International Competitiveness in Electronics

November 1983

NTIS order #PB84-170695
Library of Congress Catalog Card Number 83-600610

For sale by the Superintendent of Documents,

U.S. Government Printing Office, Washington, D.C. 20402
Foreword

This assessment, requested by the Senate Committee on Commerce, Science,

and Transportation, the House Committee on Ways and Means, and the Joint Economic Committee, completes a series of three reports on the competitiveness of

U.S. industries. The series began with Technology and Steel Industry Competitiveness and continued with U.S. Industrial Competitiveness: A Comparison of Steel,

Electronics, and Automobiles.

Today, the subject of international competitiveness has more visibility among

the general public than ever before. It has emerged as one of the primary economic

issues facing Congress. Debates over “reindustrialization” and “industrial policy”

beginning several years ago have been renewed. This assessment continues OTA’s

exploration of the meaning of industrial policy in the U.S. context, while also examining the industrial policies of several of our economic rivals.

Electronics virtually defines “high technology” in the 1980’s. This assessment

sets the characteristics of the technology itself—a technology already of such ubiquity that microprocessors and computers outnumber people in the United States—

alongside other forces that exert major influences over international competitiveness. These factors range from human resources and costs of capital to the

priorities that corporate managers place on manufacturing technologies and the

quality of their products. The report concludes by outlining five options for a U.S.

industrial policy, drawing on electronics for examples of past and prospective impacts, as well as on OTA’s previous studies of the steel and automobile industries.

OTA is grateful for the assistance of the advisory panel for this assessment,

as well as for the help provided by many individuals in other parts of the Federal

Government. OTA assumes full responsibility for the report.

Director

. . ///
Electronics Advisory Panel

Katherine Seelman, Chairperson

New York, N. Y.

Jack C. Acton

Greensburg, Pa.

Steve Beckman

AFL-CIO

A. Terry Brix

Temar Ltd.

Richard P. Case

IBM Corp.

Ruth Schwartz Cowan

SUNY-Stony Brook

William Kay Dairies

American Retail Federation

Leonard Dietch

Zenith Radio Corp.

Isaiah Frank

Johns Hopkins University

F. Willard Griffith II

GC International

Robert R. Johnson

Mosaic Systems Inc.

Richard A. Kraft

Matsushita Industrial Co.

E. Floyd Kvamme

Apple Computer Inc.

Geraldine McArdle

Reston, Va.

Charles Phipps

Texas Instruments, Inc.

K. M. Poole

Bell Laboratories

Benjamin M. Rosen

Sevin Rosen Management Co.

Kate Wilhelm

Eugene, Oreg.

Robert B. Wood

International Brotherhood of Electrical

Workers

Michael Y. Yoshino

Harvard Business School
International Competitiveness in Electronics Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Peter Sharfman, Program Manager

International Security and Commerce Program

John A. Alic, Project Director

Martha Caldwell Harris

Robert R. Miller*

Contributors

Robert Fisher* Phillip Otterness*

Robert Rarog* Barbara Sachs*

Contractors

L. W. Bergman & Co.

Princeton, N.J.

Consultant Services Institute, Inc.

Livingston, N.J.

Developing World Industry &

Technology, Inc.

Washington, D.C.

Hamilton Herman, et al.

Potomac, Md.

H. C. Lin

University of Maryland, College Park

Mary Ann Maguire

University of Maryland, College Park

Mitsubishi Research Institute, Inc.

Tokyo, Japan

Richard W. Moxon

University of Washington, Seattle

Sterling Hobe Corp.

Washington, D.C.

John H. Wheatley, et al.

University of Washington, Seattle

OTA Publishing Staff

John C. Holmes, Publishing Officer

John Bergling Kathie S. Boss Debra M. Datcher Joe Henson

Glenda Lawing Linda A. Leahy Cheryl J. Manning

*OTA ( ontra[ t p(>rwnnel
Contents

Chapte r Pag e

1. Part A: Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Part B: Extended Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

3. Electronics Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,. 67

4. Structure and Trade in the International Electronics Industry ., ..,.., 107

5. Competitiveness in the International Electronics Industry . . . . . . . . . . . 163

6. Manufacturing: Quality, Reliability, and Automation , . . . . . . . . . . . . . . . 217

7, Financing: Its Role in Competitiveness in Electronics . . . . . . . . . . . . . . . 253

8. Human Resources: Education, Training, Management . . . . . . . . . . . . . . . 301

9. Employment Effects . . . . . . . . . . . . . . . . . . . ..., . . . . . . . . . . . . ..., . . . . . 343

10. National Industrial Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377

11. U.S. Trade Policies and Their Effects . . . . . . . . . . . . . . . . . ..., . . . . . . . . 429

12. Federal Policies Affecting Electronics: Options for the United States . . 463

Appendix A: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,,.,.. 505

Appendix B: Offshore Manufacturing . . . , ..., . . . . . . . . . . . . . . . . . . . . . . . . 510

Appendix C: Case Studies in the Development and Marketing

of Electronics Products ..,...... . . . . . . . . . . . . . . . . . . . . . . . . 520

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539

vii
CHAPTER 1

Part A: Summary
Contents

Principal Findings **** o*. .*o*oo.e**o*** .*o. *o*. .eo. .o *o*..******..***** *

U.S. Competitiveness in Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Role of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy Concerns in Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Competitive Position of the U.S. Electronics Industry . . . . . . . . . . . . . . . . . . . .

Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusion . . . . . . . . . . . . . . . ● . . . . . . . .0.00,.0 .00.0..0 ● .0.0... ..00.00. ..0.0

5

5

7

7

9

11

11

13

15

19

Table

Page

U.S. Sales and Imports of Selected Consumer Electronic Products, 1982. . . . . . . . . . 12

List of Figures

Page

Sales Trends in the U.S. Electronics Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Exports and Imports of Computers and Equipment . . . . . . . . . . . . . . . . . . . . . . .

Semiconductor Production in the United States and Japan . . . . . . . . . . . . . . . . . . . . . .

Increase in Capital Costs for High-Volume Integrated Circuit Production Line . . . .

Price Index for Televisions Compared to All Consumer Durable . . . . . . . . . . . . . . . .

Market Segmentation of U.S. Computer Sales by Value . . . . . . . . . . . . . . . . . . . . . . . .

Japanese Production, Imports, and Exports of Computers and Equipment

Including Production and Exports of U.S.-Owned Subsidiaries . . . . . . . . . . . . . . . .

3

5

6

11

12

16

18
CHAPTER 1

Part A: Summary

Is the United States in danger of losing, to

the Japanese or others, in the race to develop

new high-technology electronics products—

fifth-generation computers, high-density integrated circuits, pocket televisions? Does the decline of the American consumer electronics industry prefigure that of semiconductors or

computers? Is U.S. standing in world markets

deteriorating because of poor management,

slipshod Government policymaking, overregulation of business? Will work in automobile

production or heavy industry be permanently

replaced by high-technology jobs fewer in number and paying wages at half the level of the

$15 to $20 per hour earned by auto or steelworkers? To what extent can electronics stand

for other technology-based U.S. industries?

Which policies of the Federal Government are

most crucial to the international competitiveSales Trends in the U.S.

ness of industries like electronics? Does the

United States need a more coherent industrial

policy?

These questions and others like them are addressed in this report, which covers three portions of the industry: consumer products (primarily color television); semiconductor devices

such as integrated circuits; and computers. The

focus of the report is the United States, but considerable attention goes to the electronics industries of Western Europe and Japan, as well

as several of the newly industrializing countries.

Electronics in total employs more than a

million and a half Americans; 1982 sales exceeded $125 billion—roughly one-fifth of total

U.S. durable goods output—and have been

Electronics Market

I

Total

195 5 1960 1965 1970 1975 1980

Year

SOURCE E/ecfronics Market Data Book 1982 (Washington, D C Electronic Industries Association, 1982), p 4

3
4 International Competitiveness in Electronics

growing at nearly 15 percent per year; the sector is an export leader, with a surplus of about

$3 billion on a total trade volume of nearly $50

billion. The industry’s products feed many

other portions of the U.S. economy. Not only

does the Nation’s defense depend heavily on

electronic technologies, but both manufacturing and service industries—ranging from the

production of numerically controlled machine

tools to banking and insurance—use electronic

products both directly and indirectly.

The competitiveness of firms and industries

refers to the ability of firms in one country to

design, develop, manufacture, and market their

products in competition with firms and industries in other countries. At several points

below, shares of the U.S. market or of world

markets are used as examples of trends in international competitiveness; in fact, however,

competitiveness is a more subtle concept.

While market share is one possible indicator,

it is only indirectly related to competitiveness,

How an industry will fare in international

competition depends on factors ranging from

technology itself, to industrial policies pursued

by national governments, to the human resources—technicians to upper-level managers—available in a given country. In some

cases, competitiveness is primarily a function

of prices, hence manufacturing costs—themselves determined by wage rates, labor productivities, the design of both products and manufacturing processes. This is the case in consumer electronics. In higher technology portions of the industry, one firm may be able to

offer products that are beyond the technical

capabilities of its rivals—e.g., high-density integrated circuits, advanced computer software.

Where this is true, costs are less important.

From the Federal perspective, shifts in the

international competitiveness of American industries have ramifications far beyond matters

of trade balances and foreign economic policy,

even military security. The competitive standing of a nation’s industries will determine quite

directly its gross domestic product, and therefore the standard of living of its citizens.

The linkage between competitiveness and

employment—in the aggregate, in particular

sectors, or in particular occupational categories—is much looser. Industries can rise in

competitiveness while declining in employment—the case in the U.S. textile industry in

recent years. In other cases, competitiveness

may remain high, output may expand, but domestic employment may grow relatively slowly

compared to output; this has been the case in

both the U.S. semiconductor and computer industries. Similarly, domestic employment is

only loosely related to trends in foreign investment or to government policies directed at controlling flows of imported goods; trade protection has helped the employment picture in the

U.S. consumer electronics industry no more

than it has in the steel industry or the automobile industry.

While the competitiveness of a given sector

of the U.S. economy depends on both domestic

and international economic forces, the domestic context—e.g., people and institutions here,

not overseas—generally carries the most weight

in determining which industries will grow in

competitiveness, which decline. As a result,

public policies with domestic objectives exert

the most influence over trends in international

competitiveness. These are matters of industrial policy. OTA uses this term in a neutral

sense to refer to the body of regulations, laws,

and other policy instruments that affect the activities of industry and the resources, including

human capital, that the Nation’s economy depends on. The United States has not in the past

had a self-conscious industrial policy, in part

because it had no need for one. The lesson of

the U.S. electronics industry, along with industries like steel and automobiles that OTA has

examined previously, is that future international competitiveness may well depend on a more

coherent and consistent approach by the Federal Government to matters of industrial policy,
Ch. 1—Part A: Summary ● 5

.—

Principal Findings

U.S. Competitiveness in Electronics

1. Electronics remains a leader among American industries. High-technology firms—including those making microelectronic devices like

integrated circuits and complex electronic systems such as computers—continue to be leading exporters, second to none in technology as

well as most measures of commercial success.

Although the Nation’s imports of semiconductor products exceeded its exports for the first

time in 1982 (by $160 million out of $3.8 billion

in imports) more than three-quarters of these

imports were shipments by American-owned

firms; computer exports ($9 billion in 1982) far

exceed imports.

This is not to say that there is little cause for

concern, or that the waves of publicity given

the progress made by Japan’s electronics manufacturers over the past few years have in all

cases been overdramatized. If the U.S. electronics industry is still strong when compared

to other domestic industries, its margins with

respect to electronics industries in other nations have shrunk, in some cases vanished.

Moreover, the Japanese electronics industry is

one of the most productive in that nation’s

economy; this high standing relative to other

domestic sectors is a major reason for the export strength of Japan’s electronics manufacturers. In almost all categories of electronics

products—office copiers and typewriters, miYear

2

SOURCES 1960-86-Gaps IrI Tectrnology Elecfronfc Computers (Paris Organization for Economic Cooperation and Development,

1969), p 50.

1967-81 — 1972, 1977, 1980, 1982 editions, U.S. Industrial Outlook, Department of Commerce

1982-U.S. Department of Commerce, Bureau of Industrial Economics
6 ● International Competitiveness in Electronics

croelectronics, communications equipment

and consumer goods—the U.S.-Japan trade balance is strongly negative (see ch. 4).

2. Just as the competitive positions of a nation’s industries will differ, with some rising

and others declining, so competitive positions

within an industry like electronics will vary.

Likewise, within one portion of the industry,

such as color television manufacturing, some

firms will at any given time be more competitive than others.

Within the U.S. electronics industry, competitiveness in consumer products has declined

precipitously since the 1960’s. The Nation now

imports many of its consumer electronic products, while more than 10 foreign-owned firms

assemble and market television sets within the

United States. In contrast, there are few signs

of slackening competitiveness in the manufacture of computers, although the U.S. lead in

technology is certainly less than even half a

dozen years ago. American-owned firms making and selling semiconductor devices have

faced increasingly intense competition from

Japanese manufacturers, again primarily over

the last half-dozen years; although they have

lost market share both at home and abroad in

some key products—e.g., computer memory

chips—their overall position remains strong.

3. It is not realistic to expect that American

semiconductor and computer firms will, in the

near future and in the absence of cataclysmic

changes in other parts of the world, return to

the preeminent positions they held at the beginning of the 1970’s. Nor can the United States

expect to achieve the technological and commercial leads of earlier years in other hightechnology industries. The capabilities of other

countries have improved; foreign electronics

industries have risen within their own econo5000 -

4,000 -

A

3,000 –

2,000 –

A

1000 -

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Year

SOURCES: Un/tod St8t08-l!M7.76-A Report on the U.S. Serrr/corrductor /ndustry (Washington, D. C.: Department of Commerce, September 1979), p. 39.

f9T740-Surnrnary of Trade and Tar/ff h?formatlor?: Serrr/cork7uctors (Washington, D. C,: US International Trade Commission Publication

841, Control No. 8-5-22, July 1982), p. 28.

IMI, 1982—19S3 U.S. /rrdustr/a/ Out/ook (Washington, DC.: Department of Commerce, January 1983), p. 29-7.

Japan—1967.80-Japan Fact Book ’80 (Tokyo: Dempa Publlcatlons, Inc.l 1980), p. 188; Japarr Electronics A/rnarrac 19S2 (Tokyo: Dempa Publications, Inc.,

1982), pp. 149, 178.

ffMJf, 7MZ-/r?$tat Electronics Reports Feb. 21, 1983, p. 5.
Ch. 1—Part A: Summary ● 7

mies; international economic conditions have

changed.

4. The United States can continue to be

highly competitive in electronics and other

technologically driven industries, with U.S.

firms remaining leaders in innovation, in international trade, and in sales and profits at

home and abroad. Not only is this possible, it

is necessary if the United States is to maintain

its standard of living, its military security, and

if the U.S. economy is to provide well-paying

and satisfying jobs for the Nation’s labor force.

Electronics is indispensable to a broad range

of manufacturing and service functions, from

computer-aided design of the structures of office buildings to the switching of the telephones

within those buildings,

5. Congress could take the initiative in devising programs that would actively support the

electronics industry, and others of comparable

importance. The first requisite is broad national agreement on the role of high-technology

sectors like electronics as a driving force for

future economic growth, a greater degree of

consensus on where the U.S. economy is now

heading and where it should head. The second

is better understanding of how particular

pieces of legislation affect the competitiveness

of American industry, which in turn requires

developing the capability of the Federal Government for analyzing the sources of competitive strength.

