fidelity sound systems, attempting to enter new markets (app. C de- CB transceivers, pocket calculators, color TV, scribes how Phase Linear, an American man- VCRs. Many of these were developed first in ufacturer of stereo components, created a new the United States. Video recorders are a tell- market category with its first product). The sec- ing example; Japanese firms make well over 90 ond strand in the Japanese thrust was to draw percent of the world’s VCRs—a product with on product technologies and manufacturing origins in the laboratories of Ampex and RCA. experience gained in their highly competitive, The product development, manufacturing, and if protected, home market—as well as in export- export strategies followed by Japanese firms in ing to other Far Eastern nations; Japan’s consumer electronics—discussed below in the manufacturers had a strong foundation for sell- context of the U.S. market, although applying ing in the United States. Third, TV shipments with only minor variations to export thrusts were part of a continuing effort by Japanese into Europe as well—have often been trans- companies to export a succession of products ferred to other parts of the industry.16 Thus, of increasing technical sophistication. The they are a logical starting point for an examina- strategy, while carried out by firms that com- tion of business strategies in electronics, peted among themselves, plainly was guided and encouraged by the Japanese Government Japan through MITI (the Ministry of International Trade and Industry) and other agencies. Efforts by Japanese firms to sell TVs in the United States—beginning in the mid-1960’s— Success was by no means guaranteed. In the IeSee, for examp]e, R. Ball, ‘‘The Japanese Juggernaut Lands 1960’s, the U.S. TV market was served by more in Europe,” Fortune, Nov. 30, 1981, p. 108. than a dozen domestic entrants, These in- Ch. 5–Competitiveness in the International Electronics Industry ● 181 eluded some of the largest merchandisers and tutes.17 Despite this, perhaps the most impor- manufacturers in the tant policy support came through TV broad- country. Firms like RCA, Zenith, GE, Sylvania, casting; Japan’s Government has gone farther and Magnavox had patiently constructed na- than most by actively promoting such new tionwide distribution networks. Their dealers technologies as stereo sound for TVs, multi- generally handled servicing and repairs as well plexing to give multiple language capability, as sales. Much of the production of smaller and direct satellite . Such meas- companies consisted of private-label sets for ures have fueled demand in the domestic mar- retailers like Sears, K Mart, and J. C. Penney. ket, helping build a base from which Japanese Although the market was still expanding rapid- manufacturers could achieve scale economies ly, its structure was relatively mature, Such a and export. market is not an easy one to enter, especially The second leg of the Japanese plan centered from abroad. on their selection of products. Here—as later The Japanese manufacturers recognized the case in automobiles—the choice may have their disadvantages: 1) lack of an established been more fortuitous than brilliant. The first distribution and service network; 2) lack of Japanese exports were small-screen sets (ch. 4, recognized brand names, a deficiency accen- especially table 9), where they had experience, tuated (at that time) by the lingering reputation and where solid-state designs contributed to of Japanese goods for shoddy quality. These light weight and portability. For a variety of factors argued against direct competition with reasons, the product lines of American firms entrenched industry leaders such as Zenith and were thin in this part of the market. The Japa- RCA. nese emphasis on small-screen TVs turned out to coincide with rising demand for second sets The Japanese sought ways around these bar- in American homes, demand that was more riers through both technical developments and price elastic than for the first of a family’s marketing strategies. First of all, manufacturers purchases. in Japan moved quickly toward solid-state chas- sis designs, following their earlier successes in Design improvements such as solid-state exporting transistorized portable radios. The chassis helped Japanese exporters bypass tradi- intent was to lower manufacturing costs over tional distribution channels. Greater reliabili- the long run, and—perhaps more important— ty reduced the need for service and repair fa- improve reliability and reduce the need for cilities, as well as for large stocks of spare parts, opening the way for distribution through out- service (ch. 6). Japanese TV manufacturers could not be certain of reaching either objec- lets where low price would have immediate im- tive, American producers chose to stay with pact, Japanese exporters first sold their TVs older technologies, partly in the belief that it through private-brand and discount retailers, a tactic that had worked earlier with portable was too early to expect improvements in either 18 costs or performance from solid-state com- radios. AS part of their marketing plans, it ap- ponents. pears that exporting firms frequently induced retailers to carry their product lines by offer- The development of solid-state TV designs in Japan during the 1960’s illustrates the selec- Y 7E, Sugata and T. Nameka~va ~ “ I nte~ratcxi ( ;lrt:~lits for Tele\l - tive nature of government assistance. The Kan- sion Receivers, ” IEEE Spectrum, Lfay 1969, ~). 64. Three of sai Electronic Industry Development Center Japan’s largest TV manufacturers were in(:luded hlatsushita, served as the coordinating body for a multiyear Sanyo, and Mitsubishi. lfl’[’[lshiba hegan supp]ving Sears with sma]]-screen ~OIOr R&D project directed at using ICs in TV chas- sets as early as 1964. This marked the beginning of Japan color sis, The effort, with funding from ‘I’;’ exports to an} c.ountr~, and the beginning of [J .S. import~ MITI, included five Japanese consumer elec- of this product. See ‘4 I nternatlonal Technological Competitive- ness. Tele\rision Recei\ers and Semiconductors, draft report tronics manufacturers, seven parts suppliers, under ,Natlona] Science Foundation C,rant No. PRA 78-20301, four , and a pair of research insti- (~harles Ri\’er Assot:iates ln(:., Boston hfass,, Jul\ 1979, p. 2-18. 182 . International Competitiveness in Electronics ing higher than normal margins.19 In essence, by higher authority, presumably MITI or some the Japanese tried to make TVs an “off-the- other agency of the Japanese Government, took shelf” item. Note again that this strategy place behind the scenes. Such possibilities can- depended on producing TV sets with consid- not be rejected out of hand, but are not wholly erably greater reliability than had been consistent with the rest of this view: that common. Japanese TV manufacturers took advantage of Instead of head-on competition with en- their protected domestic market to generate the trenched American producers, the Japanese economies of scale needed to compete in the thus located a market niche that was relative- United States. From the perspective of highly ly open, and offered low-priced but well-de- competitive Japanese firms, price-led expan- signed TVs of high quality through price-sen- sion at home might well have seemed a more sitive retail outlets. Indeed, price was a domi- attractive way to maximize learning and scale nant aspect of the Japanese thrust; dumping benefits. complaints brought by U.S. interests were repeatedly upheld, as discussed in chapter 11. The American Response Still, low prices by themselves were far from sufficient for the steady expansion of exports Exports to the United States by Japanese con- that followed this opening wedge. In a pattern sumer electronics firms were by no means now familiar, Japanese exporters widened both new. As early as 1954, Japanese companies had their product lines and distribution channels. begun to manufacture , with much Eventually, they began to assemble TVs in the of the output going into portable radios. Within United States. Japanese manufacturers now 5 years, fully 80 percent of the radios produced compete virtually across the board with Amer- in Japan were solid-state, many of them des- ican consumer electronics firms, utilizing tined for sale in the United States.20 In export- many of the same retail outlets. ing radios, the Japanese gained valuable ex- Some accounts have emphasized the depend- perience that could be brought to bear on the ence of Japanese pricing strategies on the more lucrative TV market. closed nature of their home market. This was a central claim in the dumping proceeding ini- As a consequence of the Japanese emphasis tiated by the Electronic Industries Association on small-screen TVs-and also because of the in 1968. In this view, low-priced Japanese ex- market focus of American producers—most im- ports were only possible in the early years be- ports have been lower priced models, as shown cause of trade protection that kept imports out by the consistently lower percentages in the of Japan; closing their domestic market to TVs value column of table 44. Conversely, Ameri- produced by more advanced American and can manufacturers have continued to concen- European firms allowed the Japanese to charge trate on higher priced, more profitable sets— high prices at home, effectively subsidizing large screen and console models. While im- their exports. Investigations following the 1968 ports have moved up-scale over the years, they dumping complaint provided support for these still account for a considerably smaller propor- allegations. tion of the market in dollar terms than in units. On the other hand, dumping in international Now that many Japanese companies assemble markets implies monopolistic pricing by Japa- TVs here, more of the imports come from Tai- nese firms that, most observers concede, com- wan and South Korea. Firms in those countries pete intensely within Japan. The implication, have followed Japan’s lead in emphasizing low- then, is that these companies colluded only priced, small-screen sets. with respect to exports—or that manipulation “J’’ The U.S. Consumer Electronics Industry and Foreign Com- 191,. Landro, “Technology, Competition Cut Price of Elec- petition, Executive Summary,” final report under EDA grant No tronics Gear as Quality Rises, ” Wa]] Street Journal Dec. 1, 1981, 06-26-07002-10, Department of Commerce, Economic Develop- p. 37. ment Administration, May 1980, pp. 46-47. Ch. 5—Competitiveness in the International Electronics Industry ● 183

Table 44.—imports of Color Televisions as a dipped below 20 percent once, in 1975); brand Percentage of Total U.S. Sales recognition and strong distribution networks, Imports Imports combined with an emphasis on larger sets, less- as a percentage as a percentage ened their vulnerability to imports. Both Zenith of unit sales of value of sales and RCA automated some of their facilities to 1968 ...... 11 .0 ”/0 5.1 “/0 hold down costs, and moved other production 1970 ...., . . . . . 17.0 8.4 1972 .., . . . . . 14,9 8.3 overseas. Firms with smaller market shares, on 1974 ...... 16.0 9.6 the other hand—especially those that depended 1976 ...... , . . . 35.9 18.9 heavily on private label sales–quickly felt the 1978, ...... 26.4 15.7 1980 ...... 11.3 7.4 impact of Far Eastern competition. For several, 1982 ...... 19.1 12,8 lower production scales—and higher manufac- SOURCES ltR%?—72-’’The U S Consumer Electronics Industry and Foreign Corn. turing costs—combined with foreign competi- petition,” final report under EDA grant No OE-26-O7OO2-1O, Depart. ment of Commerce, Economic Development Administration, May tion to move their operations into the loss col- 1980, pp A75, A-76 197442—E/ecfron/c Market Data Elook 1983 (Washington, D C Elec. umn. Companies like Philco, Admiral, War- tron~c Industries Association, 1983), pp 15 and 31 wick—most recently Sylvania—left the market.

Table 44 also points to the reactive strategies Prominent in competitive responses by the of the major American TV makers; when con- U.S. industry were efforts to persuade the Fed- fronted with low-priced import competition, eral Government that Japanese imports were U.S. producers essentially ceded that portion entering via unfair trade practices. While com- of the market.21 Part of the reason was simply panies like RCA and GE that get substantial that, even in the absence of imports, profits revenues from overseas sources have taken a would have been lower on small-screen sets. Given expanding markets, the strategies pur- sued by American firms enabled them to utilize their production facilities in optimal fashion, at least in the shorter run. With the portable experience in the background, U.S. man- ufacturers must have been well aware that con- cessions at the lower end of the TV market would give the Japanese a foothold—making for stiffer competition in later years across the rest of their product lines, Viable counter- strategies needed to be developed—and were. At present, the major U.S. manufacturers have strong product offerings in all parts of the mar- ket, small sets as well as large. Domestic firms found themselves in different situations as a result of import competition, and reacted in different ways. The major pro- ducers, RCA and Zenith, each held between 20 and 30 percent of the market in terms of unit sales, higher in value terms, at the end of the 1960’s. Through the 1970’s—and today—each has retained a market share in the vicinity of 20 percent (ch. 4, table 10; RCA’s market share

Photo crecllt RCA Z1 The U, s’, Consumer E]ectronjcs lndustr~r (Washington, II. (;.:

Department of Commerce, September 1975), p. 1 I, Color TV assembly 184 . International Competitiveness in Electronics

“free trade” stance, others, whose orientation small-screen TVs—where imports were strong- has been primarily domestic, have been vigor- est—in ever-larger numbers. Table-model and ous in pursuing trade remedies over many portable sets went from 12 percent of U.S. col- years. The intent has been to raise import or TV sales in 1965 to 68 percent in 1974. 22 prices through antidumping penalties or coun- Those American suppliers that remained eco- tervailing duties. Chapter 11 outlines the se- nomically viable did so in part by improving quence of events; briefly, collection of addi- labor productivity at relatively high rates; they tional duties imposed on TVs from Japan was also transferred many of their more labor-in- delayed for years by a series of interdepartmen- tensive manufacturing operations overseas. tal disputes within the Government. Petitions The U.S. response was, therefore, mixed. On seeking adjustment assistance under the Trade the one hand, American firms sought trade Expansion Act of 1962 were denied in 1973, protection—a reaction not untypical of busi- as were parallel efforts to have countervailing nesses experiencing foreign competition in duties assessed on Japanese TVs. Attempts by lucrative domestic markets, particularly when American interests—labor unions and suppli- they find themselves in this situation for the ers were active along with domestic manufac- first time. On the other hand, a number of U.S. turers—continued in one form or another from manufacturers successfully reduced costs, en- the late 1960’s on through the 1970’s, indeed hanced quality, and managed to keep most if are still underway. But from the viewpoint of not all of their traditional market share; RCA U.S. producers, these efforts to stimulate Gov- and Zenith together still account for some 40 ernment action that would raise import prices percent of U.S. color TV sales, But the majori- were less than successful, Even so, the cons- ty of American companies were unable to keep tant stream of claims that competitive tactics pace in the newly competitive environment. by Japanese firms were both unfair and - aging had considerable political impact: a reluctant administration was forced in 1977 to Foreign Markets take action. The results were the import quotas termed Orderly Marketing Agreements U.S. and Japanese consumer electronics (OMAs) mentioned in the previous chapter. firms have approached markets in third coun- The initial OMA with Japan was followed in tries quite differently. Companies like RCA 1979 by agreements with South Korea and Tai- have sold technology overseas—most recent- wan. ly, RCA has licensed its new video disk tech- nology in Europe—but have seldom embarked A second response by domestic firms was on major efforts to market consumer products technological. Far Eastern competition forced elsewhere, The exception is ITT—an Ameri- U.S. TV makers to move into solid-state designs can-owned firm which is one of Europe’s larger both to lower costs and to improve reliability. producers of color TVs but does not manufac- But these efforts came too late for many Amer- ture consumer products in the United States. ican manufacturers. Japanese exporters had In contrast, Japanese manufacturers have ex- achieved the volume required for economies ported products as well as technology; in re- of scale, and could continue to drive prices cent years they have also invested extensively downward. By 1971, Matsushita was the big- in industrialized as well as developing coun- gest manufacturer of TVs in the world, and 5 tries. of the top 10 firms were Japanese (ch. 4). These In Western Europe—which offers a market companies were expanding worldwide, while for color TVs about the size of that in the the of even the U.S. were efforts strongest firms — largely restricted to their home market. Mean- zz~~ectronjc &farket Data 1975 (Washington, D. C.: Elec- while, American consumers were choosing tronic Industries Association, 1975]. Ch. 5—Competitiveness in the International Electronics Industry ● 185 ——————--———