The Role of Technology

1. One way to establish a competitive advantage in an industry like electronics is through

superior technology. Better process technology

—e.g., automation—can help reduce costs. For

similar products, lower manufacturing costs

permit lower selling prices, hence a more competitive product. Alternatively, higher profits

may be possible, which can help finance further improvements. Production technologies

are particularly important in consumer electronics and semiconductors, less so for large

computers.

2. Superior product technologies may command premium prices in the marketplace, making manufacturing costs less significant. Product features—ranging from appearance to

quantifiable characteristics such as the performance of a computer system in running

“benchmark” programs—can contribute to

competitive advantage; in high-technology

fields as in low, product differentiation and

astute marketing can be important.

Understanding customer wants and needs is

vital to designing successful products; integrated circuits that are functionally similar,

perhaps even interchangeable, may be differentiated through subtle variations in performance; advertising strategies can be built around

claims of high quality or rapid delivery; a broad

array of alternate source suppliers may reassure prospective purchasers. Manufacturers

of computers and peripherals devote considerable effort to industrial design and human

factors engineering; ease of use is vital in selling computer systems to first-time customers,

Rapid technical change creates much more

scope for product technology as a competitive

weapon in microelectronics and computers

than in consumer electronics. For many years,

American semiconductor and computer manufacturers prospered by offering products that

firms elsewhere in the world could not design

or build.

Industrial Policy

1. OTA takes industrial policy to be a neutral

term referring to the group of Federal policies

that affect competitiveness, productivity, and

economic efficiency—sometimes directly,

sometimes through influences on business decisions or on individuals. Industries rise and

fall in international competition for many reasons. Seldom can single causes be found—more

seldom yet simple, straightforward policy

remedies. Plainly, industrial policy offers no

quick fixes for the dilemmas of the U.S. consumer electronics industry, nor any sure prescriptions that can guarantee the future com-
8 International Competitiveness in Electronics

——

* .

Photo cred/t: Mostek Corp.

Portion of a read-only integrated circuit memory

petitiveness of our microelectronics or computer sectors. Just as plainly, competitiveness in

electronics—and in other U.S. high-technology

industries—will depend on factors including:

●

●

●

●

capable people, hence on Federal policies

dealing with education and training;

capital for new business startups and for

expansion, hence on macroeconomic and

tax policies;

open markets for American products,

hence on foreign economic policy; and

the research base that supports domestic

firms, hence on Federal technology and

science policy.

The job of industrial policy is to evaluate, link,

and coordinate the many Federal efforts that

deal with such concerns.

2. While international competitiveness is

firmly rooted in the efforts of private companies, public policies set many of the rules of

the game. In the United States and in other

parts of the world, business enterprises compete in an environment shaped to considerable

extent by government industrial policies (including elements of fiscal, monetary, tax, manpower, trade, and regulatory policies).

Foreign governments are experimenting with

industrial policies intended to aid and support

their own electronics industries; virtually all

industrialized and industrializing nations single out electronics for special treatment. American firms seeking to export or to manufacture

overseas must contend with economic and

social policies of host governments that are

more complex and sophisticated than in the

past. Rather than outright protectionism or

other forms of overt discrimination against foreign firms, host governments now adopt indirect subsidies for their own industries—tax incentives, capital allocations, funding for commercially oriented research and development

(R&D). At the same time, governments bargain

with foreign multinationals using carrots and

sticks such as investment incentives and performance requirements while seeking to acquire jobs and technology, or to improve their

balance of payments.

3. Although a well-designed and supportive

industrial policy is not, by itself, sufficient to

build competitiveness in a given sector of a nation’s economy, government policies can, under some circumstances, tip the balance. The

United States can expect no more than very

limited success in negotiations with other nations aimed at minimizing the impacts of those

countries industrial policies.

For this and other reasons, a “business-asusual” approach is unlikely to prove sufficient

to the task of maintaining U.S. competitiveness

in electronics, Better prospects for strengthening the U.S. position would come with the

adoption of more effective industrial policies

of our own. The American electronics industry

faces only a few major problems, mostly in the

trade arena, that are directly susceptible to

Government remedy. On the other hand, Federal agencies could support the industry—

directly and indirectly–in many ways. Few of
Ch. 1—Part A: Summary ● 9 —. —

these would have much visibility. By the same

token, they would not necessarily cost much.

Consistent and careful attention to the many

smaller matters that affect competitiveness—

diffusion of technology within the United

States, tax treatment of equipment contributions to universities, the antitrust environment

for joint R&D, long-term basic research—are

the necessary ingredients in a more coherent

and productive industrial policy. A supercomputer project, to take a current example, may

be glamorous as well as desirable in itself, but

is no substitute.

4. The choice of policy tools, and the design

of individual measures, depend on overall objectives; an industrial policy is the sum of many

parts that can be put together in different ways,

Should Congress wish to pursue a more focused industrial policy for the United States,

it could choose from among five broad alternatives:

A protective strategy aimed at preserving

the domestic market base for U.S. industries, along with preservation of existing

jobs and job opportunities.

Protection and/or support for a limited

number of industries judged critical for the

U.S. economy or, more narrowly, for national security,

Support for the technological base and institutional infrastructure that underly

American industries, with particular attention to structural adjustment (e.g., labor

force retraining and mobility).

Promotion of the global competitiveness of

U.S. firms and industries by encouraging

exports and open competition in domestic

as well as international markets.

Deferral where possible to the private sector when choices concerning industrial

development are to be made.

While these five approaches to industrial policy, discussed in chapter 12, are certainly not

mutually exclusive, they represent distinctly

different thrusts, implying different mixes of

policy instruments as well as different goals.

What would be the implications of a decision

to pursue a more coherent industrial policy in

the United States? First and foremost, that to

automatically equate “industrial policy” with

a greater degree of Government involvement

in the economy is to view the matter from an

arbitrarily narrow perspective. Industrial

policy does not have to run counter to efforts

to “get Government off the backs of business. ”

Rather, it should be construed as an effort to

make the inevitable—indeed oftentimes desirable and necessary—Federal involvement a

more consistently productive one. It implies an

effort to develop, both politically and institutionally, Government policies toward industry

that:

explicitly consider impacts on competitiveness and economic efficiency;

seek to treat the problems and opportunities of particular industries in the context

of the economy as a whole, rather than in

isolation; and,

do a better job of relating policy tools to

policy objectives. - - -

Policy Concerns in Electronics

Among the elements of industrial policy, the

following are vital for the continuing competitiveness of the U.S. electronics industry.

They might have rather different places, and

be addressed in different ways, under each of

the alternatives listed above,

1. High-quality education and training (including retraining) for engineers, technicians,

and other skilled workers,

More than anything else, the competitive position of the United States in high technology

has been built on the human resources available here. A renewed Federal commitment to

education and training seems called for (see

chs. 8 and 9). Engineering enrollments running

at record levels have swamped the resources

available in colleges and universities; even so,

the United States graduated but 63,000 engineers in 1981 compared to 75,000 in Japan,

99-111 0 - 83 - 2
10 . International Competitiveness in Electronics

U.S. electronics firms have faced serious

problems in finding adequate numbers of engineers, as well as technicians and service personnel with needed skills and aptitudes. Inadequate resources in U.S. engineering schools are

harming the quality of education as well as constraining the numbers of new graduates. Training and retraining for technicians and paraprofessionals varies widely in quality and appropriateness to emerging needs. Many people in

the United States emerge from high school

quite unprepared to work in technology-based

industries.

Despite fluctuations in supply and demand

over the years, engineers in principle comprise

one of the most employable occupational

groups in the labor force; it is hard to imagine

an “oversupply” of engineers or of people with

good technical training of any of a wide variety of types in an economy like that of the

United States, provided that people are willing and able to shift jobs according to demand

within the economy and organizations are willing to help them do so.

2. A strong technological base—stemming

from basic research and applied R&D with

long-term objectives, including the diffusion of

results, in fields such as solid-state electronics,

optical devices, communications technologies,

computer-aided design of circuits and systems,

and computer software.

The Federal Government could not only continue to fund basic research, it could establish

new mechanisms for diffusing the results of

R&D to the private sector, experiment with the

support of commercially oriented (rather than

military) research, and strengthen tax incentives and other encouragements for successful

innovators.

3. Economic adjustment policies that smooth

flows of capital and labor within the economy,

aiding growing firms in their efforts to compete while providing well-paying jobs for the

domestic labor force.

Structural change is a fact of life in American

industries, driven by the currents of an increasingly open international economy (see chs. 4

and 5), as well as by technological change (ch.

3). Corporations, cities and regions, and people must adjust to changes, many of which are

outside their control. Federal attention to maximizing the positive effective of change—e.g.,

stimulating growth industries—while ameliorating the negative impacts, could be one of the

central elements in a more coherent industrial

policy for the United States. Policy initiatives

aimed at personnel mobility—whether geographic, inter-industry, or within organizations—are one example.

4. Adequate supplies of investment capital

for new startups as well as rapidly expanding

established firms.

As discussed in chapter 7, venture capital

markets in the United States function well,

although cyclic downturns are likely to recur

and risk capital is often hard to find at early

stages of technology development.

Rapidly growing companies, particularly in

the semiconductor industry, do face severe

financial pressures. These stem from increasing capital intensity, due both to higher R&D

expenses and to production equipment that has

gone up in cost by an order of magnitude over

the past decade, coupled with the preference

of American managers to finance expansion

from internally generated funds. Tax policies

have a major influence over sources of financing and risk absorption.

While the advantages are not as great as

sometimes implied, large diversified electronics companies in Japan, and perhaps in some

Western European countries, do benefit from

real (i.e., inflation-adjusted) costs of capital that

are somewhat lower than for merchant semiconductor firms in the United States. By themselves, these differences—matters of a few percentage points—are not enough to weigh heavily in the competitive balance. Constraints on

rates of capital spending—due in part to the

preference of American firms for internal financing—are more likely to be a drag on the

competitive abilities of U.S. manufacturers.

These and other factors, primarily expectations

concerning inflation, tilt the investment decisions of American managers toward the shorter term.
Ch. 1—Part A: Summary ● 1 1 —— —

Increase in Capital Costs for High-Volume Integrated

Circuit Production Line

1970 1975 1980 1985 1990

Year

SOURCE R W Broderson, “Signal Processing Using MOS-VLSI Technology, ”

VLS/ Elecfronlcs. Mlcrosfructure Science, VOI 2, N. G. Einspruch (cd.)

(New York Academic Press, 1981), p 206

5. An international trading environment that

places U.S. firms on a more-or-less equal

footing with their competitors in other countries, including those that have well-developed

industrial policies intended to protect or promote domestic manufacturers.

As discussed in chapter 11, the framework

for international trade that emerged in the

postwar era is being overrun by events. The

thrust of industrial policies in many nations is

toward indirect supports with effects on prices

and on competitiveness that cannot be quantitatively assessed (see ch. 10). Japanese industrial policy, for instance, works in part by

breaking bottlenecks; the VLSI project of the

1970’s helped train Japanese

The Competitive

engineers, transferred design and processing know-how to industry, rallied public support behind the structural shifts that were leading Japan toward an

“information economy” (or at least helped diffuse counterpressures by those disadvantaged

by such shifts). The goals of the heavily publicized fifth-generation computer project are

similar, When many of the impacts of industrial policies are intangible, how do we countervail them? Over at least the rest of the decade, U.S. trade negotiators can expect to grapple with such issues, The prerequisite is an analytical capability by the Federal Government

adequate for understanding the ways in which

public policies—here and elsewhere—affect international competitiveness.

American electronics firms, particularly

manufacturers of semiconductors and computers, may also need the continuing support

of the U.S. Government, via both bilateral and

multilateral negotiations, in securing access on

reasonable terms to foreign markets—for exports and for direct investment—if they are to

maintain their competitive position. Only by

competing aggressively all over the world, taking advantage of scale economies and new

opportunities, can American firms expect to

share fully in the growth and expansion that

will characterize this industry into the next

century. As an example, semiconductor sales

in Japan already exceed those in all of Western

Europe by more than half; U.S. firms need access to Japan market comparable to that enjoyed by Japanese suppliers here.

Regardless of the overall approach and direction of U.S. industrial policy, Congress could

act in support of objectives such as those outlined above.

Position of the U.S. Electronics Industry

Consumer Electronics left the market. Few radios or black-and-white

TVs are made in the United States. No video

1. American firms making radios, TVs, and cassette recorders are manufactured here. Colaudio products such as stereo receivers and or television production has become largely an

tape recorders have been under severe compet- assembly operation, heavily dependent on imitive pressures for years; many have failed or ported components—whether the parent firm
12 ● International Competitiveness in Electronics

U.S. Sales and Imports of Selected Consumer Electronic Products, 1982

U.S. sales Imports Import penetration

(millions of dollars) (millions of dollars) (percent) a

Color television . . . . . . . . . . . $4,253 $546 12.8%

Black-and-white TV . . . . . . . . 507 344 67.9

Video cassette recorders. . . 1,303 1,032 100.0a

Home and auto radiosb . . . . 1,579 1,207 76.4

Stereo systemsc . . . . . . . . . . 1.754 1,342 76.5

$9,396 $4,471 47.60/o

aBeCau~e ~anY lt~~~ Irnpofled In a given year are not soid until the followlng Year, dividin9 lmPo@J during a 9iven calendar

year by sales In that same year may give only a rough indication of import penetration; for instance, af/ video cassette recorders

b

sold in the United States are Imported even though 1962 sales figures exceed 1962 import figures.

Includlng auto tape players,

Concluding audio tape units and other component equipment.

SOURCE E/ectron/c Market Data Book 1983 (Washington, DC : Electronic Industries Association, 1963), pp. 6, 19, 31,

is American-owned (RCA, Zenith, GE) or foreign-owned (Sony, Quasar, Magnavox). In television manufacture especially, the policies of

the Federal Government have contributed to

the plight of the industry. Dumping complaints

against importers going back to 1968 have

never been fully resolved. An industry legally

entitled to trade protection has not received it,

2. Nonetheless, trade practices illegal under

U.S. law have been only one factor in the declining competitiveness of the American consumer electronics industry. More fundamentally, competitive advantages have shifted to

other parts of the world—first Japan, now newly industrializing countries like Taiwan and

South Korea. These countries have mastered

the technological requirements for mass-producing consumer products such as TV sets,

They have lower labor costs than the United

States, an adequate corps of skilled workers

and engineers, supportive government industrial policies, and astute corporate managements.

American firms have been reduced to a reactive posture; they have lost the lead in product

design and development while moving manufacturing operations to foreign countries in

order to keep their costs competitive, American

products in consumer electronics—e.g., color

television receivers—continue to be competitive in performance, quality, and reliability, but

they are no better than imports. The consumer

electronics market is highly price-competitive;

without advantages in technology or product

features, American manufacturers will be hardPrice Index for Televisions Compared

to All Consumer Durables

SOURCES: Consumor Dumblos-EconomicRepoti of the Preslderrt 19B2

(Waahlngton, DC.: U.S. Government Printing Office, February 1962),

p. 294,

To/ovb/ons-E/ectrorr/c Market Data Book (Washington, D, C,: Electronic Industries Association, 19S2), p, 29,

pressed to keep up with their foreign-based

competitors. While U.S. firms may continue to

innovate and to be leaders in consumer products aimed at specialized market niches—computer games have been a recent example—

broadly speaking, product leadership has been

lost, At least in the short term, prospects for

taking the lead in new generations of high valued-added mass market products seem slim.

3. The rise of foreign firms together with protracted trade disputes have contributed to a major shift in the structure of the U.S. consumer

electronics industry. The number of firms has

not changed greatly since the 1960’s; but while

once there were 16 or 17 American-owned
Ch. 1—Part A: Summary ● 1 3

manufacturers of TVs, today only 4 of 15 with

plants in the United States have headquarters

here. Still, the market shares of the traditional

U.S. leaders—zenith and RCA—have not

changed much; together these two companies

continue to hold about 40 percent of the U.S.

color TV market. It is the weaker American

manufacturers that have succumbed.

4. At the same time foreign enterprises were

investing in assembly plants in the United

States, American-owned firms were transferring labor-intensive manufacturing operations

to low-wage offshore locations. In general, final

assembly for the U.S. market remains here,

with subassembly} in Mexico and the Far East.

These moves were driven by foreign competition. U.S. color TV manufacturers felt they had

little option but to move production abroad if

they were to cut costs and meet their competitor’s prices.

Offshore production substitutes quite directly

for jobs in the United States. Nonetheless, if

American firms had not moved offshore, it is

quite possible that they would have lost even

more ground to foreign-based competition,

with yet more jobs lost over the longer term.

In most cases, transfers of production overseas

have net impacts on U.S. employment and on

the U.S. economy that appear relatively small;

improvements in labor productivity, for example-also driven by foreign competition—

have been at least as important as a cause of

employment declines in television manufacturing. Needless to say, the impacts on individuals

and communities where job losses concentrate

are often severe and long-lasting; in 10 years

the production work force in consumer electronics has been cut by more than 40 percent,

from 85,000 to 50,000.

5. Beginning near the end of the 1970’s, Orderly Marketing Agreements (OMAs) limited

imports of color TVs while encouraging foreign firms to produce here, The result was to

equalize the terms of competition and to moderate employment declines in the United

States. Otherwise, the OMAs did little to help

the U.S. industry rebuild its competitive

strength.

In this regard, U.S. experience with OMAs

restricting color TV imports has paralleled

other cases of import quotas, for instance in

the steel industry. Although the ostensible purpose may be to give domestic firms time to restructure and adjust to changing competitive

circumstances, in most cases protected industries continue to react to pressures from abroad

rather than taking strong positive steps of their

own; the notion that a respite from import competition will, by itself, help corporations restore

their competitiveness gets little support from

events in color television.

Semiconductors

1, U.S. manufacturers of semiconductor

products such as integrated circuits remain

highly competitive in markets all over the

world. American-owned merchant firms--

those that produce for the open market-are

leaders in circuit design and process technology. While their share of world sales has

changed little over the past few years, with U.S.

firms and their subsidiaries still accounting for

about 70 percent of worldwide output of integrated circuits, Japanese manufacturers have

been catching up in technology, Nonetheless,

U.S. companies have the capability to maintain

their competitiveness in most world markets.

The inroads made by Japanese suppliers of

commodity-like chips, notably random access

memories (RAMs), portend stronger competition in other types of microelectronic devices

but do not translate automatically into advantages for products such as logic chips or microprocessor families. There is no reason to expect a loss of competitiveness in advanced microelectronic products paralleling that in consumer electronics.

Although foreign manufacturers may sometimes have advantages—e.g., supportive government industrial policies, as in Japan or

Western Europe—the U.S. merchant firms

have their own strengths, Among these are the

ability to rapidly develop and commercialize

new technologies, to anticipate and design for

shifting customer needs, and to adapt to changing realities of international competition by
14 International Competitiveness in Electronics

entering into joint venture and technology

transfer agreements with both domestic and

foreign firms when this is advantageous.

2. The structure of the merchant portion of

the U.S. semiconductor industry is changing.

A number of well-established semiconductor

firms founded during the 1960’s or early 1970’s

have been acquired by larger, diversified enterprises, either American- or foreign-owned. In

part, these structural shifts are associated with

a trend toward captive production by end-product manufacturers.

Companies that design and build systems

ranging from computers and communications

networks to automobiles increasingly see needs

for internal capability in the design, development, and manufacture of state-of-the-art microelectronic devices. The acquisition of merchant semiconductor firms by larger corporaPhoto cradit: General Motors

Microcomputer for controlling an automobile engine

tions is a predictable trend in the evolution of

the industry.

3. At the same time that relatively mature

companies like Intersil—purchased during

1981 by General Electric—are being acquired,

new entrants continue to repopulate the merchant semiconductor industry. While the

downturn in venture capital markets during the

middle and late 1970’s virtually halted startups, new firms are again being established.

Since 1980, several dozen small firms producing custom integrated circuits, gate arrays,

specialized memory chips, and other niche

products have entered the industry. Aiming at

portions of the market where the knowledge

and expertise of their founders can be brought

to bear, some of these start-ups will be successful and expand, some will remain small,

others will be acquired by larger enterprises.

4. Captive manufacturers of semiconductor

devices make vital contributions to U.S. competitiveness. Such companies include IBM, the

largest producer of semiconductors in the

world, and Western Electric, which moved into

the merchant market in 1983—an action made

possible by the settlement of the Government’s

antitrust suit against AT&T—as well as a number of aerospace and defense contractors. Companies that produce for internal use not only

provide a major part of the technological foundations for microelectronics, they spawn startups and give training and experience to people who later move to other companies.

5. Just as important for continuing international competitiveness are firms that design,

develop, and build production equipment for

applications ranging from annealing silicon

wafers to automated testing and assembly.

While the United States maintains the lead

among open-market suppliers of many types

of processing equipment, notably in lithography, other countries are catching up. Government-sponsored R&D in Japan has focused

on production equipment.

6. R&D—particularly that with relatively

long-term payoffs—will remain a critical force

in support of U.S. semiconductor firms. In the
Ch. 1—Pari A: Summary ● 1 5

.- ——-—

past, much of the technology base has come

from larger firms such as IBM and AT&T. Government support for research has not been significant in recent years, although the Very

High-Speed Integrated Circuit program of the

Defense Department will have commercial

spinoffs.

The U.S. semiconductor industry can no

longer rely on past approaches to R&D and

technology development. The industry recognizes the changing situation, and is developing new mechanisms for strengthening its

technical foundations; these include closer interactions with universities, along with joint

ventures and cooperative research efforts. Congress and the Federal Government could actively support and encourage both basic and

applied research with longer run payoffs. This

is one of the surest ways of supporting continued U.S. competitiveness in microelectronics.

Computers

1. American manufacturers of digital computers have dominated world markets for

many years. Much as U.S. semiconductor firms

have demonstrated the ability to rapidly capitalize on new technological and market opportunities, so have American computer firms

pioneered most of the design concepts that

have driven information processing: networking and distributed computing, small business

machines and minicomputers, time-sharing

among multiple work stations, cheap mass

storage, desktop microcomputers.

There are few concrete signs that this

dominance by U.S.-based firms is threatened.

Nevertheless, relative positions within the

world computer industry will continue to shift,

stimulated in many cases by new applications

of computing power, As the industry continues

to evolve, the technological leads of American

firms are likely to shrink, and competitive positions may become more difficult to maintain.

Nevertheless, the U.S. lead in worldwide marketing of data processing systems is so large

that prospective challengers such as Japan cannot hope for more than modest success over

the rest of the century.

2. American firms have done a much better

job than their foreign competitors of balancing what the available technology can do

against what customers for data processing systems have wanted to accomplish. This has been

an important element in patterns of competitive success, which have depended as heavily

on software that could be easily used by neophyte purchasers and was reliable—i.e., free of

“bugs’’ -as on raw hardware performance.

In fact, foreign computer firms have sometimes been able to match the United States in

terms of hardware; by and large, Japan’s computer manufacturers can at present. But their

systems are still behind, mostly because the

software—at all levels—is not as good, Moreover, foreign firms—whether European or Japanese—have not been as adept as Americans

at finding new ways to apply their hardware.

For example, U.S. firms remain well ahead in

office automation, point-of-sale terminals for

retail merchandisers, and many other applications of distributed intelligence.

3. The ongoing structural alterations in the

data processing industry will be deeper and

farther-reaching than those in microelectronics

or consumer electronics.

Most of the recent technological innovations

in consumer electronics have come from large,

well-established firms; new products from

small companies have seldom reached mass

markets. In microelectronics, while start-ups

have resumed in the United States—many striving to establish themselves with the aid of innovative products—the path of technological

evolution seems, for the moment, well charted;

there are few signs of sudden change that

would seriously unsettle the industry. Computer technology—which depends on microelectronics, but also on other feeders, primarily

software—is potentially more volatile. As new

applications of computing power open windows of opportunity for firms in many parts

of the world, American manufacturers will

face more intense competitive pressures. Distributed intelligence will transform a broad

range of other industries as well.
16 ● International Competitiveness in Electronics

—.—

While the era of the mainframe computer is ness systems, personal computers, and “smart”

hardly over, the increasing importance of devices that do not even look like computers—

smaller machines—minicomputers, small busi- will continue to provide the greatest opporMarket Segmentation of U.S. Computer Sales by Value

1980

1985

(projected)

SOURCE: “Moving Away From Main Frames: The Large Computer Makers’ Strategy for Survival,” Business Week, Feb. 15, 1981, p. 78
Ch. 1—Part A: Summary ● 1 7

tunities for growth and expansion. The multitude of prospective applications of computing

power will offer new openings for overseas

firms as well as American companies. In some

portions of the data processing equipment

industry—especially those still in relative infancy, such as desktop machines and standardized office automation products—foreign firms

may eventually achieve a greater presence than

they have managed in mainframe systems or

general-purpose minicomputers. To the extent

that computers become mass-market products,

manufacturers in other parts of the world are

likely to emerge as more formidable competitors.

4. In the computer industry, as in microelectronics, U.S. employment is rising much less

rapidly than output. Although new jobs are being created making, operating, and maintaining “smart machines, ” other jobs are being

destroyed; the net effects on U.S. employment

might be positive or might be negative, While

there is little meaningful evidence on either

side of the job creation/job destruction question, there is no question that skill requirements

are changing rapidly. In some cases, automation—aided by electronics—lowers the skill requirements associated with the remaining jobs;

in other cases, “upskilling” rather than “deskilling ” results. A readily predictable consePhoto credit Ur7/rnaf/on

Industrial robot at wor k
quence has been serious labor market dislocations; these seem bound to intensify. Even if

labor market shifts cannot be predicted very

well, the need for adjustment is clear. To the

extent that labor market shifts—geographical,

in terms of skills, in terms of wage levels—are

unexpected (and some will always be), the impacts will be more severe. An obvious implication is that policy responses must emphasize

flexibility.

5. Japan’s computer manufacturers will not

be content with narrow or specialized markets.

Following strategies similar to those that have

succeeded in consumer electronics and semiconductors, Japanese computer firms will attempt to establish themselves in selected data

processing markets and expand from there.

Backed by government efforts such as the fifthgeneration computer project, Japan’s industry

is bent on achieving technological and commercial parity (or superiority) in machines

ranging from desktop processors to supercomputers. Still, Japan’s rising export strength in

computers differs in a major way from the patterns visible in consumer electronics or semiconductors: the leading Japanese exporter of

computers, by a large margin, is IBM-Japan—

despite the fact that it has been barred from

many of the government programs that have

aided other computer manufacturers.

While IBM has abundant resources and technology to compete effectively against Japanese

computer firms, other American manufacturers may face increasing difficulty in the future.

Although the U.S. industry is not immediateJapanese Production, imports, and Exports of Computers and Equipment, including

Production and Exports of U.S.-Owned Subsidiaries

1

1

1

1

T3

,800

,600

,400

,200

,000

800

600

400

200

0

I -1 8

7

6

5

4

3

2

1

0

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCES: ffM7-78-Ja@n Fact Book ’60 (Tokyo: Dempa Publications, Inc., IWO), pp. 173, 174.

f87840-@mn Hectrorrlcs A/marrac IWJZ (Tokyo: Dampa Publications, Inc., 1962), pp. 58, 59,

f88f, IfJ&-Department of Commerce, Bureau of Industrial Economics.
——..———

—

ly imperiled, the Federal Government could

help ensure future competitiveness through a

better developed, more consistent industrial

policy, particularly one supporting technology

development and technical education,

6. As computers and their applications continue to spread through the U.S. economy, the

Federal Government might act to strengthen

the competitiveness of the industry both directly and indirectly:

“Computer literacy"—the ability to effectively utilize smart machines and systems—will be a critical skill for the labor

force. Education and training in fields

ranging from traditional modes of quantitative thinking (arithmetic, algebra) to software engineering deserve renewed support. Congress could provide leadership as

well as direct and tangible aid.

Federal support aimed at critical bottlenecks in data processing, mostly in software, could be a vital long-term stimulus

for the American industry. Productivity in

A nat

dustries at once. Not only will

Ch. 1—Part A: Summary ● 1 9

software development has gone up only

slowly over the years. Financing for education and training in software engineering,

as well as R&D directed at computer architectures, new programing languages, and

artificial intelligence appears appropriate.

• Smaller firms striving to establish themselves in the data processing equipment industry–particularly those developing software, peripherals, and innovative applications of computing power—have the same

needs as do U.S. microelectronics firms:

not only people with highly developed

technical skills, but adequate supplies of

capital for investment in R&D and production capacity and access to foreign markets.

If effectively implemented, industrial policies

in support of such needs could pay vast dividends throughout the U.S. economy because

of the multitude of ways in which applications

of computing power can enhance the competitiveness of firms in industries of all types,

Conclusion

on can never be competit ive in all insome rank

higher than others, but places will change over

time. Economies need to adjust; adjustment

brings pain and distress to firms that encounter

trouble, people who lose their jobs, the communities affected. Even within an industry like

electronics—in the United States, highly competitive as a whole—some parts, such as consumer electronics, face a far more problematic

future than others. That such events are inevitable does not mean that at least some of the

problems cannot be anticipated, and some of

the distress ameliorated by Government action,

Moreover, the Federal Government can take

positive actions to support the development

and diffusion of technology, human resources,

the infrastructure that companies depend on

when pursuing their individual competitive

strategies. Government policies can aid growing sectors, help people and institutions adapt

to change. The dynamic of international competitiveness is continuous, and calls for a continuing series of policy responses.

People can and will argue endlessly about the

successes and failures of industrial policies in

other countries, but the primary lesson to be

drawn from foreign experience is simply this:

industrial policymaking is a continuing activity

of governments everywhere. In the United

States, industrial policy has been left mostly

to the random play of events. Improvement is

clearly possible; policymaking can be a purposeful activity characterized by learning from

past experience within a framework of empirically based analysis. Developing a more effective industrial policy for the United States must

begin in this spirit, while recognizing that the

process is inherently political. There is no one

thing that the Federal Government can do that

will make a big difference for the future com-
20 . International Competitiveness in Electronics

petitiveness of the U.S. electronics industry, Until the Nation begins this task, American

but there are many specific policy concerns firms will continue to find themselves at a disthat deserve attention. Only by linking and advantage when facing rivals based in councoordinating these more effectively can the tries that have turned to industrial policies as

United States expect to develop a coherent and a means of enhancing their own competitiveforward-looking approach to industrial policy. ness.
CHAPTER 1

Part B: Extended Summary
Contents

Page

Technology *.. *.. .a. *.** 0.*. .**. ... *.*. .*** ... ... ..*m*. be**..**.*******

Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Finance ..0.000 ● 000..0. ● 000.000 ● .****** ● ....0.. ● O****.* ..0.00.. ● 000.0. 0

Venture Capital. . . . . . . . . . . . . . . . . . . . . . 0 . . . ...0..... . . . . . . . . . . . . . . . . . . . . . . . .