United States—Japanese firms have made sig- has developed economically, the advantages of nificant inroads. For many years, trade barriers Japanese manufacturers have diminished. Mar- and patent protection helped European pro- kets are expanding in Taiwan, South Korea, ducers fend off imports (ch. 4). Now many of Singapore, and Malaysia—with local industries the barriers are weakening. Nearly half the aiming both to export and to supply rising do- high-fidelity equipment sold in Germany is mestic demand. While it is no surprise to find al ready imported from plants in the Far East. 23 Japanese firms with a greater presence in Asia, The Japanese share of the West German color one might expect the situation to be reversed TV market more than doubled from 1979 to in Latin America. But here too, many of Japan’s 1981, reaching an estimated 15 percent. Color TV makers have established subsidiaries, joint TVs are made in the United Kingdom by five ventures, and licensing agreements—in addi- of the major Japanese manufacturers; a sub- tion to their export activities. The U.S. stantial fraction of the output is shipped to presence, except for assembly plants in Mex- other European nations. One-third of the pic- ico that ship back across the border, appears ture tubes used in TV sets manufactured in limited to scattered licensing arrangements .24 Europe are imported from Japan; few if any of the 10 remaining factories making picture Japanese consumer electronics firms have tubes in Western Europe are profitable. Japa- taken a long-term approach to the development nese eports of VCRs to European countries of world markets. They have been willing to more than doubled in 1981, and doubled again adapt their strategies to the constraints im- —to nearly 5 million--in 1982; threatened with posed by foreign governments, and to local dumping complaints, Japan recently agreed to laws and regulations. Where governments have limit VCR shipments to the European Commu- limited imports, they have invested. Where in- nit y. vestment is restricted, they enter into joint ven- Japan’s entry into the European TV market tures. As one example, Toshiba commissioned has been remarkably similar to that here. As a Costa Rican company to make Toshiba-brand the PAL licensing agreements continue to ex- TVs in 1971, several years before color broad- pire, the Japanese will broaden their product casting began in that country. Later, Toshiba ranges; they are now beginning to compete in purchased part of the local firm, establishing the upper reaches of the European market. One a joint venture for manufacturing a broader response by local firms has been to move to- line of their consumer electronic products. In ward Tv broadcasting accompanied by stereo pursuing such activities, Japanese firms have sound. Through a new round of restrictive taken significant risks. They have invested in licensing practices, European companies hope economically depressed regions, in countries where the initial markets for their products to keep the Japanese out of new high-end prod- ucts . have been small, and in regions of questionable political stability. In their early years, many of Japan’s electronics firms have also been ac- these operations probably lost money. Now, tive in the Far East, where the U. S. presence Japanese companies are firmly established in is limited to offshore production. Still, as Asia such countries, and appear well positioned to take advantage of growing demand in nations ranging from the Arab states to the People’s Republic of China. If American firms were, at this late date, to try to emulate the Japanese strategy and compete on a global scale, they 186 ● International Competitiveness in Electronics

would face a formidable task in overcoming the be developed, with component TV one of the head starts of their rivals, first steps,

To a considerable extent, the future of the Other Consumer Electronic Products U.S. consumer electronics industry will de- Not only home goods like pend on its ability to keep up in such products, VCRs, but pocket calculators, electronic How successful will American manufacturers watches, and CB radios are now produced be? On the one hand, new product offerings mostly in the Far East. The older, established like the RCA video disk system are favorable consumer electronic firms in the United signs. Although thus far something of a disap- States—those that have made radios, TVs, pointment in the marketplace, RCA’s invest- audio equipment—seldom participate in these ment in the video disk demonstrates that U.S. markets. More often, the American entrants Consumer electronics firms are still willing to have been small specialty manufacturers, semi- take risks. Zenith’s venture into personal com- conductor firms, or suppliers such as Tandy, puters is another indication that American sup- which sells under the Radio Shack name. U.S. pliers are not ceding their home market to for- electronics companies with little prior ex- eign producers; so are the efforts of smaller perience in the consumer arena attempting to companies marketing electronic games, projec- diversify have, not surprisingly, sometimes tion TVs, and innovative audio products. At the misjudged demand, introduced products that same time, the failure of U.S. companies to par- proved to have little appeal to customers, or ticipate in the manufacture of VCRs will make failed to establish adequate distribution chan- it more difficult for them to regain product nels. Among the semiconductor firms, even the leadership. most successful—e.g., Texas Instruments— With U.S. sales of VCRs growing rapidly, the have had a difficult time learning to develop approaches of Japanese and American firms 25 and market consumer products. profits have now stand in stark contrast. Broadcast video- not always been high enough to convince U.S. tape recorders were introduced by Ampex in entrants to persevere, particularly where for- 1956, with RCA following in 1959; at least eight eign firms with low production costs were al- Japanese firms–starting with these U.S.-devel- ready well established. oped technologies—pursued consumer ver- What then of the future? Will American firms sions during the 1960’s, with various degrees 26 attempt to develop new strategies for market- of resource commitment and success. None ing future generations of consumer products? of the American consumer electronics firms How will their approaches contrast with those followed suit, although some made attempts of manufacturers in other parts of the world? later on. ’s Betamax, which opened the Some of the trends can be discerned, at least market, was in fact a fourth-generation ma- as they relate to product developments. Bot- chine—the result of many years of persistent tom-end pocket calculators will offer more fea- and often-disappointing efforts, The other tures as sophisticated models evolve into hand- major VCR system—developed by Matsushita held computers. Watches may incorporate (a third, built by Philips, has only a small share games, calculators, perhaps even radios. of the market)—was also the result of years of Speech synthesis—and later voice recogni- engineering, and a number of false starts. U.S. tion—will appear, enabling TVs, for example, firms were unable or unwilling to match these to switch channels in response to spoken com- mands, Integrated home entertainment sys- Zesee W. j, Abernathy and R. S, Rosenbloom, “’l’he Institutional tems combining TV reception, video tape and/ Climate for Innovation in Industry: The Role of Management or disk players, and computing capability will Attitudes and Practices, ” The 5- Year Outlook for Science and Technology 1981: Source Materials,t’olume 2 (Washington, D, C.: National Science Foundation, NSF 81-42, 1981), pp. 411-416, for for example, B, Utta], ZsSee, “Texas Instruments Wrestles With a fascinating case study~ of the com mere ial izat ion of consumer the Consumer Market, ” Fortune, Dec. 3, 1979, p. 50, VCRs, Ch. 5—Competitiveness in the International Electronics Industry 187 development programs, and now have chosen ing other products as well. Because U.S. man- to sell Japanese VCRS under their own brand ufacturers cannot expect cost advantages, they names. may be left with only their distribution systems and brand recognition as prime competitive The point is that, once having lost product weapons. To a considerable extent, Japanese leadership-as has occurred with VCRs– firms have already countered these advantages; American firms will find it increasingly dif- thus, the long-term prospects for American ficult to compete in new technologies, and may firms in consumer electronics do not appear eventually find themselves importing or adapt- bright.

Semiconductors

Technological forces have dictated the mar- circuits needed for consumer products. As the keting strategies of semiconductor companies technological level of Japan’s semiconductor in all parts of the world since the inception of industry caught up with that of the United the industry. The case study on 4K RAMs in States, many of these imports were replaced a p penal ix C points to the i mportance of e ngi- by indigenous production. The phenomenon, neering capability for U.S. merchant firms termed import displacement, has been charac- such as Mostek or Intel, Technology is no less teristic of Japan’s computer industry as well. important now than a decade ago, when the Displaced items quickly become potential ex- 4K RAM was being developed-but as late as ports for Japanese firms. the mid-1970’s the business strategies of foreign During the 1970’s, awareness of the possible semiconductor manufacturers were of little in- consequences of foreign competition grew terest to Americans. As the 4K RAM case dem- within U.S. industry and Government, al- onstrates, U.S. firms appeared to have little to though the production and trade data showed fear from producers in Japan--certainly not little cause for concern. The Federal Trade from those in Western Europe, But from a Commission, reporting on interviews con- minor position in 4K chips, Japanese firms ducted in 1976, stated: “. . . a number of com- went on to claim about 40 percent of the world pany executives expressed the opinion that market for the following generation of 16K competition from foreign companies would be RAMs. By 1982, the perception was wide- much tougher to handle than competition from spread that U.S. firms had “lost” the market other U.S. companies in the next 5 or 10 years. for dynamic RAMs. Certainly this is an over- In contrast, some other executives felt that U.S. dramatization, and the RAM market can by no companies would not have a difficult time means stand for the industry in microcosm; but maintaining their technological lead over 27 the picture has changed. How did it change so foreign companies. “ Hindsight shows those fast? of the first persuasion closer to the mark. During the 1970’s, Japanese companies ex- One sign that patterns of international com- ported considerable numbers of electronic petition would change came from subsidies components--including transistors—to this and promotional efforts adopted by foreign country, but the major growth segment, ICs, governments with the aim of fostering in- was dominated by American suppliers. Even digenous production. Japan, France, West Ger- though Japan’s Government protected the local many, the United Kingdom—all in one way or industry, U.S. shipments took a substantial part another marked the as of the expanding Japanese IC market. Custom- critical to continued economic vitality, an in- ers in Japan depended on American firms for devices that domestic manufacturers could not 2T~’faff ~eilor{ OH the Semiconductor lndustrs’: A S’urIre~ of provide—high performance or large-scale Structure. Conduct and Perlbrmance (Washington, D. C.: Federal chips, custom parts, even some types of linear Trade (;ommi~sion, Bureau (If Economics, January 1977), p. 130, I&l . International Competitiveness in Electronics

dustry not to be given over to foreign interests. Figure 34.— Distribution of U.S. Semiconductor Since the United States was far ahead in both Sales by End Market technological expertise and production vol- Military Consumer Computer and ume, the implicit targets were American com- Industrial panies, not excluding those that had invested in local production facilities. These govern- ment-led attempts to build competitive semi- conductor industries have had mixed results. Joint projects involving public and private sec- tors in Japan were quite successful—in semi- conductors as in earlier Japanese industrial policy initiatives. European attempts have been far less fruitful, for reasons that may have as much to do with the characteristics of the in- dustry and marketplace on the continent as 20 — with the policies pursued. o United States 1960 1968 1980 Year

Applications of semiconductors reflect ongo- SOURCES 1960, 1968 Innovation, Compel ltlon, and Governmental Policy In I he Semiconductor Industry Charles River Associates, Inc ing synergistic relationships among merchant final report for Experimental Technology Incentives Program, Department of Commerce March 1980, p 213 suppliers and their customers. Purchasers out- 1980 .SIatus 80 A Re,oorf on (he /n fegrafed CIrcu/t Indusfry side electronics have lately presented growing (Scottsdale, ArIz Integrated C{rcult Eng[neer[ng Corp , 1980) market opportunities—e.g., in automobiles. D 34 Nonetheless, from a technological viewpoint, firms computer- or microprocessor- where the needs of customers are more diverse, based systems remain the most influential cus- and nontechnical dimensions like price and de- tomers (fig. 34). Manufacturers of consumer livery schedules more important. electronics, systems, instru- ments and controls, and office equipment have Factors in Strategic Decisions considerable impact as well. While most of the attention below goes to merchant firms, cap- Competitive strategies adopted by merchant tive operations have played a vital role in the semiconductor firms revolve around factors technological development of the U.S. indus- such as size, market power and technological try. Furthermore, production decisions by the capability, internal need for devices (if any), larger integrated manufacturers sometimes and stage of development relative to others in have major consequences for the merchant the industry. A company’s technical strengths market, shape its product line, Process technology— whether a manufacturer is strong in bipolar or Figure 34 shows that the phenomenal expan- MOS (metal-oxide semiconductor), which va- sion in semiconductor output during the 1970’s rieties of MOS a firm knows best—is one as- was accompanied by a major shift from de- pect, design capability another. Some com- fense purchases to consumer and industrial ap- panies are known for innovative circuit de- plications; competitive success in the most signs, others for prowess at mass produc- rapidly growing market segments depended on tion—some for both. Smaller entrants tend to the ability to make the transition from special- specialize; only a few merchant suppliers have ized military requirements to the demands of broad product lines (the world’s semiconduc- private sector customers. Some companies that tor manufacturers supply perhaps 50 billion fared quite well in the military market could devices a year—of 100,000 different types—to not compete effectively for commercial sales, several hundred thousand customers). Ch. 5—Competitiveness in the International Electronics Industry ● 189

.i - .& & ket for 16K RAMs at the close of the 1970’s, the company’s unexpected entry contributing to shortages of these devices. Capacity short- falls by American firms—primarily stemming from failures to invest in additional production facilities in the wake of the recession of 1974-75 —left an open door for Japanese IC suppliers to sell in this country. * Captive manufacturers contribute in a major way to the overall strength of the U.S. position in microelectronics through their R&D activ- ities; in particular, IBM and AT&T’s Bell Lab- oratories have been responsible for much of the