Financing Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Human Resources .0...0. ● ****... ...0.00. ● 000.0.. .**..... .000.0.0 ● 00.0s .

Quantity and Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Continuing Education and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preparation for Work in Technology-Based Industries . . . . . . . . . . . . . . . . . . . . . . . . .

Management and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Employment . . . . . . . ● .00.0.. ● O..*..* ,.00..00 ● ...0.0. ● .0...0. ● ....000 ● 0 0 0

Trade . . . . . . . ......00 .**..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Antidumping Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Environment for World Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Industrial Policies .0....0 ● .0..0.0 ..000....0.0..00 . . . . . . . . ● .*...** ..0

23

23

24

28

31

31

32

32

34

34

35

37

37

39

42

42

42

46

List of Tables

Page

Color TV Imports into the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . .

World Integrated Circuit Output by Headquarters Location of Producing

Predicted Growth Rates by Occupational Category in the

United States Over

Semiconductor Sales

List of Figures

Japan’s Production and

. . . . . . . . . . . . . .

States, Western

of Video

. . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . .

Europe, and Japan . .

(VCRs) . . . i

. . . . . . . . . .

. . . . . . . . .

Firms . . .

. . . . . . . . .

. . . . . . . . .

. . . . . . . . . .

U.S. Semiconductor Sales by Type . . . . . . . . . . . . . . . . . . . .

U.S. Production of Computer Equipment . . . . . . . . .

Rates of Capital Spending by U.S. and Japanese Semiconductor Firms . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Employment in Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Employment in Computer (and Peripheral Equipment) Manufacturing . . . . . . .

U.S.-Japan Trade in Integrated Circuits . . . +, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Distribution of U.S. Semiconductor Sales by End Market.. . . . . . . . . . . . . . . . . . . . . .

24

27

41

44

25

26

29

33

39

40

44

46
CHAPTER 1

Part B: Extended Summary

Part B of chapter 1 expands upon, without

repeating, the findings in the Summary. In particular, the sections below highlight the role of

technology as a force on competitiveness in

consumer electronics, semiconductors, and

computers, along with factors such as capital

for investment in research and expanded production capacity, human resources and their

development, and industrial and trade policies

both here and abroad.

The several meanings that can be assigned

to the rather amorphous concept “international

competitiveness’ are discussed in detail in

chapter 5. The viewpoint adopted below is first

that of the manufacturer, Private companies

design, develop, produce, and market goods

which may have more or less success in the

marketplace, more or less positive impact on

a nation’s competitive position. Later the view

switches to that of governments and their policies, which act on competitiveness directly

and indirectly—by influencing business activities, supporting education, subsidizing exports, through the climate for capital formation

and economic growth.

Technology

Chapter 3 covers electronics technology in

some detail (also see the Glossary, app. A, for

explanations of technical terms). Here the interactions between technical capabilities and

market success are explored,

Consumer Electronics

In consumer electronic products such as color TVs, both product and process technologies

are well-understood and widely diffused. Product differentiation strategies are more important than technical differences; component

television, stereo sound, and digital chassis

designs illustrate the frontiers of this now largely routine field. Japan’s consumer electronics

manufacturers have benefited from the economies of higher production volumes and perhaps from more extensive automation, but both

product and process technologies in consumer

electronics tend to be standardized, technical

change to be incremental. Companies anywhere in the industrialized world have access

to much the same pool of knowledge—the exceptions being newer product families like

video cassette recorders (VCRs). Color TVs

with similar product features are made not

only in Western Europe, the United States, and

Japan, but in developing countries like Taiwan

and South Korea, Manufacturing technologies

are similar wherever TVs are built, with laborintensive operations carried out in low-wage

developing countries by European and Japanese firms, as well as American. The result

is a competitive environment in which American firms have few unique advantages,

Differences in both product and process technologies for televisions were greater during the

late 1960’s and early 1970’s when Japanese

firms were beginning to invade the U.S. market, Then, firms in Japan moved more quickly

than their American counterparts toward solidstate chassis designs. By using transistors and

integrated circuits (ICs), they were able to improve the reliability of their products, and more

easily automate portions of the production

process. Automation helped compensate for

component costs that at the time were higher

for transistorized designs than for those relying on vacuum tubes. Reliability was particularly important to Japanese firms because they

did not have service organizations or dealer

networks within the United States. To increase

their market shares, they needed to sell through

retail outlets such as discount chains. To

23
24 ● International Competitiveness in Electronics — .—— --

Color TV Imports Into the United States

Number of color TVs imported

by origin (thousands)

Imports from all sources

as a percentage of

Year Japan Taiwan Korea Total a U.S. consumption

1967 . . . . . . . . . . . . 315 — — 318 6.70/o

1969 . . . . . . . . . . . . 879 22 — 912 15.7

1971 . . . . . . . . . . . . 1,191 85 – 1,281 18.9

1973 . . . . . . . . . . . . 1,059 325 2 1,399 15.8

1975 . . . . . . . . . . . . 1,044 143 22 1,215 17.9

1977 . . . . . . . . . . . . 1,975 318 92 2,476 27.0

1979 . . . . . . . . . . . . 513 368 314 1,369 13.6

1981 . . . . . . . . . . . . 727 514 393 1,946 15.6

alnClu&~ ,~POfl~ from Countries not listed indivldualb

SOURCES 1987, 198f)-Te/ewis/on Receivers and Cer?ain Parts Thereof (Washington, D C U S Tariff Commission Publica

tion 438, November 1971), p. A%2.

1971, 1973—Te/evision Receivers, Co/or and Monochrome, Assembled or Not Assembled, Fin/shed or #of Fin/shed,

and Subassemblies Thereof WVashington, D C. U S International Trade Commission Publication 808, March 1977),

pp. A-XI, A-99

1975-79—Co/or Te/ev/sion Receivers and Subassemblies Thereof (Washington. D C U S International Trade Corn.

miss!on Publication 1088, May 1980), p D-8.

f980—Te/evision Receiwrru Sets From Jaoan (Washington, D.C U S International Trade Commission Publ!catlon

1153, June 1981), p H2{

198f-information from Department of Commerce

achieve credibility, they had to supply TVs that

did not need frequent service. Japan’s consumer electronics manufacturers succeeded in

this far from riskless strategy.

If technology is now a secondary factor for

TVs, in more recently introduced product families—not only VCRs, but video disk players,

home computers, and related applications of

electronic technologies to consumer goods—

designs are evolving at a faster pace. Japanese

entrants spent many years and a great deal of

money on engineering development of VCRs—

Matsushita even reached production in 1973

with a design that was shortly thereafter judged

not to be good enough—before achieving commercially viable products. But otherwise, competition in consumer electronics is largely a

matter of prices and marketing, brand loyalties

and customer perceptions. While Japanese exporters have established themselves firmly in

American markets for TVs and audio products,

individual companies have suffered frequent

reverses in consumer goods ranging from

stereo receivers to CB radios and pocket calculators, where markets have been unpredictable and competition always stiff.

Semiconductors

Microelectronic devices, in contrast, are intermediate products sold in accordance with

detailed technical specifications to sophisticated customers who design them into final

products ranging from TVs and electronic

games to missile guidance systems and powerful computers. To be successful, semiconductor firms must not only meet the current requirements of such customers but do a good

job of anticipating their future needs.

Technological Factors in Competition

As explained in chapter 3, the interdependence of product and process technologies in

leading-edge microelectronic devices—very

large-scale ICs–is unusual even for a high-technology industry. Circuit designers must understand the nature and capabilities of the fabrication process—including proprietary details—

to optimize the performance of a chip. Product

and process technologies advance together,

with process capability a restriction on devices

that can be fabricated with acceptable yields

(the fraction of circuits that function). The in-
Ch. 1—Part B: Extended Summary ● 2 5

Japan’s Production and Exports

of Video Cassette Recorders (VCRs)

12

11 -

10 -

9 -

8 -

7 -

6

t

2 -

1

0 1 1

1975 1976 1977 1978 1979 1980 1981 1982

Year

SOURCE “VTR Product Ion Demand,” Japan Report, Joint Publications Research

Service JPRS Lll 1100, Jan 28, 1983, p 35

tractions go in both directions. Clever circuit

design can compensate for some kinds of process limitations. Among the examples are simply

doing more with fewer transistors or other circuit elements and incorporating on-chip testing

and redundancy. Some American firms added

redundant circuit elements to their 64K RAM

(random access memory) designs, a step which

may pay dividends in the future as they move

to still higher levels of integration,

Competition in standardized products like

RAMs depends on both price and technology–

chapter 5. When 64K RAMs were first introduced, they sold in sample quantities for about

$100 each. From this level in early 1980, prices

fell to $10 to $15 by the end of that year. After

another year, 64K RAMs could be purchased

for $5 or less. These rapid price declines, typi-

.——-—— ——.—

cal of the semiconductor industry, are driven

by intense competition to improve process

yields, reduce manufacturing costs, and cut

prices to build market share. As the prices of

64K RAMs dropped, prices also fell for the previous-generation 16K devices, which by 1982

sold for about $1 each. Similar patterns will be

followed as 256K RAMs, in pilot production

in both Japan and the United States during

1983, take over from 64K chips.

Despite the intense price competition in

these commodity-like circuits, product technology continues to play a role. Not only is a good

circuit design essential for high yields and low

costs, but a high-performance RAM can command a greater price. While the most common

varieties of 64K RAMs have access times (the

average time to retrieve the contents of a memory cell) in the range of 200 nanoseconds [200

x 10–’ seconds), otherwise comparable circuits with lower access times sell for more;

during 1982, 64K RAMs with access times of

150 nanoseconds brought prices a dollar or

so above those for 200 nanosecond circuits.

Nonetheless, RAMs—and most other memory

chips—are in essence standardized items. As

for consumer products like TVs, progress is incremental and predictable, at least at present—

although the pace is much swifter.

If process technology is vital for RAMs, product technology—i.e., circuit design—carries

greater weight in competition involving other

varieties of ICs. Foreign firms have been less

successful in microprocessor families and the

arrays of support chips designed to be used

with the processors themselves, as well as some

types of linear circuits, logic families, semicustom chips, interface circuits, and the many

other varieties of specialized microelectronic

products, In contrast to memory chips—in

essence “brute force” devices—circuits that implement logic depend more heavily on creative

engineering design, on anticipating user needs,

and on recognizing new opportunities made

possible by developments in either process or

device technology, A well-designed microprocessor—one with an architecture that takes

maximal advantage of the circuit elements it

employs, with an instruction set that pro-
26 ● International Competitiveness in Electronics

— — — ————-—— ——.

U.S. Semiconductor Sales by Type

Linear

Standard Iogic

families

Linear 1975

1980

Standard

ogle families

ICs Microprocessors/

microcomputers

SOURCE 1975–E/ectronlcs, Jan 8, 1976, pp. 92, 93

1980 -E/ectronlcs, Jan 13, 1982, pp. 124, 125.

1966 -E/ecfron/cs, Jan 13, 1983, pp. 128, 129; Mar. 10, 1983, p. 8

gramers find easy to use, a convenient bus

structure and input/output ports—could be a

commercial success even if developed by a

company with only mediocre process technology. Were this the case, however, alternate

source manufacturers might end up with more

of the market and/or higher profits.

International Positions in

Microelectronics Technology

While Japanese manufacturers now make

and sell many types of microprocessors and

logic circuitry, and have always had excellent

Linear

and

other

ICs Standard Iogic

families

Microprocessors/

microcomputers

Ics--

Memories

1986

(Projected)

technology for linear ICs, they have not been

able to match American semiconductor firms

in design-intensive products. For instance, the

microprocessors that Japanese semiconductor

firms sell in large volume on the world market

are U.S. designs. Such patterns will probably

continue to hold, although here as elsewhere

the magnitude of the U.S. lead is likely to shrink

as the Japanese get better at circuit design, and

as Japanese semiconductor manufacturers hire

engineers from other countries,

In semiconductor processing, Japanese firms

are often on a par with the United States and
Ch. 1—Part B: Extended Summary ● 2 7

—

may be better in some cases. One reason has

been the VLSI research project and its several

follow-ens, orchestrated and partially funded

by Japan’s Government. By 1983, Japanese

manufacturers were, as a group, further along

in production plans for process-intensive 256K

RAMs than their American competitors. Process control also exerts a major influence over

quality; nevertheless, if a few years ago the

quality of some types of Japanese ICs—specifically, RAM chips—was higher than supplied

by American firms, today any differences are

much smaller (see ch. 6).

Semiconductor manufacturers in Japan have

made great strides as well with complementary

MOS (metal oxide semiconductor) circuitry,

one reason being its attractions for certain of

the consumer applications in which Japanese

semiconductor firms for many years specialized. In contrast, companies in Western

Europe are generally behind both the United

States and Japan in all varieties of MOS. European nations are making determined efforts to

catch up, in several cases with strong government support, Despite underlying technological abilities that in many cases are excellent,

European manufacturers have not been as successful as American suppliers at converting

their technology into successful commercial

products. In circuit design, neither the Japanese nor the Europeans seem able to match

wits with Americans. This is an advantage—a

source of “technology gap’’—that the United

States should be able to maintain. To do so,

U.S. firms must continue to vigorously pursue

new markets and American engineering

schools must retain their preeminent position

in fields related to microelectronics.

Research and Development

Despite the continued prowess of American

circuit designers, the comfortable lead once enjoyed by the United States in the underlying

technology of semiconductor devices is now

spotty at best. American merchant semiconductor firms devote most of their R&D efforts

to product and process developments with immediate application to end-products; relatively small companies with limited resources, they

have had little choice but to place the greatest

priorities on R&D that will help them in next

year’s marketplace battles.

In the United States, more basic research—

ranging from studies of the physics of electron

devices to the development of process tools

such as ion-beam lithography—has been

funded and performed elsewhere. Some of the

work has been supported by the Department

of Defense—e.g., research on high-speed gallium arsenide devices, In other cases, large organizations such as IBM or AT&T’s Bell Laboratories have carried much of the burden; Bell

Labs, in particular, has been responsible for

many of the seminal developments in solidstate electronics. In the past, Bell diffused

these widely to both U.S. and foreign enterprises, Now, with AT&T entering new markets,

World Integrated Circuit Output by Headquarters Location of Producing Firms

1978 1982a

Product ion Share of Product ion

(millions of dollars) world output (millions of dollars)

United States. . . . . . . . . . . . . . . . . . . . . . $4,582 -

68.3% $9,700

Merchant . . . . . . . . . . . . . . . . . . ... 3,238 6,450

Captive ., . . . . . . . . . . . . . . . . . . . . . 1,344 3,250

Captive percentage. . . . . . . . . . . . . . . . 29.30/o 33.5 ”/0

Western Europe . . . . . . . . . . . . . . . . . . . 453 6.7 620

Japan ... . . . . . . . . . . . . . . . . . . . . . . 1,195 17.8 3,440

Rest of the worldb ., . . . . ... . . . 482 7.2 190

$6,712 $13,950

aEstlmated

--

blncludes the Soviet Union and Eastern Europe for 1978 but not 1982

SOURCES 1978–Stafus# A Reporf on the /n fegrafed C/rcu/f /ndustry (Scottsdale Ariz Integrated Ctrcu{t Englneerlng Corp 1980), p 4

f982—Stafus 1982 A Reporf orI (he /n fegrafed C(rcuIt /ndustry (Scottsdale, Artz Integrated Clrcult Englneerlng Corp 1982), p 5

Share of

world output

69.5%

4,4

247

14
28 ● International Competitiveness in Electronics

— — — —————

including merchant semiconductor sales, and

competing under new conditions, the company

may no longer feel that it has the luxury of supporting basic research so heavily; at the least,

it will guard its technology much more closely (as IBM always has). Other forces at work

include growing software demands on microelectronics firms—an area constrained by personnel shortages, low productivity, and weak

theoretical foundations. Furthermore, the

highly competitive merchant firms have perhaps been taking advantage of new technological opportunities faster than the stockpile has

been replenished. The need for new sources

and mechanisms of technology development

and diffusion is plain.

Along with continued Federal support and

incentives for R&D, particularly more basic

work, institutional innovations that would help

to build the technological base for continuing

U.S. competitiveness in microelectronics—as

well as in computer systems—appear worthy

of congressional attention. U.S. competitiveness in electronics has depended heavily on the

technical strengths of American firms, So long

as the United States held a substantial overall

lead in electronics technology, smaller companies could successfully design and develop

their products and processes without doing

much research on their own. The foundation

provided by large companies, military spending, and the universities sufficed. Today, not

only is this base eroding, but the overall technical edge of the Nation has diminished, In

particular, research capabilities in American

universities have deteriorated because of obsolete equipment and shortages of graduate students and faculty. A redefined Federal role in

R&D could address the need for better mechanisms of technology diffusion within the

United States, as well as encouraging inflows

of technology from overseas,

A number of promising models exist, beginning with domestic ventures such as the Semiconductor Research Cooperative and Microelectronics & Computer Technology Corp. and

including a number of experiments in other

countries. Some of these are aimed at enhancing the diffusion of technology as well as at encouraging basic and applied research with potential commercial, rather than exclusively military, applications, The Fraunhofer Gesellschaft in West Germany, as well as Japan’s joint

R&D programs, both discussed in chapter 10,

come to mind. The U.S. electronics industry,

including but not restricted to microelectronics, could benefit from institutional mechanisms more closely linking R&D efforts in Government laboratories, industry, and universities. A relatively large but decentralized system of centers-of-excellence, directed toward

commercial developments—with ample scope

for local funding and entrepreneurial participation—would fit American traditions. Given

some fraction of funding, perhaps 30 or 40 percent, from the Federal Government on a continuing basis, the time horizons could be longer

than those for R&D programs funded entirely

by industry.

Computers

If manufacturing technology is critical for

cost control in consumer electronics, and both

process and product technologies are vital in

semiconductors, the computer industry exemplifies reliance on product technologies, Particularly for larger systems, manufacturing is

less significant for competitiveness because

production volumes are modest compared to

TVs or semiconductor devices. For small computers sold in large numbers—and particularly the desktop machines offered by companies

like Apple—or for peripherals such as printers

and terminals, manufacturing technologies are

of greater and growing importance.

Technological Competition

What are the major factors in marketing computers? First and foremost, performance/cost

ratio: the computing power per dollar that a

manufacturer can supply. This depends heavily

on system design—both hardware and software—i.e., in doing more with less rather than

cutting production costs. For most computer

systems, assembly is labor-intensive, costs increasing with overall complexity, The company that can design a system offering higher
Ch. 1—Part B: Extended Summary ● 2 9

—

performance at a given cost has the advantage.

IBM, as in so many other instances in the computer industry, provides something of an exception because its higher sales volumes mean

more pronounced scale economies. A further

exception has developed at the lower end of

the market, where personal machines, small

business systems, and micro or minicomputers

sold to original equipment manufacturers are

built in much greater numbers. In both cases,

greater production volumes increase the significance of manufacturing technologies but in

no way diminish the role of system design.

Because of these characteristics, the computer industry is just as design- and R&D-intensive

as microelectronics, but computer engineers

are seldom as constrained by manufacturing

processes as chip designers. They are, however, constrained by the performance characteristics of available components, principally

ICs. Microelectronic devices are the building

blocks for processors as well as essential elements in many other parts of computing systems, from controllers for disk drives to semiconductor memories themselves. Because system performance depends so heavily on ICs,

many computer firms have established captive

microelectronics R&D and production facilities. While component technologies ultimately limit what can be done, computer designers

have considerable latitude in configuring systems; the many alternatives from which they

can choose are affected in different ways by

the characteristics of both hardware and software,

Systems Aspects

Although firms located in other countries are

nibbling at U.S. market share, our dominance

in computer manufacture still continues, built

largely on the abilities of American producers

at system design and integration. Conceiving

and developing new applications of computing

power depends on engineering design and on

understanding user needs—including field

service and software support. American manufacturers opened the personal computer market, not through technical advances, but

because they perceived a potential market

U.S. Production of Computer Equipment

35 t

Year

SOURCE: 1972, 1975, 1977, 1980, 1983 editions, U S /ndustr(a/ Ouf/ook, Depart.

ment of Commerce 1981 and 1982 sh Igments estimated

where others did not. Substantial penetration

by Japanese imports may eventually follow, but

based more on low prices–stemming from the

well-established capability of Japanese electronics firms to manufacture in high volume

at low cost—than unique product features.

Nevertheless, so long as technical evolution is

rapid, and software one of the keys to sales,

American entrants with creative product designs should have little to fear from overseas

competitors. At least at first, the more successful Japanese personal computers will be

based on U.S.-designed microprocessor or microcomputer chips, as well as software developed in the United States—e.g., the popular

CP/M or Unix® operating systems and the

many applications programs that run on them.

This is only one example where American

computer manufacturers have been at the forefront in spotting new applications of computing technology. Among the other examples are:

Small machines suited to the needs of

businesses with a few dozen to a few hundred employees.

Fault-tolerant systems that can be used

where reliability is critical.

Specialized data processing installations

for banks, insurance companies, and Government agencies.

Dedicated processors to be integrated into
30 “

●

●

Intemational Competitiveness in Electronics —

industrial controllers, scientific instru- Sometimes market demand has driven the techments, aircraft flight-control systems. nology, with the design efforts of computer

Networked systems, time-sharing, satellite manufacturers shaped by perceptions of these

terminals and other mechanisms for pro- needs; occasionally, more raw computing

viding users with computing power when power has been available than has found imand where needed. mediate application.

Both large and small machines for specialized scientific and technical computing, System integration remains

ranging from supercomputers for complex American firms, and—just as for

numerical calculations in computational ductor manufacturers—so long

the forte of

U.S. semiconas American

fluid dynamics or the development of nu- companies and American engineers continue

clear weapons to array processors to be to push aggressively into new software and

used in conjunction with dedicated mini- hardware applications, they should be able to

computers in modeling chemical reac- maintain a technological edge sufficient to hold

tions. a large fraction of the world computer market.

Photo credit General Motors

Experimental electronic map display for automobile dashboard
Ch. 1—Part B: Extended Summary 31

—.

Nonetheless, this share may not be the 70 percent of 10 years ago. If so, the causes will be

multiple, as discussed in chapter 5. Rapidly expanding and fragmenting markets mean that

no one manufacturer can cover all the bases;

windows of opportunity will open for foreign

as well as U.S. suppliers, Manufacturers in

other countries may benefit from supportive

industrial policies, as well as drawing on growing pools of capable computer scientists, systems engineers, and managers. The result is

likely to be a narrowing of the technology gaps

that have favored American firms. Improvements in the standing of computer industries

in countries like Japan relative to other sectors

of these country’s economies may lead to

greater international competitiveness in computer manufacturing. Most of these forces are

outside U.S. control. Given the circumstances,

it becomes particularly important that the Nation avoid unnecessary sacrifices in competitiveness through missed opportunities by

American firms or defective policy choices by

the Federal Government.

Finance

Well-developed capital markets have been a

major source of strength for entrepreneurial

high-technology firms in the United States.

Under most circumstances, both new start-ups

a n d young, rapidly ex pa n d i ng co m p a n ies have

been able to find the money needed to grow

with their markets. Still, this has not been

u niversally true; in recent years, some electronics companies--preferring, in common

wit h most of American industry, to fund expansion with internally generated cash flows--

have found themselves lacking the financing

needed to keep pace with market opportunities.

Perhaps of greatest significance, volatile interest rates i n the United States reinforce other

factors that bias decisionmaking by corporate

managers toward short-term undertakings,

Venture Capital

Over the past quarter century, venture capital

in its various forms has spawned many of the

new entrants in the U. S. electronics industry:

companies supplying software, instrumentation, semiconductor devices, computers and

peripherals. Some of these–-Digital Equipment

Corp., Intel--have become mainstays of U.S.

competitiveness. Other nations-West Gerrnany, the United Kingdom, even Japan—have

sought to build some of the characteristics of

U.S. venture capital markets into their industrial policies. These attempts to generate the

vitality and dynamism that venture start-ups L

have brought to American growth industries

have seldom met with success.

Bottlenecks in U.S. capital markets are more

probable and more significant when it comes

to financing rapid expansion in sectors like

microelectronics, where capital intensity is

escalating along with sales, than in funding

new ventures. Nevertheless, venture funding

has not always been available, part

capital for developing new ideas well before

production is in sight. When venture funds

dried up in the middle 1970’s, new start-ups

in electronics manufacture virtually halted.

Around the turn of the decade, after the reduction in capital gains taxes that took effect in

1978—one of many forces affecting venture

capital supplies—the market received. Most of

those supplying venture funds look for capital

appreciation over a 3- to 5-year period, with

typical target returns being 35 to 50 percent per

year. Plainly, capital gains tax rates are important both to individual and institutional suppliers of risk financing. However, for reasons

that are poorly understood, venture capital

funding is notoriously cyclical; factors other

than tax changes also contributed to the revival

of the market. By mid-1980, a veritable boom

in venture funding was underway, with much

of the money going to electronics. Prospective

entrepreneurs, many in the Silicon Valley region of California, saw opportunities in microcomputers and other applications of microprocessors, in software and computer periph-
32 ● International Competitiveness in Electronics —.————— — ——

erals, in semiconductor chips themselves. Capitalists saw the technological windows in much

the same light. More than 20 new microelectronics firms alone were established during the

first two years of the venture capital resurgence.

Financing Growth

As chapter 7 points out, finding capital for

continued expansion has been a greater concern for many U.S. electronics companies, particularly given the high growth rates in much

of the industry. While there are few if any signs

of overall shortages of capital for investment

in the United States, financing growth is a common problem for young companies anywhere

in the economy, Electronics firms, especially

those producing ICs, face unusually steep hurdles. The first is simply the need to keep up

with markets that in some years have grown

at 25 percent or more. Firms trying to increase

their shares of such markets have to add production capacity at rates that can severely

strain financial resources; needless to say, the

investments must precede the added revenues

they bring in. At times, U.S. semiconductor

manufacturers may have been unable to secure

the funds needed to keep up with market

growth—or, more likely, have judged the conditions imposed by prospective suppliers of

capital unacceptable.

Rising capital intensity for semiconductor

processing creates a second hurdle. Denser ICs

require more expensive fabrication equipment.

A state-of-the-art manufacturing facility, which

cost perhaps $5 million a decade ago, now

might run $50 million. High levels of R&D

spending, mandatory for companies that hope

to compete in markets for advanced devices,

contribute a third hurdle, Thus capital demand

is mounting even more rapidly than the market

has been growing, compounding the already

difficult financing problems of U.S. semiconductor firms.

In common with most of American industry,

U.S. electronics firms have been reluctant to

rely heavily on external funds—either debt

(loans, bonds) or equity–for financing growth.

At times over the past decade, it would have

been difficult to issue either bonds or stock.

Nonetheless, the U.S. electronics industry exhibits a pattern of consistently low debt/equity ratios contrasting sharply with foreign manufacturers. Aversion to borrowing may have

constrained the growth of some American electronics companies over the past decade.

The changes in U.S. tax law implemented by

the Economic Recovery Tax Act of 1981 have

increased cash flows for electronics firms

along with other businesses in the economy.

High-technology electronics manufacturers

benefit particularly from the R&D tax credit.

Accelerated depreciation is a different matter:

although more rapid capital cost writeoffs are

now available to virtually all U.S. corporations,

the benefits are much greater for numerous

other sectors. Because electronics firms, particularly in the high-technology portions of the

industry, have always been able to depreciate

at fairly rapid rates, they have not been helped

as much as sectors like primary metals. In

earlier years, many such industries faced

lengthy capital cost recovery periods. The relative position of electronics has suffered under

the 1981 Tax Act to the extent that companies

in other lines of business have an easier time

securing external funds.

International Differences

Why do American companies limit their use

of external funds? Most managers would answer by citing high costs of capital, whether

debt or equity, as reflected in high U.S. interest

rates over the past few years. American businessmen have claimed that they face costs of

capital perhaps twice those of their competitors

in Japan. In fact, although costs of funds in the

United States are higher than in Japan, the

differences—when adjusted for inflationary expectations—appear relatively small, certainly

less than 5 percentage points, While not insignificant, the resulting advantages for Japanese

electronics manufacturers are hardly overwhelming, even when the tax benefits of the

higher debt/equity ratios characteristic of Japanese corporations are taken into account.

Lower costs of capital in Japan make no more
.— ——

than minor contributions to differences in

manufacturing costs. A much more potent

source of advantage for large, diversified Japanese electronics firms, particularly in periods

when markets are expanding rapidly, stems

from their ability to allocate funds internally,

using moneys generated in other lines of business to finance high rates of spending on R&D

and new production capacity. U.S. semiconductor firms, especially those that remain independent and have a limited range of products, will always be hard-pressed to keep up

with diversified companies, Japanese or American. A major difference between diversified

Japanese and American electronics firms is the

evident willingness of Japanese semiconductor manufacturers to compete in the mass marCh. 1—Part B: Extended Summary . 33

ket for merchant products, and to aggressively add new production capacity. It remains to

be seen how American firms like Mostek or Intersil, which are now parts of large conglomerates, will behave over the longer run—and

how Western Electric will fare, now that it is

entering the merchant market.

While the contrasts between financing practices of American and Japanese electronics corporations are many—as are those with European enterprises—the net advantages that

Japan’s companies receive from government

guidance applied to investment funds are

small. Japanese industrial policies continue to

influence capital allocations and costs of funds,

but the high leverage characteristic of Japanese

Rates of Capital Spending by U.S. and Japanese Semiconductor Firms

1 1 1 1 I I 1

1973 1974 1975 1976 1977 1978 1979 1980 1981

Year

alntegra[ed CIrCUIIS only, 1973-1979, weighted average of 12 manufacturers 1973-1979 11 manufacturers 1980, 1981

bl 9731980 Weighted averages for 11 U S merchant semiconductor manufacturers, 1981 estimated

SOURCE Un/tad States— 1973-1977, Bureau of Census, 197&1981, Department of Commerce and Semiconductor Industry Association

./span— f973-1979, Japarr fact Book ‘BO (Tokyo” Dempa Publications, 1980), p 203, 198U, 19Bf, Japan EcorIom/c Journa/
34 International Competitiveness in Electronics

— —

corporations, as measured by the ratio of debt

to equity or debt to total capital, helps primarily

in terms of taxation. In Japan as in the United

States, interest can be written off as an expense

(while dividends paid to shareholders cannot);

therefore higher proportions of debt reduce

corporate tax bills. That banks in Japan lend

willingly to highly leveraged firms places these

banks in a position more like that of equityholders in the United States: Japanese banks

absorb higher risks than American banks, but

the impacts of this, by itself, on the competitiveness of Japanese companies are small. Furthermore, leverage ratios of Japanese firms

have been slowly declining over the years—

one example among many of the gradual movement of the Japanese economic system toward

convergence with other advanced nations.