Photo credIf Western E/ecfr)c Co basic research underlying the semiconductor Technician loading plasma reactor with industry in this country, indeed around the semiconductor wafers world. Merchant firms—because of the pace and intensity of product development, the con- tinuing cycles of improvement in design and production that characterize succeeding A number of U.S. merchant manufacturers generations of ICs—must set different pri- have integrated to some extent into systems. orities; they also have more limited resources A few, such as Texas Instruments, have always for R&D. been diversified. Others have been purchased by larger enterprises but still sell the great bulk Technological Factors of their production on the open market (ch. 4, A company introducing a new device must table 24). As merchant suppliers expand, so assume that even if their design is at the does the range of their product offerings, forefront of the state of the art it will be Smaller companies with limited resources aim superseded later if not sooner. Timing is crit- at niche markets, Newer entrants set out to de- ical; technological windows sometimes open, velop specialized or custom devices of less in- providing opportunities for leapfrogging the terest to larger corporations; the 1981 startup competition. Companies that quickly mastered Linear Technology—a spinoff from National production of dynamic RAMs, or concentrated Semiconductor—specializes in linear ICs, in on microprocessor design architectures in at- which the founders have expertise. tempts to tie up large portions of that market, Captive semiconductor producers have dif- were aiming at such advantages, Needless to ferent strategic aims. While most of the larger say, some firms have better records at ex- computer firms make some of their own logic ploiting these opportunities than others. A chips, IBM has traditionally produced most of number of companies that had been strong in its memory circuits as well. The company con- bipolar technology–including Fairchild and sumes so many that, for products such as Texas Instruments—did not move as rapidly RAMs, on occasions when it chooses to pur- into MOS as the competition; Texas Instru- chase from outside vendors it can account for ments staged a quick recovery, while Fairchild a sizable proportion of total demand (the com- has continued to lag. Mostek, as its name con- pany is probably the largest single purchaser notes, was founded with the intention of spe- in the merchant market, as well as the world’s cializing in MOS; the company has emphasized largest producer of semiconductors). This then memories, designing their own RAMs—the de affects the business decisions of merchant sup- facto industry standard 4K RAM was a Mostek pliers: IBM’s external purchases were a power- design (see app. C)—while serving as an alter- ful and rather unpredictable force on the mar- nate source for microprocessors. Electronic 190 ● International Competitiveness in Electronics

Arrays, now owned by Nippon Electric, had is likewise rather easy to predict. Under such specialized in read-only memories (ROMs). circumstances, Japanese suppliers quite nat- Other firms seeking to exploit particular tech- urally emphasize memory products. nological paths have had less success: Amer- In contrast, market acceptance of logic cir- ican Microsystems’ work on v-MOS ICs is one cuits or microprocessors is less predictable. In- example, RCA’s pursuit of -on-sapphire vesting in a new microprocessor design—the c-MOS another. Internationally, Japanese firms 432 $100 moved into MOS ICs much more rapidly than 32-bit Intel iAPX cost more than mil- lion to develop—is risky, but the potential re- the Europeans, most of whom are still well behind their competitors in the United States wards are great; designs with an edge over the or Japan and relying on technology imports to competition—in performance, ease of program- ing, adaptability to a wide range of applica- try to catch up; this has been one of the objec- 28 tives of Le Plan des Composants—a major in- tions—sell for premium prices. Furthermore, microprocessors—best thought of as families dustrial policy effort by the French Govern- of related ICs rather than unique devices—have ment (ch. 10). In the United States, some firms longer product cycles, extending the period —Signetics, Monolithic Memories—continue to specialize in bipolar devices. IBM likewise re- over which investments can be recouped. mains relatively stronger in bipolar than MOS; Memory circuits are manufactured as long as the speed advantages of bipolar circuits have demand holds up, but sales tend to peak and led many computer manufacturers to continue decline more rapidly than for other device emphasizing the older technology. types. Five or six years elapsed between the onset of high-volume production for 8-bit mi- Quality and reliability comprise another com- croprocessors and mass production of the suc- petitive realm where strategies depend both on ceeding generation of 16-bit parts, while life- circuit design and manufacturing practices (ch. cycles for RAM chips—though slowly length- 6). While Japanese firms have zealously pub- ening—have been perhaps 3 years, sometimes licized the quality and reliability of their ICs less.29 —in much the same way that Japanese con- sumer electronics firms used reliability as a Abbreviated product cycles dictate strategies wedge into the American TV market—domes- aimed at profitability within a narrow time window, along with continuous efforts to de- tic producers like Advanced Micro Devices have also pursued an image of quality and velop new or differentiated offerings. The lat- ter can be original designs but need not; sec- reliability as a marketing tool. ond-sourcing has been widespread for many Products and Prices years, in part because customers often insist on more than one supplier before they will One of the attractions of memory circuits— design an IC into their end products. Thus, sec- in addition to the vast market—is the relative- ond-sourcing can accelerate market expansion ly orderly and predictable progress of the tech- for everyone, Semiconductor firms choose to nology itself; circuit design is vital—along with become alternate sources for chips developed excellent process capability—but more straight- forward than for logic or microprocessors. Zaon the ~om of microprocessor design, see R. N. Noyce and Everyone in the industry knows that the next M. E, Hoff, Jr,, “A History of Microprocessor Development at Intel, ” IEEE MICRO, February 1981, p. 8. Intel’s first micro- generations of dynamic RAMs will be 256K processor, a 4-bit device, was designed in 9 months by a single chips, followed by 1 megabit; circuits offered engineer; 100 man-years went into the iAPX 432. by various firms are much more similar than ZQIntel’s 8080 family—introduced in 1974 and the largest sell- ing 8-bit microprocessor—will no doubt remain in production the designs of competing 16-bit microproc- for many more years, Worldwide, more than 10 companies still essors, One result is the fierce price competi- produce 8080 chips. Mostek—an alternate source for another tion that has often seemed the dominant char- popular 8-bit processor, the Z-80—for a number of years pro- duced more of these devices than Zilog, the originator. See “The acteristic of the memory market. Progress in Antenna, ” Electronic News, Mar. 12, 1979, p, 8; “Eight-Bit static RAMs, and in the various types of ROMs, Level,” Electronic News, July 5, 1982, p. 12. Ch. 5—Competitiveness in the International Electronics Industry 191 by other companies to beef up their own prod- below those of its rivals, margins above. Com- uct lines, perhaps by complementing circuits panies with proprietary designs often license they already build, as well as to reduce market alternate sources, but at least at the outset risks and save on R&D expenses. From the second-source suppliers will be at a cost disad- viewpoint of the originator, it may be more sen- vantage. If the initiator decides to follow a pric- sible to settle for a smaller piece of a rapidly ing strategy keyed to anticipated cost improve- expanding market than to try to keep others ments, follow-on firms may find it difficult to from duplicating an IC design. Attempts to pre- make a profit. Texas Instruments, for instance, vent duplication are virtually impossible if a has had the reputation of practicing advance circuit finds an enthusiastic reception in the pricing whenever possible, In a very real sense, marketplace. As one consequence, formalized then, later entrants can be at the mercy of in- alternate sourcing agreements have largely re- novators should the latter choose to cut prices placed the copying that was once common- and exercise the cost advantages of being far- place. Sometimes alternate source manufac- ther down the learning curve. On the other turers acquire the originator’s technology —e.g., hand, an innovating firm might choose to in- mask sets for lithography. Other times only crease margins by holding price levels high. drawings or specifications are provided. The Under such circumstances, an alternate source recent agreement between National Semicon- may itself be able to carve out a place through ductor and Fairchild, the latter acquiring the price. One facet of Intel’s corporate strategy right to build National’s model 16000 micro- has been to choose products where it could processor in exchange for developing a com- enter the market first, reap high profits, then plementary line of peripheral chips, is an in- move on—leaving later sales, at lower margins, creasingly popular route. to others, Nonetheless, in many cases, especial- ly where the innovating company is small, lin- Cost reductions via the learning curve (ch. ing up an established supplier as a second 3, fig. 5) help shape competitive strategies, As source may be a prerequisite to sales in any vol- production volumes increase, yields rise and ume. manufacturing costs drop. Pricing decisions have often been based on projections of ex- A further strategic choice, increasingly crit- pected cost reductions into the future, For a ical for American firms, is whether to design firm early to market with a new design, cost and produce -like chips or to con- advantages over potential rivals can build rap- centrate on custom or semicustom devices, The idly, increasing with leadtime. Firms that are first option entails high-volume production of late to market face a dilemma; they may have ICs that are, or may become, shelf items— to choose between foregoing participation or standard circuits serving the needs of cus- pressing on with their own design in the hope tomers who design them into end products, that it too will win acceptance, In early 1982, The alternative, customizing, can be ac- with six Japanese entrants mass-producing 64K complished in a variety of ways; semicustom RAMs, versus only two American manufactur- chips such as gate arrays or programmable ers, a number of U.S. firms were confronted logic arrays are specialized only at the last with such decisions; Advanced Micro Devices, stage of processing. Regardless of the techno- for one, decided not to build a 64K chip, logical approach, firms in the custom or semi- In different circumstances, then, firms custom business create specialized ICs meeting assume different strategic postures. Companies the needs of one or a few, rather than many, entering the market with a new device, par- purchasers. Because circuit design is expen- ticularly one incorporating proprietary technol- sive, prospective order quantities must be large ogy—product or process—may have several ad- enough to cover engineering costs; alternative- vantages over competitors that follow. An early ly, the buyer must be willing to pay a higher entrant will normally try to remain ahead on price, Custom chips for automotive applica- the learning curve, keeping production costs tions are an example of the high-volume case, 192 . International Competitiveness in Electronics

military systems of custom chip markets where cant monopolistic profits from new technolo- production volumes tend to be small. Occa- gies), and 2) just as inevitably the pace of tech- sionally, end users design their own ICs and nical advance will render new product offer- contract out production. ings obsolete within a few years at most. The price history of the 64K RAM illustrates the At the center of competitive strategies in first point: offered in sample quantities at $100 semiconductors—as for many industries—then each in 1979, and $20 to $30 during 1980, lies the choice of products. Firms with broad prices dropped to the $10 to $15 range in early product lines may offer devices based on a 1981 and $5 to $7 a year later; during 1981, 16K variety of technologies while attempting to stay RAM prices were driven down from $4 to at the technical frontier with only some of about $1, largely as a result of price declines these. Others—such as Mostek in the mid- for 64K parts.30 Such pricing trends have meant 1970’s—operate within narrower boundaries that all firms, U.S. and foreign, have had to where they attempt to be leaders. Some en- work continuously at cost reduction, In con- trants are content to follow the obvious trends, trast to numerous other industries, passive or offering unique designs infrequently while reactive pricing policies are hardly possible; relying on other strengths—perhaps low prices although product differentiation is a viable or a reputation for quality—to attract custom- alternative under some circumstances, price ers, In its early years, Advanced Micro Devices competition in semiconductors is a constant took such an approach (see app. C). force–enough by itself to set this industry off from many others. The second market charac- Beyond these common themes, mostly hing- teristic, rapid technological change, has forced ing on aspects of the technology, companies managers and technical personnel alike to plan their strategies according to the strengths adapt constantly; firms that have remained and weaknesses they perceive in their own po- wedded to older technologies have faltered or sitions compared to those of their rivals. No disappeared from the marketplace, single company has the resources to manufac- ture and sell all the tens of thousands of International Dimensions semiconductor products now marketed in the United States—one of the reasons for the From an international perspective, the larger periodic emergence of startups, Extensive U.S. merchant firms have shared three major product lines can confer advantages where strategic thrusts: 1) offshore manufacturing to customers prefer to deal with only a few ven- reduce labor costs, 2) foreign investment to dors; broad-line manufacturers may also be serve overseas markets, and 3) attempts to do able to achieve economies by spreading mar- business in Japan. This last effort–on which keting costs over many items. Nonetheless, a number of companies are just embarking, or such factors are secondary compared to choice reembarking after past rebuffs—may prove crit- of product and process technology, along with ical to the continuing ability of U.S. merchant a variety of ingredients that could be labeled firms to compete with large, integrated Japa- “entrepreneurship.’ Successful new compa- nese manufacturers, particularly in commodity nies have frequently been established to exploit products like memory. a particular product, often one that larger com- Offshore manufacturing investments have panies have failed to pursue—perhaps because been concentrated in developing Asian na- of limited resources, or simply a judgment that tions, Generally, the more labor-intensive the potential market was too small, assembly operations—e.g., wire bonding and encapsulation—have been moved. In the semi- No matter the decisions they themselves take, managers of semiconductor firms can be cer- 30A, Alper, “Buyers Hedging on Long-Term 64K Pacts Until U.S. Firms Ramp Up, ” Electronic News, Feb. 8, 1982, p. 1; C. tain of two features of their market: 1) competi- H. Farnsworth, “Japanese Chip Sales Studied, ” New l’ork Times, tion will eventually drive prices downward (it Mar. 4, 1982, p. D1. Prices for 64K chips eventually fell to lows has been extremely difficult to capture signifi- of about $3 during the 1982 slump. Ch. 5—Competitiveness in the International Electronics Industry ● 193 .— conductor industry, the stimulus for these cil, MITI, and other agencies, controlled in- transfers has not been import competition, as ward investment flows and for the most part in consumer electronics, but domestic rivalry. prevented the establishment of manufacturing Transfers offshore began in the early 1960’s, facilities under foreign .32 Joint ven- long before Japan appeared a significant threat tures in which a Japanese company held the in semiconductor production. By 1970, Ameri- majority interest met a more favorable re- can companies operated more than 30 subsidi- sponse. The purpose was obvious: to provide aries in such locales as Hong Kong, Singapore, shelter for Japanese companies which at the Malaysia, the Philippines, and Mexico.31 Re- time were well behind in semiconductor tech- locating labor-intensive production operations nology. MITI believed—with good reason, if has been especially attractive because transpor- the European case is indicative—that allowing tation costs are low; chips are often shipped American firms to produce in Japan would sti- by air. A cost comparison illustrating the ad- fle the domestic industry, particularly when it vantages of offshore assembly is included in came to more advanced device types. In acting appendix B (table B-2). this way, the Japanese Government was behav- ing much like others that have sought to pro- A second international involvement of U.S. tect infant industries, but Japan has often been semiconductor companies has been point-of- accused of maintaining protectionist measures sale production to serve developed country long past the point at which her industries have markets, Investments in point-of-sale plants been able to fend for themselves, began about the same time as offshore assem- bly, but from the standpoint of industry strat- In any event, as a consequence of protec- egy the motives were quite different. These tionism in Japan, American suppliers were have been twofold, First, foreign governments forced to adopt business tactics different from have often taken steps to make local produc- those pursued on the continent. Most re- tion attractive, or, conversely, to make export- sponded to MITI’s entreaties and entered into ing from the United States onerous. European licensing agreements with Japanese produc- countries, in particular, have relied on incen- ers.33 Such steps were entirely rational, pro- tives combined with tariff and nontariff bar- vided the U.S. firm could be reasonably cer- riers to attract U.S. high-technology in- tain the technologies transferred would not vestments. Second, point-of-sale production find their way into products they would face can become a competitive necessity to the ex- at home or in third-country markets. With this tent that other firms have already made such proviso, it would pay to sell technical knowl- moves. edge, the proceeds from which could then at least partially offset the costs of generating that Efforts to establish sales, production, and/or knowledge, The outcomes of licensing agree- R&D facilities in Japan—now a bigger market ments with Japanese firms have led to many than all of Europe—comprise the most recent second thoughts within the American industry. overseas thrust by American firms. While Nonetheless, clear-cut cases in which U.S. Texas Instruments had been able to establish technology was an irreplaceable ingredient in a wholly owned subsidiary in Japan, other the growing capability of Japanese semicon- American firms were kept out until recently. ductor manufacturers are rare, particularl in Semiconductor manufacturers attempting to y later years —the exceptions being perhaps de- invest in Japan suffered much the same fate as velopments flowing from Bell Laboratories. other U.S. companies; the Japanese Govern- ment, through the Foreign Investment Coun- 32M. Y. Yoshino, “]apanesc Foreign Direct investment, ” T/m ]apane.se h’conom~r in lnternafjonaf Perspective, I. Frank (cd,] [Baltimore: Johns l{opkin~ L~niversity Press, 1975), p. 248. 31 W F’. E’ i n a n, ‘‘The International Transfer of Semiconductor 73see, in ~articul a r, W. F. Flna II, “The Exchange of Semicon- ‘rhro~lgh [J, S,-Flased Firms, ” National Bureau of ductor Technology Betureeo Japan and the United States, ” f’~rst Econ{)mi(: Rcsear(, h Working Paper No. 118, Dwernher 1975, 1 I! S.-]apan Technological Exchange S~’mposium, Washington, p, 57 This fi~(lr[) e~(:lu~le~ point-of-sale facilities in industrial DC,, oct, 21, 1981. Finan points out that American firms general- oat ly did not transfer proprietary information to licensees (p, 9], 194 ● International Competitiveness in Electronics

Texas Instruments became the single excep- necessity. The usual explanations for the exits tion to MITI’s licensing rule—in reality only of a number of large corporations during the a partial exception. Because it held a series of earlier years of the industry revolve around fundamental patents covering ICs, Texas In- rigid decisionmaking styles. struments was in stronger position than other More recently, the character of the market American companies. As a condition for li- has been shifting; American companies have censing its patents to Japanese firms, Texas In- been forced to alter their thinking. In some struments demanded that it be allowed to estab- respects the changes are a continuation of lish manufacturing operations there. When familiar patterns: more complex ICs–large and MITI refused—consistent with its decisions re- very large-scale integration (VLSI)—make still garding other electronics firms—the stage was more applications cost-effective, creating new set for prolonged negotiations.34 Texas In- and different puzzles for chip-makers. More struments and MITI eventually compromised fundamentally, VLSI has altered the cost struc- in a 1968 agreement permitting a joint semi- ture of the industry in at least two ways. First, conductor manufacturing venture with Sony. production is growing more capital-intensive; Four years later, Sony sold its share to the new sources of financing are needed to pur- American company. chase more expensive manufacturing equip- Thus, Texas Instruments, although reported- ment (ch. 7). Some of the capital has come via ly subject to a production ceiling, became the mergers, which have changed the industry’s only U.S. semiconductor firm to both manufac- structure. The second way in which VLSI is ture and sell its devices in Japan, just as IBM affecting the structure of the industry stems had—a few years earlier—become the only from shifts in product design. What had been American company to build computers there. a hardware-oriented business is now systems- (IBM was also able to gain entry by taking ad- and software-based as well. ICs are becoming vantage of its patent position.) Only recently, more than components, To tap the vast poten- as the Japanese have gained confidence in their tial markets made possible by microprocessors own technical abilities, has MITI softened its coupled with cheap memory, semiconductor attitude toward foreign investment; a growing manufacturers must commit substantial re- number of U.S. electronics manufacturers are sources to computer-aided design and software now contemplating wholly owned subsidiaries development, This comes at a time of intensi- in Japan. While the longer term consequences fying international competition—but with or of these decisions are not yet clear, investment without the Japanese in the picture, the prob- within Japan could—given the examples of lem facing U.S. merchant firms is one of lo- other industries—prove a vital support for cating sources of new capital in substantial American firms seeking to compete with Japa- amounts while battling to preserve even their nese rivals in third-country markets as well as existing profit margins. As companies devise in Japan. their responses, several trends are emerging, Greater will probably Current Trends have the farthest reaching consequences. Larg- The competitive strategies of American semi- er merchant companies—e.g., Texas Instru- conductor firms have been aimed first and ments, which has entered a variety of con- foremost at survival in a highly competitive, sumer markets, including that for personal rapidly changing market. Companies big and computers—are taking advantage of broad- small have had to stay abreast of and adapt to based positions in microelectronics to integrate technological change. Flexible management downstream into the manufacture and sale of and organizational structures have been a final products, The reasoning behind such de- cisions is straightforward. If much of the tech- 34J. E. Tilton, International Diffusion of Technology: The Case of Semiconductors (Washington, D. C.: The Brookings Institu- nology of data processing and other electronic tion, 1971), pp. 146-147. systems is incorporated in ICs, why not make Ch. 5—Competitiveness in the International Electronics Industry ● 195

end products too, increasing value-added and where it is becoming common for such agree- profitability? To this strategy—essentially an of- ments to spell out in considerable detail the fensive one—could be added a defensive ele- R&D and/or circuit design obligations of each ment. For semiconductor manufacturers with partner.35 the resources to contemplate entry into systems markets, greater vertical integration reduces Arrangements in which two or more com- vulnerability in the event that customers begin panies independently develop different mem- to integrate backward into device production. bers of a family of chips fall at one end of the The fact is that backward integration is on the R&D spectrum—complementary product devel- upswing, as manufacturers of computers, of- opment. At the other end, closer to basic re- fice equipment, consumer durables, and a host search, industry groups are moving toward of other products sense the need to develop in- cooperative rather than independent but com- house capability in microelectronics. One path plementary projects, The Semiconductor In- is purchase or merger with a semiconductor dustry Association and the American Elec- company. Merger activity in the industry has tronics Association have each established pro- grams that will channel contributions from been high since the latter part of the 1970’s; by 1983 only a few of the larger, broad-line mer- member firms to university projects. The Semi- chant suppliers remained independent. conductor Research Cooperative is funding re- search directly, while the Electronics Educa- Mergers have been of several types: some tion Foundation aims to improve training in semiconductor firms have been absorbed into electrical and computer engineering, primari- conglomerates—one example is United Tech- ly through fellowships and faculty support.36 nologies’ purchase of Mostek. Other acquisi- Another effort, Microelectronics & Computer tions have been more directly motivated by in- Technology Corp., will be an independent prof- ternal needs, as in General Electric’s acquisi- it-seeking R&D capitalized by the tion of Intersil. Foreign takeovers have been participating firms. 37 At least six universities prominent—Schlumberger’s purchase of Fair- are also establishing centers for R&D in semi- child. Sometimes the apparent motive on the conductor technology and/or systems applica- part of the semiconductor company is the need tions of microelectronics.38 Whether all these for new financing; this was no doubt a factor efforts will survive and flourish remains to be with Mostek, explicitly so with IBM’s purchase seen. of a substantial interest in Intel. The motives The emerging strategic picture in the United of foreign investors have varied: buying an States, therefore, is fluid and uncertain. Semi- American firm can be a quick way to get tech- conductor manufacture, along with other por- nology as well as a convenient entrance into tions of electronics, is undergoing far-reaching the U.S. market. restructuring, with outcomes that are hardly In a related development, many American obvious. Given settlements in the IBM and semiconductor companies are seeking alter- AT&T antitrust cases, the way also seems clear natives to “going it alone” in the development 35 For exa rnples, See s. 17uss e]] and S, Z,i Pper, ‘‘] Iltt:], N! ot Or{)] a of new technology-largely because of rising Tighten Hold on General-Purpose MPUS: Sec Peripherals KeYI costs. New variations on accepted technology Market for Niche Suppliers, ” Electronic Newrs, hlar. 8, 1982, p. 1. U.S. merchant firms are also negotiating such agreements sharing arrangements have been devised. Some with Japanese manufacturers—S. Russell, “Zilog, Toshiba to semiconductor manufacturers have prevailed Swap MIJU, CMOS Technology, ” Electronl(: .hreb~,s, Apr. 19, on customers for assistance in developing spe- 1982, p. 53; “National Semiconductor Sets ~renture L$’ith Japa- cialized chips and software. Both General nese Firm, ” Wall Street )ourna], Jan. 23, 1983, p, 22 (the Japanese participant is Oki). Motors and Ford have supported such efforts. 3CIS, Russell, ‘‘S I A Eyes $5 M Fund i ng for Research Coopera- Semiconductor firms have also sought new t lve, ’ ‘ Electronic Newrs, Dec. 21, 1981, p. 6. ways to share product development costs 37C, B a rney, “R&I) CO-01) Gets Set To Open [Jp Shop, ” Elec- tronics, Lfar. 24, 1983, p 89. among themselves, sometimes through exten- wC. Norman, “Electronics P’irms Plug Into the [~nitersities,” sions of past practices in second-sourcing, Science, Aug. 6, 1982, p. 511. 196 ● International Competitiveness in Electronics

for continued expansion by these two giant ly half the American market for 16K RAMs. semiconductor//computer com- Two years later, Japan’s manufacturers seemed panies. AT&T’s manufacturing arm, Western well on their way to comparable levels of Electric, plans to be the first American firm to penetration in the next-generation 64K RAMs; deliver 256K RAMs—a rather spectacular en- indeed, as sales began to build, the Japanese trance into the merchant market. Other firms— share soared toward 70 percent. While there Xerox is one—are also contemplating broad, is considerable feeling that ultimately they will systems-oriented strategies. Meanwhile, small- not be able to hold more than about half the er companies continue to seek specialized U.S. market for 64K chips, any temptation to product niches that will prove lucrative while underestimate the capabilities of Japan’s not attracting large and powerful competitors. semiconductor manufacturers has long since And in the background are the Japanese, add- passed. Seemingly countless studies recount ing another dimension that will continue to in- the strategic attack, tracing the targeting prac- fluence the strategies of American firms both tices of government and industry. domestically and internationally. From Linear to Digital Circuits Japan Firms in Japan had long since become major Until half-a-dozen years ago, few in the U.S. producers of linear semiconductors, a main- semiconductor industry gave much thought to stay in consumer electronics. By the early Japan as a serious competitive threat. Japanese 1970’s, some American companies began to manufacturers—almost exclusively divisions of abandon this part of the market, especially as large corporations—mostly produced devices domestic sales seemed to be drying up. Leading for consumer products; even today, nearly half U.S. producers put their resources into rapid- of Japan’s semiconductor output goes to con- ly expanding digital IC technologies. Mean- sumer applications.39 During the 1970’s, while, for the Japanese, strength in consumer Japan’s budding computer manufacturers de- devices was both a blessing and a curse. While pended on American suppliers for advanced giving their engineering staffs experience in ICs. While Japanese companies were clearly on circuit design and—more important—in high- the way to the skill levels needed for more ad- volume production, the concentration on linear vanced devices, the prevailing belief in the circuits did little to raise overall levels of com- United States was that they could not really petence. At the time, the primary customers for hope to catch up. The primary concern was the digital ICs—computer manufacturers—were a closed Japanese market. American companies relatively minor component of Japanese de- had been prevented from establishing a pres- mand. ence remotely comparable to that which they This was the situation when, in line with its had achieved in Europe; customers in Japan longstanding policy of fostering internationally bought only those devices that were not pro- competitive industries, MITI acted to break the duced locally. impasse created by the focus on consumer Today the situation seems quite different. products, The agency helped fashion an R&D Japanese firms have emerged as viable global program intended to increase Japan’s capabili- competitors in VLSI devices. Although their ties in large-scale digital ICs, particularly MOS prowess has centered on memory chips, they devices, and accelerate movement toward have made up a great deal of ground in logic VLSI. The organization of the program, which circuits and other device types as well. By 1980, began in late 1975, is described in chapter 10; the gravity of the threat had become obvious; five companies and three separate laboratories quite suddenly, Japanese firms captured near- were involved in the 4-year effort. Funding— totaling about $300 million—was provided part- 3e]aPan ,E)wtronjcs A~anac 1982 (Tokyo: Dempa Publications, ly by the participants and partly by govern- Inc., 1982], pp. 142, 143. ment. The program has had far-reaching im- Ch. 5—Competitiveness in the International Electronics Industry ● 197