Likewise, the unusually high rate of personal

savings in Japan has impacts at the aggregate

level which are only loosely coupled with costs

of capital for individual firms. These costs vary

widely across the Japanese electronics industry, just as in the United States. Indeed, cost

and availability of capital differ more from firm

to firm within the U.S. electronics industry

than, on the average, between the electronics

industries of the United States and Japan.

The apparently high costs of capital in the

United States—as reflected in high interest

rates, stemming in the past from expectations

of continued price inflation-do have a serious

consequence. High and uncertain interest rates

in the United States tend to skew investment

decisions toward short-term undertakings.

Although no one knows how to measure or aggregate the time horizons of business executives in any meaningful way—much less compare those of American executives with their

counterparts in West Germany or Japan—all

else the same, interest levels that fluctuate unpredictably will act to shorten time horizons.

Investments with longer payback periods—for

example in basic research or in advanced production equipment—will appear less attractive.

To the extent that capital markets in the United

States continue to mirror expectations of high

and uncertain interest rates, the future competitiveness of American ind

ics may suffer,

ustries like electronHuman Resources

Business enterprises depend on capable people for tasks ranging from assembly line work

to service and repair of their products, design

and development, and general management.

From the standpoint of international competitiveness, the larger the pool of qualified people a firm or an industry can draw from, the

better. An ample supply of engineers and technicians means that companies will have the

luxury of picking and choosing, while from the

employee viewpoint, salaries may be depressed. A small pool means potential shortages, most likely of specialists, perhaps driving organizations to move people laterally to

meet their needs. Soaring demand for computer professionals, for example, has drawn in

many people without formal training in the

discipline; about two-thirds of those employed

in programing and related jobs have degrees

in other fields.

Quantity and Quality

For several years, during which engineering

graduates in all disciplines were in short supply, the U.S. electronics industry experienced

a scarcity of entry-level electrical engineers and

computer scientists. In the short term, demand

has dropped—largely because of recession—

while the supply continues to rise, fed by

swollen undergraduate engineering enrollments, The longer term picture—including

prospects of continuing shortages of software

engineers, integrated circuit designers, and

others with specialized skills—has not changed.

Moreover, the supply of grey-collar workers for
Ch. 1—Part B: Extended Summary ● 3 5

the electronics industry—technicians, drafters,

and designers, field service repairmen, laboratory aides—may also be short, although quantitative data on supply and demand for such

jobs are scarce. There is, needless to say, no

shortage of unskilled assembly workers; the

heart of the problem in this, as in a number of

other American industries, is an excess of unskilled workers coupled with sporadic shortages of those with higher levels of education

and training.

The scarcity of recent U.S. graduates in engineering has been real, extending to virtually

all specialties. Its origins lie in low enrollments

during the early and middle 1970’s (see ch. 8).

Since then, engineering enrollments have rebounded to record levels. Educational resources have not kept pace, with the result that

a substantial number of engineering schools

have had to limit the numbers of students admitted. Not only is supply constricted, but the

quality of engineering education is suffering.

Shortages of teaching faculty have constrained engineering education more than any

other factor. Despite undergraduate enrollments that have nearly doubled over the past

decade, trends in graduate engineering study

have been nearly flat, In particular, students

have been reluctant to enter doctoral programs.

Fewer Ph.D.’s in engineering were graduated

in 1982 than in 1972. Nearly half those now receiving Ph.D.’s from American engineering

schools are foreign nationals. Recent Ph.D.’s

have been avoiding teaching careers, for which

the doctoral degree is today virtually mandatory. Not only are salaries low relative to industry, but new teachers can anticipate heavy

course loads as a result of high undergraduate

enrollments and the faculty shortages that

already exist. Coupled with uncertain prospects for research support and a lack of prospective graduate students of their own, university teaching is no longer an attractive prospect

to many who in earlier years would have been

prime candidates. The result is 1,400 to 2,000

unfilled vacancies on the faculties of U.S. engineering schools.

Deteriorating laboratory facilities create a

second bottleneck. Engineering education is

expensive; curricula include numerous laboratory courses, as well as heavy use of computing

facilities. Keeping laboratories relatively current, so that students get some experience with

up-to-date equipment—instrumentation, small

computers, applications of microprocessors—is

a long-standing problem that has grown worse

in recent years.

If the trends outlined above continue, serious

harm to the competitive prospects of many

American industries could result.

Continuing Education and Training

In contrast to constraints on supplies of new

engineering graduates, the United States has

hundreds of thousands of midcareer engineers

already in the labor market. If the half-life of

a college education in engineering is, say, 10

years, upgrading these peoples’ skills offers

vast opportunities both for individuals and for

U.S. industry. In some cases periodic short

courses or self-study may be enough to boost

people along chosen career paths; in others,

they may wish to move laterally—e.g., from analog to digital circuit design, from hardware

design to software. As pointed out in chapter

8, little data exists on the frequency with which

engineers take advantage of opportunities for

continuing education and training; it appears

that most who do are recent graduates, and that

those with the greatest need—i.e., people 10

years or more out of school—rarely pursue continuing education beyond the occasional (and

seldom very challenging) short course. Several

implications follow: 1) the rewards of pursuing continuing education and training in engineering could be low—e.g., employers may

not support such activities extensively, preferring to hire new graduates with the skills they

need at lower salaries; 2) the programs available may not be attractive—i.e., working engineers may perceive them as academic and unrelated to their jobs; 3) the quality of programs

may vary quite widely, so that those who have
36 International Competitiveness in Electronics

—

or hear about bad experiences are reluctant to

try again.

The paucity of information on this subject

is in itself disconcerting, but it appears that

all of these factors are at work, and others as

well. Certainly, existing incentives seem high

enough to motivate only those with unusual

ability or perseverance. While some companies

have devised effective programs for encouraging employees to maintain and improve their

skills, others do little or nothing. The picture

is likewise mixed among educational institutions; some engineering schools have developed aggressive outreach programs aimed at

providing high-quality coursework for technical professionals, those who are seeking advanced degrees and those who are not. Continuing education programs offered by professional societies as well as profitmaking organizations vary considerably in quality. The

quickest, surest way of providing the numbers

of qualified engineers needed to maintain the

competitiveness of American industries like

electronics is to make high-quality continuing

engineering education more widely available

and attractive to midcareer professionals.

Despite recent difficulties, engineering education in American universities remains the

best in the world. In part because schools and

universities in some countries do relatively

poorly at preparing their graduates for careers

in industry, foreign companies resort more frequently than U.S. firms to internal and on-thejob training, Extensive company-run training

programs are prominent in the Japanese electronics industry, where continuing education

is widespread among blue-collar and grey-collar employees as well as white-collar professionals. One way for the United States to increase its pool of skilled grey-collar workers

would again be to develop a more effective approach to continuing education and training.

Such programs will be more effective where

closely coupled with prospects for upward mobility within organizations. At present, the

probability that an unskilled worker in an electronics firm will be able to move up to a higher

paid position is small.

More broadly, programs of all types aimed

at vocational education in technical fields appear to need reexamination and modification

if the quantity and quality of graduates is to

grow. In the United States, as many as 8,000

public and private schools offer vocationaltechnical education and training (compared

with roughly 300 engineering colleges). The

quality of the courses and programs offered by

these institutions varies widely, Activities are

fragmented, with little detailed information

available even to form a baseline for analysis,

One point is clear: the fraction of the labor

force in U.S. manufacturing industries with

formal training in technical fields (through apprenticeship programs or schooling) and/or

credentials (e. g., certification granted after examinations) is far lower than in a number of

other industrialized nations, including West

Germany and Japan. While correlations with

on-the-job ability may be imperfect, the prevalence of such programs in other countries is

good evidence of a commitment by individuals,

governments, and business enterprises to building a labor force that will help maintain the

competitive ability of technologically based industries into the future. So far this commitment

has been lacking in the United States.

Congressional leadership could have a major impact. As the pace of technical advance

in industries like electronics continues or accelerates, workers at all levels will face new demands on their capabilities. Given the increasing disjunction between the skills of the U.S.

labor force—what people are capable of doing—and the skills that industry needs, the

American economy seems bound to face increasing problems in meeting its manpower

needs, as well as controlling unemployment,

unless progress can be made in training and

retraining. A company might, for example,

lend an employee the money to cover vocational schooling, retraining, or an advanced degree

program, with repayment forgiven if the employee remains with the firm for an agreed

period. Tax policies and other instruments of

Government support could increase the incentives for both corporations and individuals.
Ch. 1—Part B: Extended Summary . 37

..—

Public policies might be designed to lessen the

risks that companies sponsoring education and

training for their employees would lose their

investments when people switch jobs. The Federal Government could provide incentive

grants to the States, to be matched with corporate support.

Preparation for Work in

Technology= Based Industries

At the root of many of the present and prospective difficulties outlined above lies poor

preparation in science and mathematics provided by the public schools. Leaving aside the

large number of functional illiterates among

U.S. high school graduates—an illiteracy rate

that some estimates place as high as 20 percent—and the one-quarter of this age group that

does not even complete high school, many

good students get little education in science or

mathematics once they reach the upper grades.

The number of students electing courses that

are prerequisites for careers in technical fields

is low and still falling; even those who choose

science often shy away from physics and chemistry in favor of biology or geology. Technology, as opposed to science, is invisible within

the public schools. As the U.S. economy conPhoto credit: Digifa/ Equipment Corp

Computer-aided engineering design

tinues to shift from manufacturing toward services, and toward more knowledge-intensive industries, the American labor force will need

to be prepared for technology-based jobs or risk

doing without. Even those performing unskilled work will be in a position to make

greater contributions to productivity and competitiveness, while enhancing their own job security and job mobility, if they are comfortable

with numbers and quantitative reasoning, and

have a basic understanding of the physical

world.

Part of the problem is again a shortage of

teachers; secondary schools are being stripped

of their science and mathematics instructors

by the attractions of higher paying jobs in industry. But the fundamental point is this: a student who opts out of science—and particularly mathematics—at an early age has made a virtually irreversible decision, foreclosing a wide

range of options in college and in his or her

career. If American students continue to turn

away from mathematics and science at secondary and high school levels, the United States

will find itself with an even greater fraction of

technological illiterates in the adult population.

Already, the Nation finds itself with few leaders in industry or Government who grasp the

workings of technology.

Management and Organization

Patterns of organization and management in

business enterprises mediate between the skills

and abilities that employees bring with them

to the workplace and outcomes in terms of

competitive firms and industries. How well

companies utilize the talents of the people they

hire is quite as important as how good these

people are to begin with. Thus management

style and philosophy becomes a second critical

element in human resources for the U.S. electronics industry. While American management

includes a “human relations” or participative

management tradition, employee involvement

tends to be honored in theory more than in

practice. Techniques flowing from scientific

management, the other main tradition, remain

dominant in U.S. industry. The recent vogue

for Japanese management practices represents
38 ● International Competitiveness in Electronics

a swing of the pendulum toward the human relations pole, offering paths to improved competitiveness for some U.S. firms, though no

sure cures.

Within a given country—whether the United

States, Japan, or one of the European nations—

electronics firms show a good deal of diversity

in management style. Nonetheless, successful

electronics companies in the United States and

Japan exhibit more similarities than differences, Despite the current fascination with the

“secrets” of Japanese management, uniquely

Japanese traits are rare even in the cruder stereotypes. If the differences between firms within each country are often greater than the differences between countries, and clear-cut distinctions between management styles in the

United States and Japan less common than

often assumed, two features of Japanese management do stand out: first, reward structures

in Japanese companies create incentives for talented people to build careers in manufacturing; second, Japanese organizations tend to

stress human relations more consistently and

more effectively.

Generally speaking, manufacturing and production engineering get more attention and

more status in Japanese companies than American. This is one reason consumer electronics

and semiconductor firms in Japan could move

swiftly to create perceptions that their products

offered better quality and reliability, Often, as

discussed in chapter 6, those perceptions were

firmly grounded in reality; although American

firms have largely caught up, the strong institutional commitments in Japanese corporations

to production engineering mean continuing

pressure in this area. Furthermore, that manufacturing managers in Japan carry more weight

in corporate councils means in at least some

cases faster shifts into automated production,

The importance Japanese companies place on

manufacturing in their internal decisionmaking also translates into a greater share of resources for developments such as the complex

and demanding tasks of integrating robotics

and other forms of programmable automation

into the factory environment; companies that

learn to utilize programmable automation most

effectively will reap substantial competitive

dividends in the future.

Stress on human relations is certainly not

unique to Japanese organizations, but is more

consistently visible—notably among large companies characterized by low labor mobility and

“lifetime” employment (ch. 8). That workers at

all levels tend to spend much if not all of their

careers within a single organization creates

strong incentives for internal training, job rotation, and other steps aimed at improving people’s skills and preventing stultification. A

number of successful American electronics

firms also go to considerable lengths to retain

their employees, even in periods of business

downturn. Rather than treating the labor force

as a variable cost, such firms, in both countries,

regard their workers as a resource to be retained and nurtured although economic conditions might seem to point toward layoffs, Accomplishing this implies more than keeping

people at work and providing education and

training. It also implies opportunities within

the corporate structure to fully utilize present

and potential skills without sliding into paternalism or coercion, A number of the highly

publicized techniques associated with Japanese

management could, in fact, be as fairly termed

manipulative as participative,

A renewed commitment to the development

and utilization of the human resources available to American firms could make a major

contribution to the future competitiveness of

the U.S. electronics industry, indeed may be

critical for the future prospects of this as well

as other high-technology sectors of the American economy. Management practices in successful organizations, whether American or

Japanese, tend to be associated with attention

to human relations and employee participation.
Ch. 1—Part B: Extended Summary ● 3 9

—

Employment

Continuing inadequacies in U.S. education

in science and mathematics will aggravate

structural unemployment caused by technological development and shifting competitiveness

among American industries. In the past, technical change has generally created more jobs

in the aggregate than have been destroyed. Unfortunately, there are no guarantees that continued technological change—especially that

resulting from applications of microelectronics

and computers—will in the future lead to aggregate increases in job opportunities. I n

Europe, the term “jobless growth” has come

to describe the widespread phenomenon of

high unemployment despite expanding output,

This may or may not have been happening in

the United States—the evidence either way is

scanty—but structural unemployment is a reality here.

Shifts in the composition of the work force

in electronics illustrate one of the consequences of technological and structural

change. In the United States, it is fair to say

that jobs in electronics are becoming more skillintensive. Only in the manufacture of consumer products like TVs, a portion of the industry that has been relatively stagnant, has the

ratio of blue-collar to white-collar employees

remained high. In both computers and semiconductors, the fraction of white-collar workers is much greater and increasing.