pacts—as much through diffusing technology rather than product technologies; one-third of and training people as through the technology the funds were spent in the United States sim- developed. A parallel government-sponsored ply on purchases of state-of-the-art manufac- VLSI program—this one focused on telecom- turing equipment. This suggests that the major munications—was carried out in the labora- thrust was to develop skills in low-cost produc- tories of Nippon Telegraph and tion of commodity-like devices such as RAM (NTT), which had the most capable microelec- chips. tronics R&D organization in Japan. Two aspects of MITI’s approach deserve par- MITI’s objective was not only to aid Japan’s ticular emphasis. First, subsidization of micro- semiconductor manufacturers: the VLSI pro- electronics R&D was only the opening move gram was part of a much more extensive ef- in a broader strategy for building a competitive fort to move the nation toward knowledge- computer and telecommunications sector. intensive products with high export potential. Hindsight provides ample corroboration of Like its counterparts within the governments what was in fact an explicit goal: MITI’s subse- of other industrialized countries, MITI recog- quent support of computer and software devel- nized that semiconductors would be funda- opment, as well as the Japanese Government’s mental building blocks for many sectors of the reluctance to allow open competition for NTT Japanese economy. Supporting the computer procurements. NTT was a principal—though and information industries was the first step. independent—actor in the VLSI program; the MITI was fully aware that technical compe- government evidently hoped to restrict its high- tence in digital ICs would be essential, and that volume purchases to domestic manufacturers without some form of stimulus private compa- (the company does not produce its own semi- nies would find it difficult to shift rapidly from conductors), helping generate the economies linear to digital devices. From MITI’s perspec- of scale so necessary for international competi- tive, support for “cooperative” R&D was a nat- tiveness, ural extension of past efforts in other indus- tries; the VLSI program itself has been followed The second point—suggested by MITI’s level by related work in computers and robotics, as of support, generous for a government R&D well as further microelectronics projects. program but certainly not enough by itself to boost the Japanese industry past American Still, by American standards, MITI’s sub- firms—is that the VLSI project was never con- sidies were not large. Individual U.S. firms like ceived purely as an exercise in technology de- Texas Instruments had R&D budgets that came velopment. Consistent with the usual Japanese close to matching the yearly outlays of the VLSI approach to government-supported R&D, it project; IBM’s corporate R&D spending was an was intended to focus industry efforts, help order of magnitude larger. Of course, partici- train engineers from private firms in state-of- pating Japanese companies continued their in- the-art technologies, diffuse these technologies ternally funded R&D programs; MITI spending within the Japanese industry—in other words, thus gave a substantial incremental boost to to overcome weaknesses in Japan’s technologi- Japanese semiconductor research, reducing cal infrastructure created in part by the lack risks and supporting longer term work. Even of personnel mobility (ch. 8). so, total expenditures in Japan remained well below those here. Nor did the VLSI project re- This makes it doubly difficult to assess the sult in large and direct benefits to Japanese contribution of the VLSI project. While sep- firms, at least in terms of product offerings. A arating what might have happened from what great deal of attention in the United States has did occur is impossible, pieces of evidence do centered on the thousand or so patents asso- exist: for instance, MITI excluded Oki Electric ciated with the program, but it is not clear what from participation and subsidies, yet Oki man- value these have. There are no signs of major aged with NTT’s help to develop a 64K RAM . Primary attention went to process that the company now exports in considerable 198 ● International Competitiveness in Electronics — volume. Many of the events of the past few Domestic firms have been effectively protected years—the upsurge in Japanese production and from import competition as well as from pro- exports of RAMs—would probably have oc- duction within Japan by foreign-owned con- curred in any event, albeit at a slower pace; cerns. Protection of growing industries through memory chips were obvious targets for Jap- government action is hardly unique, but can anese firms confident of their abilities to only be judged to have succeeded if the pro- mass-produce relatively straightforward de- tected companies eventually emerge as viable signs to high quality standards. They were also competitors. In microelectronics, the “infant needed for the computers that these same firms industry” approach has been attempted else- were determined to make in greater numbers. where, most notably in several European na- tions, but only Japan has achieved success. Jap- In the United States, the impact of the VLSI anese industrial policy is discussed in detail in project has been exaggerated. It has come to chapter 10; here the point is that none of the symbolize not only direct subsidization of com- policy measures adopted by Japan’s Govern- mercially oriented R&D but also interfirm co- ment, taken separately, appear to have been operation that might be illegal under American major forces in the ultimate growth and ma- antitrust law. In fact, as pointed out in chapter turation of the semiconductor industry. Taken 10, cooperation among Japanese companies together, they a different picture—one in has been rather limited—evidence of the which industrial policy provided vital guidance strength of the barriers within the Japanese in- and support for the development of an inde- dustry that MITI was trying to overcome; this pendent capability in semiconductor design aspect has been overplayed by American man- and manufacture. Cumulatively, the policies of ufacturers understandably distressed at in- Japan Government have had a major impact. by overseas competitors, While the VLSI project makes a convenient target, by itself it Strategy and Structure is a far-from-adequate explanation for penetra- tions of what had been traditional American Despite MITI’s pervasive influence, the com- markets. Indeed, government policies in sup- petitive strategies of individual Japanese semi- port of Japan’s information industries have conductor manufacturers are governed first by ranged far beyond R&D subsidies, Among the the basic structure of the industry, which is other policy tools have been: populated by companies for whom microelec- tronics comprises a relatively small part of preferential government procurement; their business. Most of these companies—Oki favorable credit allocations, especially dur- and Nippon Electric being partial exceptions— ing the formative years; are large, integrated firms whose sales consist

special depreciation and other tax meas- predominatel y of final products such as com- ures; and puters, consumer electronics, and telecommu- grants for training and education. nications systems, Table 45 shows that only for

Table 45.—Proportion of Sales Accounted for by Semiconductor Productsa

Japanese firms (1981) U.S. firms (1979) Nippon Electric Co. (N EC) ...... 19.8% Mostek ...... 93% Fujitsu ...... 12.9 Advanced Micro Devices ...... 89 Oki Electric ...... 9.8 Intel ...... 75 Toshiba ...... , , ...... 8.1 Fairchild ...... 69 Hitachi ...... 5.3 Texas Instruments ...... 36 Mitsubishi ...... 5.3 Motorola ...... 31 alncluding internal consumption. SOURCES Japanoaa Firma-Table 29 (ch 4). U.S. Firma—’’S.S. and Japanese Semiconductor Industries A Flnanclal Compare son,” Chase Financ!al POIICy for the Semiconductor Industry Association, June 9, 1980, p 15 Ch. 5—Competitiveness in the International Electronics Industry ● 199

NEC and Fujitsu—the latter Japan’s largest competition in products representing a sub- computer manufacturer, with heavy internal stantial part of their total business leaves few consumption—have semiconductors contrib- options for counterattacks. uted a proportion of total sales even half as The Japanese strategy—protecting domestic great as for those U.S. merchant firms that are semiconductor manufacturers from overseas least dependent on their semiconductor divi- rivals while providing modest R&D subsidies sions—Motorola and Texas Instruments. Semi- and at the same time fostering domestic com- conductors account for less than one-tenth the petition—parallels that in . It has sales of the other Japanese manufacturers. In yielded equally impressive results: deep pen- this, they are closer to American companies etration in targeted markets based on low like Rockwell or RCA, which nonetheless dif- prices and quality levels above previous norms. fer in being primarily suppliers of specialty There has been a fortuitous element as well; rather than mass-market circuits. unexpected demand swamped U.S. suppliers The fact that the major semiconductor sup- during 1979 and 1980. As a result of continued pliers in Japan build end products creates capacity expansions during the preceding mar- potential intracorporate synergisms absent in ket slump, Japan’s producers were ready to fill companies that are primarily chipmakers. the void. While some U.S. managers view integration as Some spokesmen for the American industry dysfunctional, likely to sap entrepreneurial find other familiar features: claims have been drive and retard innovation, it has been an ad- repeatedly voiced that the Japanese practice vantage for Japanese companies—which have price discrimination, maintaining high mar- different sets of strengths and weaknesses than gins in protected home markets while slashing American firms. To begin with, the same half- prices in the United States and Europe, Such dozen corporations that produce most of Ja- tactics would imply either explicit or implicit pan’s ICs account for perhaps two-thirds of de- monopolistic agreement among Japanese man- mand; given the focus on vertical integration ufacturers—e, g., tacit acceptance of existing and internal production, it should be no sur- market positions at home, with price cutting prise that U.S. suppliers have had difficulty confined to foreign markets. Even so, questions selling in Japan. Second, as the next chapter of dumping are problematic for integrated points out, the quality of Japanese ICs has been firms; companies making ICs for both internal high–again, this might be foreseen, given that consumption and open-market sales have a firms producing for internal consumption will good deal of latitude in allocating costs and set- find themselves bearing high downstream costs ting prices. Dumping, as defined under GATT when quality lags. A further synergism asso- rules and the laws of most countries, would be ciated with size and diversification stems from difficult to prove; nor would the usual ration- the ability to tap cash flows generated in other ales for prohibiting dumping necessarily be lines of business; these funds can be channeled very relevant. to R&D or added production capacity, matters amplified on in chapter 7. Further, diversified MITI’s push toward ICs for computers and companies can more easily tolerate short-term communications has contributed to Japan’s losses resulting from price-led penetration of strength in world markets for memory chips. new markets. Diversified Japanese companies At the same time—one legacy of the industry’s have combined such tactics with an emphasis roots in devices for consumer applications— on quality—both image and reality—to drive Japanese product lines remain more narrow- boldly into markets once the province of ly based than those of the leading American American firms. Indeed, few other strategies suppliers. Microprocessors are a case in point; could have worked. Unfortunately, from the the major Japanese firms all continue to pro- standpoint of smaller and less diversified U.S. duce American designs. NEC, Toshiba, Mit- merchant manufacturers, unrelenting price subishi, and Oki sell members of the Intel 8080 200 ● International Competitiveness in Electronics

family; at least three Japanese firms are build- ly view as critical; U.S. firms heavily depend- ing Intel’s 16-bit 8086.40 Although several Japa- ent on memory products have been severely af- nese manufacturers have designed microproc- fected, In other product categories, Japanese essors for internal use, these have not found competition is also stiffening; a major effect other markets. And if made-in-Japan dynamic was to further depress prices and profits dur- RAMs now claim a major share of worldwide ing 1981 and 1982, when domestic firms were sales, the overall Japanese presence in the troubled by a deep recession, United States remains modest. In 1982, imports In the longer term, American semiconduc- from Japan accounted for about 5½ percent by tor manufacturers have every reason to be value of total U.S. integrated circuit consump- wary of continued pressure from powerful tion; although increasing rapidly (fig. 26, ch. multinationals with headquarters in Japan— 4), Japanese imports remain small in absolute firms that have already demonstrated their abil- terms. Still, the inroads have come in a market ity to compete successfully in major world mar- segment that American manufacturers right- kets for other technically demanding products. The U.S. merchant manufacturers have their ‘R. H. Silin, The Japanese Semiconductor Industry: An Over- own advantages—they do well some things that view (Hong Kong: Bank of America Asia, Ltd., January 1979), p, 148; “Background of VLSI War With United States Reviewed, ” Japanese firms do poorly–but they cannot ex- Japan Report, Joint Publications Research Service JPRS L/10662, pect an easy time of it in the future. July 16, 1982, p. 43.

Computers

If American manufacturers were for many suppliers in Europe and the United States. It years unchallenged in world markets for semi- is too early to predict the extent to which the conductors, the United States has been still Japanese strategy may succeed, but structural more preeminent in computers. Even in Japan, changes in the world computer industry are American-owned firms continue to account for creating new opportunities for firms every- over 40 percent of mainframe sales; the U.S. where. The Japanese will probably be able to share of the Japanese market for small systems exploit at least some of these, certainly better is lower, but such firms as Data General and than European producers. Hewlett-Packard have recently established pro- duction facilities there. In Europe, U.S. com- The Environment for U.S. Suppliers panies are far out front except in the United Kingdom, where the government has actively By virtually any standard, the United States supported ICL through procurements and sub- has far and away the most computer-intensive sidies. American-owned enterprises account economy in the world, a position it can expect for nearly three-quarters of all computer sales to maintain indefinitely. From the early days in Europe. of the industry, the number of computers in- stalled in the United States mounted at a pace This section again concentrates on the that kept the total about an order of magnitude United States and Japan. While Japanese com- greater than for all of Western Europe.41 By puter manufacturers have not yet proven no- 1981 there was a computer terminal for every tably effective competitors outside their home 48 people employed in the United States; by market, they are at present uniquely situated to launch a campaign aimed at the U.S. posi- tion—in part because of their newly acquired strength in microelectronics, in part because 41Gap5 in Technology: Electronic Computers [paris: Ch’ganiZa- of their active pursuit of joint venture ties with tion for Economic Cooperation and Development, 1969), p, 16. Ch. 5—Competitiveness in the International Electronics Industry . 201