But a division into skilled and unskilled—or

white-collar, grey-collar, and blue-collar, not at

all the same thing given the high levels of knowhow associated with some but not all jobs in

each of these categories—is too simple. It

masks the increasing stratification and specialization characterizing technologically based industries, not only electronics but the sectors

it feeds. The journeyman machinist may go the

way of the tinker as computer-controlled machines replace engine lathes. The skilled mechanic who could rebuild such a lathe can

probably no more fix the electronics of a

U.S. Employment in Consumer Electronics
40 ● International Competitiveness in Electronics

1955 1960 1965 1967 1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCES: 1955-65-1977 Census of Manufactures. 1966—82-Bureau of Labor Statistics.

numerically controlled machine than program

the computer that controls it. Specialists not

only design the parts to be made and program

the computer, but pick the feeds and speeds,

specify tool materials and cutting fluids. Gaging and inspection may be automated, rather

than the responsibility of practiced hands with

dial gage and surface plate. As skilled jobs

change—and at least some skilled work disappears along with unskilled—people who have

no skills to start with will face still more trouble in finding satisfying, well-paying employment. Those who cannot learn new skills may

find themselves outside the labor pool. Upward

mobility in the United States may decline.

Many unskilled jobs are migrating overseas—in electronics, mostly to low-wage countries in Asia. Moves offshore by American corporations have attracted widespread attention,

and opposition on the grounds of “exporting

jobs. ” Offshore assembly has been much more

prevalent in semiconductors and consumer

electronics than in computers; even so, in both

sectors, other factors have often made greater

contributions to declining blue-collar job opportunities (see ch. 9 as well as app. B). Among

these factors, improvements in labor productivity, many stemming from investments in

automated manufacturing equipment, have

generally had the greatest impacts. Moreover,
Ch. 1—Part B: Extended Summary ● 4 1

transfers of production offshore tend to be

driven by competitive pressures, domestic as

well as foreign in origin, which are largely outside the control of individual firms. For instance, once a few U.S. semiconductor manufacturers began assembling chips in low-wage

countries to cut costs, other suppliers had little choice but to follow suit. When the pressures are international, moves offshore may in

some cases save domestic employment opportunities over the longer term by helping maintain U.S. competitiveness, though sacrificing

jobs in the shorter term.

Manufacturing by American-owned as well

as foreign-owned companies has become widely dispersed internationally. But this is only one

cause of unemployment in the United States.

Ongoing structural and demographic shifts are

causing serious and persistent adjustment difficulties, People with few skills or with obsolete

skills will find diminishing job opportunities

in many of the older U.S. industries. Ten million and more Americans have been out of

work at a time when American industry has

been short of as many as a million employees

with specific skills and abilities. In the aggregate, and even considering multiplier effects, a million new jobs only dents the unemployment problem facing the United States.

Yet from the standpoint of the individual, each

job counts. policy makers may find themselves

unable to predict the causes and consequences

of structural unemployment with any precision. This does not mean the problems cannot

be attacked. It means that adjustment measures

should aim to enhance job mobility—intra-firm

as well as inter-firm—without depending on detailed predictions of supply and demand by occupational category and industrial sector.

The total number of jobs created over the

next decade in electronics and other high-technology industries will not be large. After all,

the entire U.S. electronics industry employs only

about 11⁄2 million people today, and employment has not expanded as rapidly as output.

Still, many of the fastest growing occupational

categories in the economy will be found in this

sector. The people who fill the new jobs will

benefit; at the same time, U.S. electronics comPredicted Growth Rates by Occupational Category

in the United States Over the 1980’s

Predicted increase

in employment

Occupation a

(1980-90)

Paralegal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1090/0

Data processing machine mechanic . . . . . . . 93

Computer operator . . . . . . . . . . . . . . . . . . . . . . . 72

Computer systems analyst . . . . . . . . . . . . . . . . 68

Business machine service technician . . . . . 60

Computer programer. . . . . . . . . . . . . . . . . . . . . 49

Employment interviewer. . . . . . . . . . . . . . . . . . . 47

Computer peripheral operator . . . . . . . . . . . . . 44

Psychiatric aide . . . . . . . . . . . . . . . . . . . . . . . . . . 40

aN~nin~lu~ive; f=te9t growing Occupations in electronics are listed together with

selected occupations outside of electronics (in Ital Ics) for comparison

SOURCE: “Testimony Before the Senate Subcommittee on Employment and Pro.

ductlvlty, March 26, 1982, by Ronald E Kutscher, Assistant Commissioner, Off Ice of Economic Growth and Employment Projections,

Bureau of Labor Statistics,” Product/v/ty in the American Economy,

1982, hearings, Subcommittee on Employment and Productivity, Committee on Labor and Human Resources, U S. Senate, Mar 19 and 26,

Apr 2 and 16, 1982, p 327

panics need good people to remain competitive. Nonetheless, there has as yet been little

concrete discussion of what is needed to prepare people for future job opportunities; the

organizations and institutions that deal with

such concerns tend to be dispersed and to operate independently of one another. Although

the past few years have seen considerable criticism of training programs said to be preparing people for jobs that have already disappeared, little usable information on such subjects in fact exists. Local control of secondary

and vocational education is the traditional pattern in the United States. Educators and

schools of education seldom interact extensively with industry or organized labor. Vocational

education and training has little visibility at the

Federal level. Over the past two decades,

schools have turned away from providing marketable skills. Company-run training programs

are limited in number and tend to be emergency responses to hiring shortfalls rather than

everyday features of corporate organization. A

thorough re-thinking of the American approach

to education and training, particularly for blueand grey-collar workers, seems called for. Congress could decide to take the lead in reinvigorating the traditional American commitment

to education and training.

99-111 n - 83 - 4
42 ● International Competitiveness in Electronics

—— . — — —— — —

Trade

Trade policies pursued by the Federal Government have affected the several portions of

the U.S. electronics industry in radically different ways. Consumer electronics has suffered

from uncertain enforcement–some would say

nonenforcement—of antidumping statutes, although other parts of U.S. trade law have been

called on to protect domestic firms from import competition. American manufacturers of

semiconductors and computers have benefited

from U.S. leadership over the postwar period

in creating an open environment for international trade and investment. One of the

strengths of American semiconductor and

computer firms has been their global approach

to markets, a strategy aided by reductions in

barriers to trade and investment over the past

three decades. Even though semiconductor imports from Japan have increased rapidly during the last few years, more than three-quarters

of U.S. semiconductor imports continue to consist of interdivisional shipments of American

companies. In Japan, the largest exporter by

far among local computer manufacturers is

IBM-Japan,

Antidumping Enforcement

Dumping complaints leveled at importers of

Japanese TVs as early as 1968 have never been

fully resolved. Dumping–selling imported TVs

at prices below those charged in Japan—was

proven under U.S. law, but legal challenges

and interagency disputes have delayed final

collection of duties for years.

During the 1960’s and 1970’s, Japanese TV

manufacturers, followed by those in South

Korea and Taiwan, relied heavily on price cutting to force their way into U.S. markets. Nonetheless, dumping was neither the sole cause nor

even a primary cause of competitive shifts in

consumer electronics. The worldwide success

of Japanese consumer electronics firms amply

demonstrates their ability, not only to manufacture at low cost, but to produce reliable TVs

with good performance and product features

that American consumers want. At the same

time, uncertainty created by lengthy and inconclusive legal proceedings meant that domestic firms could not know whether they

might eventually be able to raise prices as a

result of antidumping duties levied on imports.

These added duties might have totaled well

over $100 million; higher prices generating

higher profits could, in principle, have aided

embattled American firms in revitalizing their

businesses.

Eventually, U.S. color TV manufacturers and

their suppliers did receive trade protection, in

the form of negotiated quotas on imports from

Japan, Korea, and Taiwan. Under the name Orderly Marketing Agreements (OMAs), the

quotas followed escape clause proceedings

filed in the wake of sharp rises in color TV imports during the 1970’s. Unfair trade practices

were not at issue. The OMAs speeded structural shifts already underway in the U.S. consumer electronics industry. By limiting imports, they created incentives for foreign firms

to invest in assembly plants within U.S. borders. OMAs did little to revive the American

consumer electronics industry; they did accelerate foreign investments, many of which

would eventually have been made in any case.

In effect, weaker American TV manufacturers

driven from the market by imports have been

replaced by subsidiaries of foreign firms. While

these subsidiaries help to maintain domestic

employment, half or more of the value added

typically remains overseas.

The Environment for World Trade

A number of American computer firms that

began as makers of office equipment, including

IBM, maintained foreign operations before the

war. During the postwar period, overseas investments by American computer manufacturers expanded; subsidiaries of U.S. firms became the backbone of computer industries in

most parts of the industrialized world. Today,

along with the older companies whose product

lines still center on general-purpose mainframes, the major American manufacturers of
Ch. 1—Part B: Extended Summary . 43

— ———..

minicomputers also operate all over the globe.

Likewise, U.S. semiconductor firms began to

invest overseas at an early stage; these investments, beginning around 1960, were made for

two reasons: 1) to supply foreign markets via

local production in industrialized nations; and

2) to cut costs by moving labor-intensive manufacturing operations to low-wage countries.

Direct and Indirect Barriers

Foreign investments by U.S. computer and

semiconductor manufacturers, along with their

continuing high levels of exports, have been facilitated by a relatively open environment for

international trade and investment—chapter

11. Created largely under the auspices of the

General Agreement on Tariffs and Trade

(GATT), in which the United States has played

a major role, this opening of opportunities for

multinational firms via relaxation of direct barriers to trade and investment—tariffs, import

quotas, restrictions on flows of capital outward

as well as inward—has, on the whole, been of

great benefit to the U.S. electronics industry.

At the same time, relaxation of direct barriers

to trade has been accompanied by a simultaneous increase in less direct obstacles and

controls.

As the industrial and trade policies of foreign

governments have evolved, they have swung

toward more subtle combinations of indirect

import barriers, performance requirements, investment incentives, and subsidies. In some

cases, these measures—described in chapter

10—are intended to influence investment and

exporting, In others, the objectives are primarily matters of domestic policy: national security, employment, regional development, Governments intent on pursuing industrial policies

that will support local industries while attracting U.S. dollars and/or technology can choose

from a well-stocked arsenal: trade barriers

range from paperwork obstacles to “buy national” rules; performance requirements may

entail transferring technology, purchasing supplies and materials locally, or exporting a

prescribed fraction of production as a condition for investment; common forms of subsidies include R&D funding, capital preferences,

and guaranteed procurements, European nations, in particular, have sometimes used investment incentives to attract American electronics firms in the name of jobs and technology,

Over the past half-dozen years, spokesmen

for the U.S. semiconductor industry have frequently complained that the trade practices of

some foreign enterprises have been unfair,

while also voicing concern over government

industrial policies in countries such as France

and especially Japan. (U.S. computer firms

have seldom been as vocal over trade practices

or internal subsidies benefiting their foreign

rivals.) Among the restrictive practices that still

exist in many parts of the world, the relatively

high tariffs levied by the European Community (EC) on semiconductors—17 percent—are

perhaps the most visible. One consequence has

been to encourage investments within the EC

by American firms, but the European market

is in any case large enough that these investment patterns could have been anticipated. In

neither semiconductors nor computers have

European suppliers been very successful in approaching the EC market as a whole. With only

a few exceptions, local firms have exhibited

relatively fragmented patterns of production

and sales, In contrast, American-owned enterprises have often done a better job of treating

Europe as a unified regional market, But

whereas the trade practices of Western European nations may have ended by harming the

ability of local firms to compete with the

Americans more than they have helped, the

situation has been vastly different in Japan.

Japan

For many years the Japanese Government effectively protected the country’s electronics industry, including manufacturers of consumer

products such as TVs, through controls over

foreign investment as well as restrictions on

imports. With only a few exceptions—e.g.,

IBM-Japan—American-owned computer and

semiconductor firms have had no more than

modest success in selling their products

through either exports or local production. A

complex of factors ranging from chauvinism
44 ● International Competitiveness in Electronics

350

50

0

1975 1976 1977 1978 1979 1980 1981 1982

Year

SOURCE: 1993 US /rrdustrla/ Outlook (Washington, D C : Department of Commerce, January 1983, p. 29-5. 1982 figures estimated.

to explicit government policies has impeded

both exports and investments in Japan by

American electronics suppliers. The negative

impacts on U.S. competitiveness have been far

greater than those visible anywhere else in the

world.

American companies have been able to sell

products that the Japanese could not make for

themselves—advanced integrated circuits,

state-of-the-art semiconductor fabrication

equipment, some types of computers. But products available from Japanese suppliers tend to

be purchased locally, in part because of deeply ingrained “buy Japanese” attitudes. Structural differences also play a role, particularly

in microelectronics: the half-dozen large companies that produce most of Japan’s semiconductors also consume perhaps two-thirds of

these same semiconductors; such a market is

difficult to attack from the outside. While

foreign investment is in theory much less restricted today than in the past, only a few

American semiconductor and computer firms

have as yet established wholly owned operations of any size within Japan.

Given the rapidly improving technological

abilities and competitive postures of Japanese

electronics manufacturers, investment in Japan

by American firms appears vital for maintaining U.S. competitiveness; while many in Japanese Government and industry will no doubt

continue to oppose such investments, Japan’s

Government has officially endorsed liberalization many times, and should be held to these

statements in practice as well as in principle.

The Japanese market for electronics products

is now second only to that of the United States;

for many types of products, sales within Japan

exceed those for all of Western Europe. Not

only will local manufacturing help expand

markets for American firms, enabling them to

compete more effectively with Japanese companies in third countries as well as inside

Japan, it will accelerate flows of technology

from Japan to the United States. As in industries such as steel or automobiles, American

electronics companies can now learn from

their Japanese counterparts—and not only in

consumer products. U.S.-owned R&D laboratories in Japan could help compensate for personnel shortages here, as well as improving access to the results of subsidized research programs such as the fifth-generation computer effort. Full participation in the dynamic Japanese

electronics market is critical to the continuing

competitiveness of American computer and

Semiconductor Sales in the United States,

Western Europe, and Japan

Sales (billions of dollars)

1974 1982

United States

Discrete semiconductors . . . $0.88 $1.3

Integrated circuits. . . . . . . . . 1.2 6.3

$2.1 $7.6

Western Europe

Discrete semiconductors . . . $0.77 $0.77

Integrated circuits. . . . . . . . . 0.52 1.5

$1.3 $2.3

Japan

Discrete semiconductors . . . $0.55 $1.2

Integrated circuits. . . . . . . . . 0.59 2.4

$1.1 $3.6

SOURCES: 1974–E/ectronics, Jan. 8, 1976, pp. 92, 93, 105.

lfW2-E/ec?rorrlcs, Jan. 13, 1983, pp. 128, 142, 150; Mar. 10, 1963, p, 8.
Ch. 1—Part B: Extended Summary ● 4 5

— —

semiconductor manufacturers; Congress could

help ensure that the Federal Government actively supports such endeavors by American

firms, which are fully consistent with this

country’s historic commitment to open trade

and investment. Competition in Japan on terms

perceived to be fair will yield dividends within

the United States by creating conditions under

which American companies can better maintain their competitiveness.

Recent Developments

Broadly speaking, the Tokyo Round multilateral trade negotiations, completed in 1979 and

implemented shortly thereafter, in the United

States by the Trade Agreements Act of 1979,

are having generally positive though small impacts on the American electronics industry.

Continuing tariff reductions will help U.S. exports; accelerated duty reductions on semiconductor products and computers by Japan are

especially significant, though perhaps as symbol more than substance.