42 1986 there should be 1 for every 10. American product lines that match up reasonably well leadership in design, production, and sales— while at the same time staking out their own as well as utilization—is reflected both in trade territory—e.g., Control Data in high-perform- data, where the computer industry continues ance scientific machines, Burroughs in small to be a prodigious net exporter, and in the business systems (on the latter, see the case prominence of U.S.-owned subsidiaries in study in app. C). In these efforts, American other parts of the world. computer firms have been aided by the tech- nological lead of the U.S. semiconductor indus- Strategic Patterns try, Although IBM has relied heavily on inter- nal semiconductor design and manufacture, For many years the story of American su- other firms—whether or not maintaining cap- premacy in the global computer industry was tive production facilities—have been able to the story of one company—International Busi- take advantage of components available on the ness Machines, Although IBM trailed Reming- merchant market that were often superior by ton Rand, builders of the Univac, in marketing conventional yardsticks to IBM’s devices, This early computer models, by the late 1950’s IBM is one of the reasons IBM has itself begun to had gained the huge lead it still enjoys. For the purchase ICs on the outside. A major element other old-line firms—including Burroughs, in the strategies of other mainframe suppliers NCR, Honeywell—competition has mostly (excluding those making plug-compatible ma- meant jockeying for places in the residual mar- chines] has been to expand into new applica- ket left by IBM; these companies have found tions while tying their installed base to propri- it difficult to reach the Wale needed to offer etary software—thus keeping old customers. a full product line and to’ support a sales/serv- None have had more than limited success; ice organization competitive with IBM’s. In other mainframe-oriented firms have general- general-purpose mainframes, IBM has ac- ly been a good deal less profitable than IBM, counted for 60 to 70 percent of the world and have made little headway in eroding IBM’s market over the years, with lower figures in market share, Several have done better abroad; such countries as Japan and the United King- Honeywell’s joint venture in France has been dom balanced by even higher percentages else- a greater force in the European market than where. To be sure, numerous entrants—mostly the parent has been in the United States. American—have attempted to carve out com- petitive positions against IBM, with much The Impacts of Microelectronics and more success in rapidly growing markets for Reliability Improvement small systems than in mainframes. Companies ranging from Digital Equipment Corp. or Con- Because the market has enlarged and changed trol Data in the United States to Fujitsu in so radically, focusing on the older mainframe Japan and Nixdorf in West Germany have es- companies hardly gives a fair sampling of cur- tablished themselves solidly in some portions rent strategies. As figure 35 indicates, market of the market. But none has come close to growth for general-purpose mainframes—the IBM’s overall sales, despite the rapid shifts in mainstay of the industry just a few years ago— overall market structure described in the pre- is now much slower than for other types of sys- vious chapter, tems. As sales of minicomputers, small busi- ness installations, and desktop and personal Most of IBM’s American competitors have machines exploded, competitive dynamics taken a straightforward approach to their situa- altered fundamentally. Newer entrants have tion: following IBM’s lead in the development staked out major shares of markets for products of faster and larger systems, trying to maintain like word processors. These structural shifts are continuing—indeed accelerating. 421, M, Branscomb, “computer Communications in the Eight- ies—’I’ i me To Put It All Toget her,” Computer Networks, ~ol. ~, What are the implications for international 1981, p. 3. competitiveness? As in semiconductors, prod-

99-111 0 - 83 - 14 202 . International Competitiveness in Electronics

Figure 35.—Market Segmentation of U.S. Computer Sales by Value

1980

1985 (projected)

SOURCE “Moving Away From Mainframes The Large Computer Makers’ Strategy for Survival, ” Business Week, Feb 15, 1982, p 78 Ch. 5–Competitiveness in the International Electronics Industry ● 203 uct planning decisions in the computer in- banking or distributed word processing. Start- dustry are shaped by technical possibilities. ups of earlier years—Data General, Prime, Tan- Specialized machines of all sizes have long had dem—have become substantial multinationals their place, but the turn toward small and ver- in their own right. Independent software ven- satile computers is a direct consequence of dors are creating a whole new industry. twin driving forces: advances in software for Better reliability—in addition to broadening networking and distributed processing, plus the applications of computers—has had a sec- advances in microelectronics. Computer sys- ond, equally important, impact. As in con- tems need no longer be structured around a sumer electronics, it has allowed manufac- single processor. A central unit can be sur- turers to skirt traditional distribution channels rounded by a number of satellites, or the en- and reach customers through new outlets. This tire processing load can be shared throughout trend—which began as early as the 1960’s with a network. Given cheap microprocessors and systems houses that purchased minicomputers single-chip microcomputers, designers can put and peripherals in quantity, assembling them, “intelligence’ where they want it, Computer together with software, to supply turnkey in- firms that fall behind in such developments— stallations—also promises to continue and per- more broadly, manufacturers of systems incor- haps accelerate. Greater reliability has reduced porating machine intelligence, not all of whom the need for onsite maintenance and repair; think of themselves as part of the computer in- where field service was once a vital element dustry—will be poorly placed to compete in fu- in any marketing strategy, smaller manufactur- ture markets. ers are now less constrained by the need to fi- Improvements in system reliability—flowing nance service networks. Moreover—while hob- partially but not wholly from the growing byists, engineers and scientists, and many bus- reliability of microelectronic devices—yield inesses could be reached through specialized another powerful driving force. Mean times be- distribution channels–selling personal or desk- tween failure for computer systems have been top computers to the general public requires increasing steadily despite greater complexi- retail distribution. This, in turn, is realistic only ty. Today’s computers are orders of magnitude if the need for aftersales service is modest. Cur- more dependable than those of even a decade rently, the personal computer market is mov- ago; this not only cuts operating and main- ing through a transition paralleling the earlier tenance costs but helps expand applications. shift in color TV—desktop machines are be- Computers can now be used in a host of ap- coming off-the-shelf items rather than products plications where the dangers of a failure were sold and serviced by specialty outlets. The per- formerly too great–real-time air traffic control, sonal computer is a product in which IBM had electric utility load management, critical in- no great advantages beyond name-recognition dustrial processes. and abundant internal resources for product development. While these are far from trivial Ever-greater reliability combined with ever- assets, IBM will probably not be able to dupli- greater computing power per dollar has eaten cate its position in mainframes in the far more away at IBM’s traditional strengths—customer diverse and competitive desktop market, just support and service, plus the ability to lock in as the company has not been able to do as well customers via a product line broad enough to in small business systems, supercomputers, or satisfy virtually every need. Now, so many ap- word processors. The general point is: to be in plications have opened up that no one com- the computer business no longer necessarily pany can hope to cover them all; in many of means confrontation with IBM; it need not en- these, IBM’s market power—so valuable in sell- tail attempting to cut into the installed base of ing general-purpose mainframes—has been, if any mainframe manufacturer, much less try- not irrelevant, at least a far smaller advantage. ing to match IBM’s hardware or software New entrants can specialize in systems for across a broad spectrum of products. *

204 ● International Competitiveness in Electronics

Even in small systems, only a few companies puter goes in large part to the specialized ap- have been able to span a major portion of the plications programs that were available, Even market. Some—e.g., Hewlett-Packard—have more, as hardware costs fall, specialized soft- specialized in powerful machines for sophis- ware becomes the pacing factor in applications ticated customers. Others, like Wang and Data- ranging from office automation—where much point, have aimed at business applications, of the competition for word processor sales Digital Equipment Corp. (DEC)—which started revolves around software—to industrial robots. as an OEM supplier—now has a relatively Limited growth in software productivity and broad product line, including personal com- high associated costs (ch. 3) are problems that puters, As in the semiconductor industry, man- now confront all firms in the industry, here and agers have had to search for market opportuni- overseas; among the possible solutions are mul- ties that match their ’ strengths. tinationalized software generation. In the Their choices and decisions, constrained by re- future, the importance of software compared source limitations and conditioned by govern- to hardware can only increase; the exceptions ment policies, will determine the future com- are perhaps at the very high and very low ends, petitive posture of the U.S. industry. Mistakes where supercomputers remain hardware-inten- will be made, and weaker companies—most sive and small machines selling for less than likely those making peripherals, office automa- a thousand dollars compete on the basis of tion equipment, and desktop computers—will price. find themselves being absorbed or merged with From a slightly different perspective, soft- competitors. ware can become a constraint: switching to new software, particularly system software, is Product Strategies: Hardware and Software time-consuming and expensive. Customers The mainframe-oriented companies do retain with extensive data processing installations advantages in structuring complex and far- and large software inventories become locked flung information systems. Designs for such in because of the high costs of transferring. systems are often shaped by existing software This is a constraint on the system manufactur- inventories, The original supplier has an easier er as well, who may be burdened with obsoles- time achieving compatibility; indeed, computer cent software that cuts into potential perform- firms have had a good deal to gain by making ance. The picture is somewhat different for it difficult for competitors to reverse-engineer computers sold to purchasers who are techno- their software and develop compatible systems. logically adept—e.g., OEMs who integrate com- Some have gone so far as to replace portions puters into their own products, or those with of the system software with “firmware” stored needs in engineering or science. Such custom- in ROM chips which can be changed from time ers commonly have the internal resources for to time. Generally, such efforts have been in- solving their own software problems, and find tended to thwart plug-compatible manufac- shifting to new systems, though a difficult task, turers. not an insurmountable one. Still, given their software investments, virtually all customers The importance of software extends far be- have strong motives for replacing or augment- yond the system level. Machines capable of ing their equipment with new models from the data processing for business needs are now same manufacturer—and manufacturers within the financial reach of even the smallest strong motives for ensuring software compati- firms—and, of equal significance, can be used bility within their product lines. Therefore, by people with little special training, Software once markets begin to mature, a manufactur- that is user-friendly, as well as reliable, is a key er’s share of the installed base becomes a good element in selling to those without previous indicator of future prospects; competitors need data processing experience. As the case study hardware that is substantially better or cheaper in appendix C points out, credit for the suc- to stand much chance of convincing customers cess of IBM’s System/32 small business com- to switch allegiance, Brand loyalty has been Ch. 5—Competitiveness in the International Electronics Industry 205

high in general-purpose data processing mar- the technology—although occasionally market kets, largely for such reasons. demand outstrips what the industry can sup- ply, as happened with word processors—and Plug-compatibility is aimed at breaking this it is difficult to predict where it may lead. Some cycle. Originally referring to peripherals such observers believe that IBM’s market power will as disk drives, plug-compatible manufacturers continue to deteriorate, even in areas where (PC MS) later moved into mainframes that can the firm’s position has heretofore seemed un- operate on IBM software; now some build assailable. Others think the future lies with equipment compatible with DEC minicom- large and powerful companies able to combine puters or IBM Personal Computers. Basically, far-flung communications and information net- the PCM strategy has been to make equipment works into vast integrated systems. In fact, both that can be used interchangeably with IBM’s, views are probably correct, given the fragmen- while undercutting the latter’s price/perform- tation and specialization brought by cheap ance ratios .43 hardware. The forces outlined above shape the strat- egies of companies striving to keep up in the American computer manufacturers, living marketplace. New approaches to product de- nervously with rapid technical change at home, velopment are appearing throughout the in- face another series of choices in foreign mar- dustry; even IBM has begun to purchase more kets. Governments in industrialized nations hardware outside, as well as software. In where American subsidiaries have long been another new departure for the company, IBM dominant continue to follow policies trans- has started selling disk drives on an OEM basis. parently intended to reduce that dominance, As in semiconductors, technology-sharing Such policies are nothing new: France’s Plan agreements have become more common— Calcul was set forth more than 15 years ago, cross-licensing of patents, direct purchases of and the Governments of Great Britain and Ja- technology, joint development—as firms con- pan have, over the years, found many ways to serve resources through specialization. This is support local computer manufacturers. While the idea behind Microelectronics & Computer most such policies have had only limited ef- Technology Corp.—spearheaded by Control fects in the past, certainly in Japan the tech- Data and presumably aimed not only at oncom- nological fervor is now intense, ing competition with the Japanese but the con- If competition from Japanese computer firms tinuing struggle of smaller entrants with IBM. is on the rise, American entrants are them- Movement toward technology purchases and selves fashioning new international strategies. technology sharing appears to have even more Already DEC operates six plants in Europe and momentum in Europe, despite earlier failures three more in the Far East. A partial list of of joint efforts like Unidata. Siemens, ICL, and other American minicomputer manufacturers Olivetti are among the companies now market- with foreign production facilities would in- ing Japanese-built mainframes in Europe. clude Hewlett-Packard, Wang, Data General, Datapoint, and Texas Instruments. U.S.-based International Aspects multinationals specializing in desktop ma- The picture that emerges in the U.S. com- chines include Apple, with plants in Ireland puter industry is one in which the long-dom- and Singapore, and Tandy. Manufacturers pro- inant leader is being challenged on all sides, ducing plug-compatible mainframes have also Structural change has been driven largely by begun to expand abroad: Amdahl has opened an Irish facility intended in part to supply the Common Market, as has Trilogy Systems. tsrrhe fou n(jer of A m{lah], the leading supplier of PC M main- frames, has said that sur~i~’ing in competition with IBM requires The rules of the competitive game are in par- costs that are 15 percent lower or performance that is 20 per- cent better, See “Makeshift Marriage, ” The .&onomist, Aug. II, ticular flux in lesser developed parts of the 1979, p, 78. world. Developing countries are putting in- 206 International Competitiveness in Electronics

dustrial policies to work attracting technology eral industrializing nations are attempting to and fostering local computer manufacturing. improve the capabilities of their labor forces Mexico’s approach has been to restrict imports, so that they can produce software needed in limiting sales to companies that agree to estab- advanced economies. Countries like Singapore, lish production facilities. With an annual mar- Hong Kong, and Taiwan are seeking to create ket now approaching $500 million, Mexico has “software centers” where Western computer been able to attract a pair of U.S. minicomputer manufacturers could establish subsidiaries that firms willing to live with these rules. Brazil’s would transfer skills and provide training for Government has reserved the domestic mini- the local work force while also producing computer market for locally controlled enter- much-needed software. Once the people were prises; transfers of technology have been en- available, locally owned companies could take couraged, but foreign investments are limited over at least some of the work. to minority interests. While American compa- nies have generally chosen to stay out, several Japan European and Japanese firms have agreed to Objectives announced by Japan’s Govern- participate—no doubt hoping for benefits sim- ment over the past few years herald a com- ilar to those now flowing to the Japanese con- petitive onslaught directed at the U.S. com- sumer electronics manufacturers that accepted puter industry. MITI is sponsoring a pair of such conditions in earlier years. long-term R&D projects dealing with computer How will the onset of local production in systems, plus several related efforts.44 The fifth- developing countries affect international com- generation computer project—the origins and petition in computers? While any answer re- organization of which are described in chapter mains conjectural, it would be foolish to dis- 10—is software-intensive, directed at artificial miss the possibility that some of these nations intelligence, information organization and may evolve into viable forces in the market- management, and natural language input and place. Although their ability to compete will output. In the second project, MITI is helping probably be restricted to simpler products over fund the development of a supercomputer in- the foreseeable future, developing economies tended to surpass the most powerful offerings will begin by building equipment such as ter- of American companies like Control Data and minals, printers, and disk drives, where labor Cray. A related lo-year project will support is a major cost element. It is not a big step from development of the high-speed microelectron- making TV receivers to producing the simpler ic devices needed to implement the software types of computer terminals—indeed a step concepts of both fifth-generation machines and that countries like Korea and Taiwan have al- supercomputers. The goal is nothing less than ready taken. With the experience gained in to thrust Japanese companies into the forefront such products, and with protected markets of world computer technology, to leapfrog the contributing to scale economies, a number of United States in the design and marketing of the newly industrializing countries could move both hardware and software. The objectives of fairly quickly into world markets.

As a final point, again consider software de- ‘Outline of Research and Development Plans for Fifth Genera- velopment. By its nature, programing has been tion Computer Systems (Tokyo: Japan Information Processing Development Center, Institute for New Generation Computer labor-intensive–therefore increasingly costly Technology, May 1982); Computer White Paper: 1981 Edition in high-wage nations. Software generation de- (Tokyo: Japan Information Processing Development Center, pends on people with ability and experience— 1982], pp. 59-75; “Machinery, Information Industries ’81 Pro- grams Outlined, ” )apan Report Joint Publications Research Serv- including an understanding of the problems ice JPRS L/10086, Nov. 2, 1981, p. 21; “Archetype of Fifth Genera- faced by users, Such factors have prevented the tion Computer Described, ” )apan Report, Joint Publications Re- transfer of this work to developing countries, search Service JPRS 1./11007, Dec. 14, 1982, p. 49; “MIT I Proj- ect To Develop Supercomputer Starts in January, ” Japan Report, even those like India where the raw program- Joint Publications Research Service JPRS L/10348, Feb. 23, 1982, ing skills might be available. Nonetheless, sev- p. 34. Ch. 5—Competitiveness in the International Electronics Industry 207 these programs are by no means unique to their weaknesses, and have made plans accord- Japanese manufacturers; they are squarely in ingly. the mainstream of the evolution of computing. It is the strength of Japan’s commitment—the Technology backing by MITI and other government agen- Carefully targeted R&D is a central strand in cies, the lo-year schedules—that differentiate the Japanese computer strategy, as in earlier them from efforts in other countries. ventures into other industries, Japanese pro- As the rhetoric associated with such pro- ducers and their government realize, just as grams makes clear, Japanese firms, with the they did in microelectronics, that international help of their government, hope within 10 or 15 competitiveness in computers cannot be at- years to lead the world in computer technol- tained so long as they rely on technology from ogy. Despite Japan’s relatively successful ex- the United States, The reasons are twofold, perience with previous government-sponsored First, American firms are far less likely to R&D efforts—the Pattern Information Process- license technologies than in the past, The Jap- ing System (PIPS) project, the VLSI project— anese know that computer manufacturers in this is a tall order. At present, the market posi- the United States, unlike at least some of their tion of Japanese manufacturers is modest; as predecessors in other sectors, are acutely of 1981, American-owned companies held aware that technical leadership is a primary more than three-quarters of the world com- source of competitive strength, and that to puter market in value terms, Japanese-owned make their technology too easily available companies only about 7 percent. Still, Japan is would weaken their own position, The second now the second largest supplier of general- reason is even more fundamental. In the basic purpose computers to the world market, with building blocks of computer hardware, semi- a very high rate of export growth (ch. 4, fig. conductors, Japanese firms are near parity with 30). The country is also second only to the American companies; in some areas they may United States in intensity of computer utiliza- be ahead. Japan can hardly depend on im- tion. After the experiences of consumer elec- ported technology; rapid progress toward an tronics, automobiles, and semiconductor mem- eventual goal of leadership in information ory chips, few in the American industry would processing requires extensive indigenous capa- take Japan’s goals lightly. bility of the sort that Japanese firms now have in high-density memory chips, Nevertheless, because of the role that factors such as installed base and software inventories The Japanese also recognize that their short- play in the marketing of computer systems, comings in the marketplace are not so much Japanese manufacturers must begin with the matters of hardware as of software and related knowledge that—no matter how good their applications-based constraints, Several Japa- technology—they cannot hope to come close nese firms now offer computer hardware as to the United States for many years. In this powerful as any. However, IBM’s huge in- sense, the computer market is not at all like that stalled base and vast catalog of applications for semiconductors, where purchasers quick- programs have forced Japanese competitors, ly switch suppliers to take advantage of low as those elsewhere striving to break into the prices, quick delivery, or new device types. mainframe market, to build plug-compatible Success in niche markets for computer systems machines that run on IBM software. To get is quite possible, indeed a necessary first step, around this impediment is perhaps the major but breadth in an industry expanding in as reason for the fifth-generation project. While many different directions as information proc- companies like Amdahl have demonstrated essing can only be a long-term undertaking, that a comfortable business can be built sup- The U.S. position, both in technology and plying PCM mainframes, markets tied to market share, is simply too strong. Leaders in another manufacturer’s software are inevitably Japanese Government and industry recognize limited. Japan’s gamble is that it can jump 208 ● International Competitiveness in Electronics

ahead of American entrants with families of $100 million over roughly the same period.** computer systems having performance capa- A parallel microelectronics project—which bilities that will render present-day software goes by names such as “R&D on New Func- inventories obsolete. This goal has shaped the tion Elements’’—has a budget of about $150 hardware and software R&D planned for the million and is scheduled to run from 1980 to fifth-generation project: to take full advantage 1990, Money will go to three major develop- of emerging microelectronics technologies in ment efforts:45 more closely linking the needs and abilities of Three-dimensional circuit elements— people with the capabilities of the system. If which can be visualized as more-or-less these objectives are met, individuals—even conventional ICs stacked atop one those with little training—will be able to com- another, increasing the density. municate with fifth-generation machines High electron mobility transistors through ordinary language in spoken or writ- (HEMTs), one variety of which consists of ten form, as well as through graphical or pic- very thin layers of semiconducting mate- torial images. Such systems would not only rials such as gallium arsenide or gallium be user-friendly, but might ultimately display aluminum arsenide; HEMTs offer poten- something of the independent decisionmaking tially higher switching speeds, hence faster capability associated with human reasoning. * computers. If the technical objectives of the fifth-gen- Radiation-hardened devices suitable for eration project—and similar efforts in other use in extreme environments such as nu- countries—are achieved, even novice users clear powerplants or outer space (resist- would be able to harness enormous computing ance to heat and vibration is a related ob- power. The commercial potential is immense. jective). Government Assistance The first two especially will support both supercomputer and fifth-generation projects. The Japanese Government has supported Among related government-sponsored pro- R&D activities in information processing over grams, another of major significance for the many years. MITI has been selective in finan- corporate strategies of Japan’s computer man- cial aid, directing funds to potential bottle- ufacturers has aimed at the development of necks, exemplified by the VLSI program’s sup- software and peripheral devices with Japanese port for digital ICs, or to R&D that could help language input-output capability. Scheduled Japan’s industries leapfrog the competition, the over the period 1979-83, nearly $200 million intent of the fifth-generation computer project. 46 was allocated to this effort. Funding for the latter is projected at about $500 million over a 10-year span (1981-91); the super- As in microelectronics, R&D is but one of computer project is expected to get another many ways in which Japan’s Government as- sists the computer industry. The Japan Devel- opment Bank loans money to the Japan Elec- tronic Computer Corp. (JECC), a jointly held firm which purchases computers from partic- *An example from the field of artificial intelligence—the area ipating manufacturers and them to known as expert systems—will illustrate, Research in expert sys- tems aims at computer programs that mimic attributes of peo- ple who are “experts” in some realm of knowledge—e. g., medi- cine, where such programs might help automate diagnosis. The * * Planning for the fifth-generation program began several objective would generally be to augment or complement rather years earlier, as outlined in ch. 10. A variety of funding levels than supplant human skills; an expert system would not have for both projects have been reported; spending plans and sched- the judgement of a physician, but could offer, for example, per- ules will no doubt shift as they progress. fect recall of vast amounts of information. Expert systems typ- 46’’FY82 Government Projects in Electronics Listed, ” }apan ically depend on complex software and large data bases; thus, Report, Joint Publications Research Service JPRS L/10676, July advances in hardware as well as software maybe needed if they 22, 1982, p, 55. are to be widely implemented. ~Computer White Paper: 1981 Edition, op. cit., pp. 4ff. Ch. 5– Competitiveness in the International Electronics Industry 209 — .— -— . —.—

Table 46.— Research and Development Expenditures by Several U.S. Computer Manufacturers, 1981

R&D spending (millions of dollars) Burroughs ...... $220 Control Data Corp. ., ...... 202 Digital Equipment Corp.. ., ... 251 Hewlett-Packard . . . . 347 Honeywell ...... 369 IBM ., ...... 1,600 SOURCES Annual reports

dustries in Japan—including indirect support through tax preferences—could only be esti- Photo credit IBM Corp mated by making a large number of essential- Memory cells in experimental Josephson junction integrated circuit chip ly arbitrary assumptions; see ch. 10. ) MITI's R&D subsidies are also modest in comparison to the research budgets of Japanese companies. Fujitsu spent $260 million on R&D in 1981, users. Manufacturers can set up tax-free re- while Hitachi and NEC spent $610 million and serves to offset losses incurred when con- $230 million, respectively .47 The government tracts with JECC are canceled and equipment money does have an important function: help- must be repurchased. Since 1979, tax-free re- ing with the kinds of long-term R&D that in- serves have been permitted for up to half the dividual companies might otherwise have dif- income associated with some categories of soft- ficulty in justifying. In addition, MITI-spon- ware. Purchasers of certain types of computers sored projects—though not cooperative in the can write off 13 percent of their value, beyond usual sense-attempt to stimulate creative normal depreciation, in the first year. The gov- thinking, technology interchange, and the com- ernment has also established special deprecia- plex of synergies so vital to engineering re- tion schedules for high-performance remote search. The Japanese electronics industry prob- data processing equipment. ably benefits more from these factors—which A panopoly of support measures—of which tend to be lacking within the laboratories of in- many more examples could be cited—has thus dividual corporations-than a strict compari- been designed to help Japanese companies son of funding levels would suggest. achieve technological superiority and commer- Of course, other governments also provide cial success in the 1990’s. At first glance, the assistance to their computer industries, not ex- sums of money involved may seem large; in cluding the United States. European nations fact, when viewed in the context of the world routinely channel direct financial aid to local computer industry, they are modest; as chapter companies, along with indirect subsidies 10 stresses, it is the consistent support provided through procurement and tax benefits. Hand- by many individual measures acting in concert some incentives designed to attract in- that gives Japanese industrial policy its impact. vestments and technology have been dangled To place the expenditures of the Japanese before the European subsidiaries of U.S. and In the United States, Government in perspective, table 46 lists R&D Japanese companies. spending by a number of [J. S.-based computer funding by the Department of Defense through firms. On an annualized basis, subsidies pro- the Very High-Speed Integrated Circuit pro- vided by Japan’s Government for R&D in in- gram and this country’s own supercomputer formation processing come to less than the ex- project—still in the planning stages—will have penditures of any one of these American com- panies. (Total subsidies for the information in- 47An n ual reports 210 ● International Competitiveness in Electronics commercial spillovers. The lesson is that no in- ternational business experience compared to dustrialized nation has been content to accept American firms of even quite modest size, a secondary position in technologies and mar- Until recently, most (but not all) Japanese com- kets considered essential to future economic panies have preferred to manufacture at home development. The concern is that the Japanese for export; this could prove a major weakness may be more successful in implementing their in computers. While a few Japanese electronics policies than other countries. companies—Toshiba is another—have ex- panded aggressively via overseas investment, Marketing Strategies and most of Japan’s past international successes Multinational Operations have come in products where integrated man- ufacturing and marketing in foreign countries Individual computer manufacturers in Japan has not been essential. The examples include have begun to formulate product strategies steel, automobiles, and semiconductors; con- based on technologies expected to flow from sumer electronics is only a partial exception. government-supported R&D projects, as well In each of these cases, Japanese companies, at as their internal activities. Marketing com- least in the beginning, concentrated on export puters presents special difficulties because the sales. Generally able to take advantage of es- chief competitors are already well entrenched; tablished distribution systems, they invested only in peripheral equipment such as ter- overseas only when import restrictions com- minals, printers, and disk drives have Japanese pelled local manufacturing. The competitive manufacturers made a significant impact out- pressures that led U.S. semiconductor or com- side their home market. In Europe and the puter firms to invest in Europe and elsewhere United States, where nearly two-thirds of the have only recently begun to impinge on the world’s computer systems have been installed, Japanese. By now, American computer firms Japanese companies are inconsequential as in- not only operate wholly owned sales and serv- dependent suppliers. ice networks in many parts of the world, they In an industry where sales depend on a thor- have established internationally dispersed and ough grasp of user needs at a technical level— integrated manufacturing operations—partly in software as well as hardware—late entry is a response to governmental demands and part- major handicap. American suppliers-includ- ly due to the nature of the market. Japanese ing newer participants like DEC and Hewlett- firms, on the other hand, have been largely un- Packard—have built networks of sales and serv- willing or unable to make the enormous in- ice centers staffed by engineers and techni- vestments required to participate in the world cians who now have longstanding ties with marketplace for computers. customers; IBM has such a network within Ja- Managers of Japanese firms, along with bu- pan, Even those Japanese firms with strong in- reaucrats within the government, recognize ternational positions in microelectronics or their lack of background and experience, and telecommunications cannot match the distribu- are seeking remedies. The international (as op- tion systems of U.S. computer manufacturers. posed to R&D) strategy appears to be an in- To make much progress, Japanese entrants will cremental one, geared to minimizing the re- have to invest substantial sums over many sources at risk and taking advantage of existing years without the expectation of immediate strengths. As part of this strategy, Japanese returns. The history of fields like consumer electronics firms, with the encouragement of electronics indicates that at least some Jap- MITI, are beginning to establish manufactur- anese companies will be willing to make this ing plants in other industrialized countries, commitment. Following investments by Japanese consumer Perhaps surprisingly, given the global per- electronics suppliers in the United States and spectives of consumer-oriented firms like Mat- elsewhere, tentative steps have been taken in sushita, the Japanese computer industry as a semiconductors, a market in which the Japa- whole suffers from a pronounced lack of in- nese have already become well entrenched Ch. 5–Competitiveness in the international Electronics Industry 211

through exports. These same semiconductor minicomputers or small systems. Moreover, manufacturers are of course the major com- the Japanese participants remain a critical step puter firms. Experience gained from invest- removed from the customers whose applica- ments in semiconductor production will help tions their equipment is intended to serve— in structuring multinational computer opera- joint ventures will provide limited help at best tions. in remedying past weaknesses of Japanese firms in software or customer support and As a parallel step, Japanese manufacturers service. To become viable international com- have established marketing links with a num- petitors, Japan’s computer companies will need ber of foreign firms, Fujitsu now furnishes to accumulate experience in dealing directly Siemens [West Germany) and IGL (Britain) with with the requirements of customers in markets large mainframes, while Hitachi has similar ar- where they hope to sell. rangements with BASF (West Germany) and Olivetti (Italy). Fujitsu has taken a minority in- Computer manufacturers in Japan do not terest in SECOINSA of Spain, while agreeing share these problems in equal measure; the in- to a technology transfer tie with a company dustry is far from monolithic. Fujitsu, at the partially owned by the Brazilian Government. moment in a clear leadership position (ch. 4), In the United States, Fujitsu holds a minority has, along with Hitachi, chosen to stake its in- interest in Amdahl, the PCM pioneer to which ternational position on supplying IBM-com- it exports large machines; for several years, Fu- patible equipment--decisions that will limit jitsu distributed its smaller systems within the both companies’ options for many years to United States through a joint venture with come. NEC has taken a different route, devel- TRW. National Advanced Systems, a subsidi- oping its own system software (although deriv- ary o f National Semiconductor, sells Hitachi ative of U.S. technology). Nor has NEC yet c o m put ers here. entered into marketing arrangements with for- eign concerns. Instead, the company's manage- Such arrangements build from the fact of ment appears to be shaping a strategy intended Japanese parity in hardware for large com- to take advantage of the overlap and merger puters, parity which does not extend to soft- of computer and communications technolo- ware; both Fujitsu’s and Hitachi’s systems are gies, areas where the company is already prom- IBM-compatible. European firms have been inent. Despite its relatively small size compared unable to attain the economies of scale that to other Japanese electronics firms, much less Japanese manufacturers get in their home mar- IBM or AT&T, Nippon Electric’s managers are ket, and have chosen to compete with Ameri- attempting to position their organization for can producers by importing from Japan, From what they see as an eventual competitive strug- the collective viewpoint of Japanese firms, gle with these two American giants for domi- these ventures—even where the equipment is nance of the international information indus- labeled with some other brand name—increase try, market exposure and add to production scale. For some time, such relationships will continue At several points above, the entry barriers to be essential elements in the marketing strat- created by the well-established sales and serv- egies of at least several of Japan’s computer ice networks of American firms have been de- manufacturers, Even so, they link companies scribed. This aspect of the market for com- none of which has more than a minor share puters effectively turns one of the supposed ad- of the global computer market. Siemens, ICL, vantages of the Japanese system on its head. and the other partners of Japanese firms to- Barriers erected by government to keep out gether do not account for even 5 percent of foreign firms have given Japan’s manufacturers world computer sales. With the possible excep- advantages in a number of industries, partly tion of ICL, none has a scale of operation and through scale economies. Closed markets cre- distribution approaching that of the competing ated by import restrictions and foreign invest- local subsidiary of IBM. None is strong in ment controls have been reinforced by com- 212 . International Competitiveness in Electronics

plex distribution structures and a deeply in- tion and marketing experience will be able to grained “Buy Japanese” attitude. In computers, exploit the new technologies most effectively. however, the longstanding customer ties main- In this context, present efforts would not be tained by U.S. firms combine with technologi- so important in themselves; rather they would cal strengths to create formidable entry barriers be preparatory steps for rapid growth in the for Japanese companies—indeed, new entrants 1990’s. Another path, one that some firms will from any part of the world. Windows do open certainly pursue, is to concentrate on selling because of technological advance; through smaller systems and personal machines. Here these windows newcomers have moved into the now-traditional Japanese entry strategy is markets for microcomputers, small business feasible because distribution networks are open systems, and other specialized products. Thus to all comers, Thus far, attempts to challenge far, most of these entrants have been American American companies like Apple or Tandy in firms—in part because the U.S. market is so personal computers, or the many U.S. entrants large, but also because American companies in the market for small business systems, have control the distribution apparatus in most parts not been notably successful—in the United of the world. The going will be difficult for States or elsewhere. Still, if and when such Japanese manufacturers, although they are be- products become more nearly standardized ginning to find niche products—desktop com- and interchangeable, Japanese companies puters may be one—suited to their strengths. could expect an easier time, But even if com- panies based in Japan were to expand into In medium and large systems, Japanese com- these markets, it is not at all obvious that this panies can choose from a number of alternative would help them in other types of systems. (or complementary) courses of action. One is to continue to build joint relationships with Japanese producers of computers are thus foreign enterprises. As noted above, such a taking what seem the only paths available in strategy will require, first, deeper involvements their attempts to break into the world market: with end users by the Japanese participants, independent technology development coupled and, second, movement into markets in more with joint marketing relationships. That the parts of the world. If firms such as Burroughs, marketing ties involve firms that are them- Control Data, or Honeywell were to be en- selves weak and in need of partners is hardly ticed—each has a relatively small but well- surprising, but makes the establishment of a established market share—the prospects for viable international presence that much more Japanese firms would look a good deal better. difficult. At this point, the Japanese have had The constant pressure of trying to achieve costs only marginal impacts on global markets; at comparable to IBM’s could well force one or home, IBM-Japan remains a formidable com- more American companies to accept such ties. petitor. Whether or not technical developments As an adjunct to joint marketing ventures, in microelectronics and software will thrust Japanese manufacturers will probably seek Japan into a position nearer the forefront re- other ways of incrementally expanding sales, mains to be seen. If Japan’s computer manufac- while awaiting the fruits of the fifth-generation turers do begin to increase their market shares computer project. If Japan succeeds in pioneer- significantly, the most likely victims will be ing a new generation of hardware and soft- smaller competitors—first in Europe, then per- ware, companies with multinational produc- haps in the United States. Summary and Conclusions

While international competitiveness—in any are central. Costs of labor and capital, techno- industry—depends on many factors, the busi- logical resources, government policies, human ness strategies pursued by private corporations resource endowments—all can, at least in prin- Ch. 5—Competitiveness in the International Electronics Industry 213 — . —.— ciple, be looked on as forces impinging on man- products. But they were in a good position to agement decisions, as features of the landscape catch up. The first signs of success came early, for business tactics and strategies. when Japanese manufacturers like Sony cre- ated new families of radios smaller While a useful perspective, the strategic view and lighter than those offered by American of competitiveness is nonetheless an imperfect firms. The transistor was invented in the substitute for more quantitative indicators. Un- United States, the first transistor radios also fortunately, the swiftness of technical change made here, but Japanese firms pushed their in electronics precludes useful quantitative product development efforts vigorously and measures. Productivity trends mean little outstripped their U.S. rivals within a few years. where the standard products of today—wheth- Now that Japan is in the lead with new genera- er semiconductors or mainframe computers-- tions of consumer products it will be difficult have capabilities that may be orders of magni- for American or European manufacturers to tude beyond those of a decade past. Compara- regain the lost ground. tive manufacturing costs carry weight in some cases, but not where one company can build In computers and semiconductors, Western products exceeding the reach of competitors. Europe came out of the war well ahead of Little meaning attaches to patent statistics as Japan. The Europeans had good fundamental surrogates for technical ability when incentives technology, but were stymied by small and for acquiring patents vary widely among coun- fragmented markets, as well as by manage- tries and nowhere correlate very closely with ments that had neither the resources nor the qualitative aspects of technology. vision of their counterparts here. Subsidiaries of U.S. corporations became the backbone of If shifts in international competitiveness can- the European computer industry---they still not be extracted from statistical series, careful are—and took the lead in microelectronics. In examination of business activities can yield in- the Japanese market, American firms could not sights into future prospects as well as past match their accomplishments i n Europe be- trends. In semiconductors and computers, not cause of the protective policies of Japan Gov- to mention consumer electronics, American ernment. Still, if not dominant, the United firms--once undisputed leaders in technology, States was—and remains—a major force in Jap- as in sales in their home markets and virtually anese computer sales, particularly for large around the world-face much stronger compet- machines, as well as in some types of semicon- itive pressures. Foreign enterprises, mostly ductor devices. Continued efforts by American Japanese but also entrants with headquarters firms--backed if necessary by the U.S. Govern- in other Far Eastern countries, are selling ment--to participate on equitable terms within larger volumes of electronics products within Japan, whether by exporting or by direct invest- the United States; American corporations are . ment, appear vital for maintaining U.S. com- having a more difficult time in foreign markets, petitiveness in electronics. The Japanese elec- The sources of these shifts are many, By-and- tronics market is large and still expandin large, they are not due to mistakes or faulty g rapidly; it is now more important than Europe. strategies by American firms or by the U.S. Government. First and foremost, rising foreign Japanese industrial policy has been a more competition flows from continued rebuilding significant source of support in semiconduc- of the electronics industries of Europe and tors and computers than in consumer elec- Japan in the aftermath of World War II. It is tronics. The MITI-sponsored VLSI research not a new phenomenon. By the mid-1950’s, program—while not as important as some when much of the basic reconstruction of over- Americans have claimed--did help Japanese seas economies was complete, companies in firms master process technologies for very Japan and much of Europe found themselves large-scale digital ICs. In standard device still well behind the United States in their abili- families like memory chips--where the path of ty to design, develop, and produce electronics technological evolution is clear for all to see, 214 ● International Competitiveness in Electronics — — and technological success a function more of hard-pressed to keep up, even survive; their painstaking development and detail design managers will face hard choices in allocating than highly creative engineering—the Japanese limited resources. Few companies—even in- have excelled. While they cannot as yet match cluding the largest, here or in Japan—will be the breadth of American product lines, they able to cover more than a small fraction of will certainly continue to improve their capa- product markets. bilities in circuit design as well as processing. While no one can foretell competitive out- If U.S. semiconductor manufacturers can ex- comes in the world computer industry, it is ob- pect intense competition, they too have their vious for all to see that Japan has made a series advantages—a different set than those of Japa- of explicit decisions—going back as far as the nese firms. If American companies continue 1960’s and involving both government and in- to capitalize on these strengths—the best trained engineers in the world, quick recogni- dustry–aimed at claiming a major share of tion and response to market needs, innovations sales and applications. Based on past perform- in circuit design, applications of computer- ance in other sectors of electronics, the prob- aided techniques, specialized products pursued ability of continued expansion by the major with entrepreneurial zeal—the United States Japanese computer manufacturers is high. Be- should be able to maintain a leadership posi- cause the characteristics of the market for data processing equipment differ from those for tion. Still, American companies will not be able semiconductors, the United States remains in to monopolize world sales as they did a decade a stronger relative position. There is no reason ago. why the United States cannot continue to hold Competitive pressures, evolving technology, an overall lead in both technology and sales. and growing capital intensity—along with the As events in all three portions of the elec- continuing expansion of captive production by integrated firms—are changing the structure of tronics industry demonstrate, competitive posi- tions in global markets have shifted more-or- the U.S. semiconductor industry. New struc- less continually over time. Some firms in some tures bring new strategies. Structure is chang- parts of the world rise, others decline. Of those ing in the computer industry as well, driven that decline, a few may eventually revive, by the technology of computing, itself depend- ing heavily on microelectronics. As computing others disappear. No country can expect all its industries to thrive in international competi- power becomes ever cheaper, more and more tion; any nation that trades will be more com- applications become cost effective. These at- petitive in some industries than others, the tract new firms, designing and developing not leaders in competitiveness shifting over time. only peripherals and software, but specialized That U.S. competitiveness has slackened in processors—minicomputers, personal and consumer electronics does not imply that sim- desktop units, business systems, While the ilar events will follow in other sectors. This mainframe is hardly a dinosaur, a “computer” could happen, but there is no reason to expect can now be a great many things—many never declines in microelectronics or computers par- envisioned by the designers of the general- alleling those in color TV—particularly so long purpose machines sold two decades ago by a as the technology continues its rapid evolution small number of companies such as Univac and markets expand at high rates. These are and IBM. Computing power is now cheap and conditions under which American firms have widely dispersed, often invisible to users. As traditionally prospered. When the pace of distributed processing and data communica- events slows, other sectors of the Nation’s tions continue to spread, new firms will try to economy might begin to find themselves far- establish themselves, entering through win- ing better than electronics in international dows of technological or market opportunity. competition. Some of the older firms will find themselves