Nonetheless, tariffs are no longer the principal barrier to international trade in electronics. They are being replaced by indirect

and nontariff barriers, including a wide range

of implicit and explicit subsidies. In particular,

American electronics firms continue to complain over government-funded R&D programs

in Europe, Japan, and a number of developing

countries. Although the Tokyo Round yielded

a new subsidies code intended to deal with this

and related issues, the prospects for substantial progress seem slim.

Taken one at a time, individual programs in

foreign countries—including such prominent

examples as Japan’s VLSI R&D effort, and,

prospectively, the fifth-generation and supercomputer projects now underway—have often

had no more than modest impacts on international competitiveness. At the same time, their

goals often include intangibles such as technology diffusion or improvements in the skills of

the labor force; these make outcomes difficult

to evaluate. Subsidies directed at commercial

technologies and typically rationalized as domestic support measures rather than export

promotion policies have few counterparts in

the United States. It is the justification in terms

of domestic objectives rather than strengthened

export competitiveness that makes such policies a problematic subject for international

negotiations. Public funds for R&D, the use of

government procurement to favor domestic industries, and the many related instruments of

industrial policy detailed in chapter 10 have

become part of the conventional approach by

foreign governments. Countries in many parts

of the world pursue such measures in hopes

of building their competitiveness in high-technology sectors like electronics.

Given the growing prevalence of planned

programs of industrial development, virtually

all of which give electronics a prominent place,

it seems unlikely that continued U.S. attacks

on such policies as “export subsidies” will have

much effect in arresting the trend. This is particularly true given the indirect and intangible

impacts of programs directed at infrastructural

support, precompetitive technology development, or human resources. Many of Japan’s industrial policy initiatives have been directed

at overcoming structural obstacles such as

limited labor mobility and a less than stimulating working environment for technical professionals. Totaling the monetary value of such

subsidies, even where possible, is an exercise

that holds little meaning. And, in the end, most

foreign governments will regard such efforts

as too important to give up; certainly they do

not welcome them as legitimate topics of international negotiations, bilateral, or multilateral. While it is clearly in the interests of the

United States to press for clarification and

agreement on the “rules of the game, ” it may

not be very productive to devote a great deal

of effort to combating on a case-by-case basis

what have become standard tools of industrial

policy in other countries.
46 ● International Competitiveness in Electronics

U.S. Industrial Policies

As many observers have noted, industrial

policy in the United States has been a largely

ad hoc construct of unrelated measures aimed

at diverse objectives; not infrequently, policy

measures have worked at cross purposes or led

to unanticipated outcomes. Seldom have they

represented conscious attempts to stimulate the

competitiveness of American industries. Trade

policy, treated separately above, is only a partial exception.

In recent years, U.S. industrial policies have

seldom had major impacts on the electronics

industry; however, early developments in both

computers and semiconductors benefited from

Government procurement and from R&D

funded by Federal agencies concerned with

defense and space. Since the 1960’s, overlaps

between military/space applications and civilian needs have diminished. Today, military

electronic systems are seldom as advanced as

civilian; it has been many years since Federal

spending has had much influence over electronics technology or competitiveness.

Distribution of U.S. Semiconductor

Sales by End Market

MiIitary Consumer Computer and

I n dust r I a I

1960

I 1

1968

-1 I

1980

‘tear

SOURCES: l~r 1S68: “’lnnovatlon, Competition, and Governmental Policy In the

Semiconductor Industry,” Charles River Associates, Inc., final

report for Experimental Technology Incentives Programl Department of Commerce, March, 1980, p. 2.13.

1980; Status ‘13cT A l?e~orfOrI the /ntegrated Clrcuft Industry (Scottsdale, Arlz. Integrated Clrcult Engineering Corp., 1980), p 34

Faced with increasing competition in many

industrial sectors, slower economic growth,

and a multitude of adjustment problems, the

question for the United States has become: Can

the country continue with a de facto industrial

policy or is a new approach needed? The surprising variety of programs intended to nurture technologically based industries in Japan,

Western Europe, and several newly industrializing countries reveal an attentiveness to

economic development simply lacking here.

One response has been to argue that the United

States needs to find ways of negating or countering foreign industrial policies, Alternatively, rather than a reactive posture, the United

States could itself move toward policies intended to stimulate and support industrial

development.

Foreign industrial policies have had their failures—and successes too. The important point

is that countries which have adopted relatively systematic industrial policies continue to experiment with policy tools, to develop new programs—in short, to accumulate experience and

improve effectiveness. The U.S. system has

strengths and weaknesses different from any

and all of the nations—Japan, France, South

Korea—that have pursued industrial policies

aimed at economic growth and development,

What sort of industrial policy could help the

United States to maximize its own strengths,

minimize its weaknesses? To help frame this

question, OTA suggests five possible orientations that Congress may wish to consider for

a more coherent U.S. industrial policy:

1. A policy approach aimed at ensuring a

strong domestic market base for U.S. industries, along with preservation of existing jobs and job opportunities.

2. Policies designed to protect and/or support

a limited number of industries judged

critical to national security, defined narrowly or broadly.

3. Measures that will support the technological base and institutional infrastructure

for American industries, particularly those

undergoing structural change.
—

4.

5.

-—

Policies intended to promote the global

competitiveness of American industries.

An orientation that would defer wherever

possible to the private sector when choices

concerning the development of industry

are to be made.

These policy directions, examined in detail in

chapter 12, are by no means mutually exclusive; they might draw, for example, on similar

policy tools in areas such as international trade

or technology development. Nonetheless, they

represent distinctly different thrusts: the goals

differ even where the instruments are alike.

The five alternatives, outlined below in the

context of the electronics industry, carry implications for the entire economy, as well as the

political environment where any policy would

have to be implemented. These broader dimensions are emphasized below because focusing

too strongly on specific policy tools—e.g., those

addressing problems visible at the moment in

electronics-would simply repeat the ad hoc

approach to U.S. industrial policies now

current.

Each of the five approaches has positive and

negative aspects, They can be usefully contrasted in terms of differential effects on sectors of the economy as well as susceptibility

to the political forces that corporations and

their employees bring to bear on the policymaking process. The intrinsically political character of this process, now or in the foreseeable

future, has often been couched in terms of Government’s ability to pick and choose among

“winners” and “losers. ” Early debates over industrial policy in the United States tended to

focus on such questions—rather pointless given

that many Federal policies have always had

this effect. The Economic Recovery Tax Act

of 1981 treats some industries much more favorably than others; trade protection has in recent years been extended to manufacturers of

color TVs, automobiles, and clothespins; political pressures routinely affect decisions on

public works and defense projects.

When industrial policy decisions are made

on an ad hoc basis—without linking one sector of the economy to others, without setting

Ch. 1—Part B: Extended Summary ● 4 7

—

the problems of a domestic industry into the

context of the world economy—political considerations can more easily predominate. To

begin coordinating such decisions more closely

carries two quite different implications: 1)

greater reliance by the Federal Government on

empirically grounded analysis of industrial

competitiveness, productivity, and economic

efficiency; and 2) risks that—beyond influencing policy decisions on a case-by-case basis, as

happens already—political pressures will skew

the policy approach as a whole. The first is one

of the potential advantages of a more coherent

industrial policy, the second, one of the pitfalls—a pitfall because companies and industries in trouble, and their employees, have a

more obvious stake in policy decisions, hence

bring more pressure to bear, than sectors of the

economy on the upswing.

The first two of the policy orientations listed

above carry the greater risks of political deflection. Ensuring the domestic market base for

U.S. industries could easily amount to nothing

more than a protectionist response to trade

pressures and the rise of competitive enterprises in other countries. Basically an inward

looking, defensive strategy, it equates import

penetration with damage to U.S. interests. An

industrial policy centered on safeguarding

American markets and American jobs would

be largely congruent with the political forces

that will always advocate protectionist measures—firms and industries in competitive decline, their employees, the communities and regions in which they are located.

Decline may be temporary and reversible, or

it may be the consequence of deeply rooted

shifts in the international economy that, over

the longer term, are likely to force contraction

regardless of public policy responses. A market

protection strategy implies, first of all, determining whether protection is needed because

of short-term problems—which might range

from macroeconomic dilemmas to misjudgments by corporate managements. For such

reasons, temporary protection is sanctioned by

international trade law under circumstances

as described in chapter 11. Indeed, temporary

trade restrictions might find a place in any in-
48 ● International Competitiveness in Electronics

dustrial policy alternative. Longer term decline

brings a different set of issues to the policymaking process; the options may range from managing decline (via adjustment measures intended to ameliorate the most immediate problems) to wholesale protection and subsidization

(as several European nations have occasionally attempted).

A critical industries strategy—whether

“critical” refers narrowly to military strength

or carries some broader economic connotation—would also lead to a great deal of political

jockeying among firms and industries bent on

demonstrating their criticality. Such an outcome is virtually inevitable because few objective criteria exist that would allow essential or

critical industries to be identified beyond the

broadest and most general level. Under virtually any criteria imaginable, electronics would

be judged vital to “economic security” as well

as military security. Even so, when the industry

is disaggregated, judgments at finer levels immediately become difficult.

Electronics would probably not suffer under

either a protectionist or a critical industries approach; although backlashes by other countries

are always a possibility, nations that import

high-technology electronics products usually

need them badly enough that they would pick

other alternate targets for retaliation. Even so,

a number of other Us. industries would be likely to benefit more. For at least some companies,

the lobbying involved would be business-asusual. Large and powerful corporations experienced in dealing with the Federal Government,

defense contractors, and firms in heavily

unionized industries would tend to have an

edge over smaller, technology-based concerns.

The more aggressive and outward looking hightechnology portions of electronics could not expect as much positive support as they might

get under other policy decisions.

Under any of the five alternatives, political

forces would bear heavily on policy outcomes.

Firms and industries will always have strong

incentives to press for direct and indirect subsidies flowing from Federal decisions, This is

quite understandable, and built into the American political system, but has consequences

that are largely undesirable if a basic objective

of industrial policy is to improve U.S. competitiveness. Industrial policies are most likely to

be productive and effective when they complement ongoing changes in the world economy—e.g., by aiding structural adjustment.

When industrial policies oppose long-term

shifts in comparative advantage, they are generally doomed to high costs, inefficiencies, and

marginality if not ultimate failure.

This could well be true, for instance, in the

case of Federal actions that would steer capital

to selected industries. Such policies have frequently been advocated by those favoring “reindustrialization, ” as well as a critical industries orientation. However, targeting of investment in a conscious way—a key element

in many foreign industrial policies—seems an

unlikely prospect for the United States, if only

because capital markets here work much better than in most other economies. Moreover,

the Federal Government’s experience with investment, leaving aside sectors such as housing, has been restricted mostly to aggregate

measures and to a few well-known bailouts of

troubled corporations. Finally, the records of

foreign countries that have tried to channel investment into industries intended as mainstays

of economic growth and competitiveness are

decidedly mixed.

Everyone knows what the future growth industries will be. The current list includes

computer-aided manufacturing and robotics,

biotechnology, new nonmetallic materials,

microelectronics, computers and communications. U.S. capital markets have been “picking”

these winners quite effectively. An industrial

policy intended to support future U.S. growth

industries—under a critical industries rubric

or some other policy approach—would have to

do more. Specifically, it would have to search

out cases where markets were not performing

consistently well. These do exist. The time

horizons of markets maybe shorter than desirable from a public standpoint (there are many

examples in R&D, most notably in basic research but also in the development of generic
.

technologies that could benefit a wide range

of firms while being difficult to protect or

monopolize). Bottlenecks are always possible

(the unambiguous successes of foreign industrial policies often involve breaking bottlenecks). Response times can be excessively long

(as in the case of the educational system, heavily dominated by government bodies which

create inertia and slow responses, while also

suffering from cloudy perceptions of future

needs and opportunities). Such examples point

to approaches that would not be explicitly sectoral.

The third of the policy orientations considered by OTA—policies that would provide generalized support for technology and infrastructural development, cutting across sectors

of the economy—would reduce the leverage

that special interests could exert by avoiding,

where possible, policies with strong sectorspecific thrusts, Instead, the tools of first choice

would have more aggregate objectives—not

only R&D and its diffusion, but education and

training, open competition, structural adjustment. At the same time, sectoral policies would

.

A

●

●

●

●

●

not be totally ruled out. -

variety of instruments are available:

manpower training and retraining;

new institutional mechanisms for technology development (emphasizing, for example, cooperative efforts among Government, business, and universities);

incentives as well as direct funding for

research and development;

the infrastructure for diffusing available

technologies as well as new R&D results

through the U.S. economy (including technologies from overseas); and

policies aimed at stimulating capital formation and investments in new and productive technologies.

By supporting the technological and human resources underlying competitive industries, interest groups angling for special favors would

have fewer obvious and attractive targets, at

least in terms of immediate financial rewards,

Primarily future-oriented, this policy orientation is based on the assumption that the Federal

Ch. 1—Part B: Extended Summary 49

.—

Government can help build competitiveness by

promoting evolutionary shifts in the economy,

as well as by easing the negative impacts of adjustment on particular groups and regions.

In terms of R&D, the chief difference between private sector and Federal Government

decisions lies not in the ability to evaluate opportunities but in the longer time horizons that

Government can bring to such questions. Motivated by social rather than private returns to

investment, unconcerned with capturing immediate rewards, public policy initiatives can

be formulated with a longer term view than private corporations take. This is as true for mature industries like steel or automobiles as for

“sunrise” or growth sectors. One of the tasks

of an industrial policy oriented toward adjustment and infrastructural support would be to

find such opportunities and develop appropriate responses, To develop an industrial policy

capable of attacking problems of this sort, the

Federal Government would need to understand

industries and their workings on a concrete,

practical level—the level of the shopfloor and

the R&D laboratory as well as the boardroom,

The Government does not now have this capability, a capability it would need in order to

Photo credf lnte/ Corp

Silicon wafer after chip fabrication
50 ● International Competitiveness in Electronics

—. — — —

implement with reasonable effectiveness any

consistent and explicit industrial policy.

As pointed out above, competitive industries

depend on the human resources available,

while training and retraining are essential to

economic adjustment. But what, specifically,

should people be trained to do? What kinds of

skills will be needed 20 years from now? What

are the best ways of reaching people already

in the labor force? Are institutional changes

needed? Should the United States continue to

leave training and retraining largely to local

initiative, or is a continuing but redefined Federal role needed? These are among the questions with which this third approach to industrial policy would have to come to grips. They

illustrate the need for a well-developed analytical capability within the Federal Government.

Like the first of these five policy alternatives,

preservation of domestic markets, the fourth—

promoting the global competitiveness of U.S.

industries—centers on trade issues. However,

promoting competitiveness implies an outward

looking, export-oriented stance, an emphasis

on openness in international trade coupled

with stimuli for emerging, competitive sectors

of the economy. Taking as its starting point the

dynamics of international competitiveness—

the rise and decline of industries over time—

the global trade alternative would seek out,

even accelerate, processes of change, attempting to keep American industries technologically and commercially ahead of their foreign

rivals. To the extent that such policies hastened

the decline of other portions of the economy,

adjustment measures aimed at speeding resource flows out of these sectors, as well as

cushioning the impacts of decline, might also

be called for.

The global approach to industrial policy

builds naturally on the traditional U.S. attitude

that international trade benefits all parties and

should be encouraged. It is the option furthest

removed from the common notion of industrial

policy as necessarily working against openness

in trade. The Federal Government might not

only continue to press for access for U.S. exports and investments in other countries, but

reciprocally keep the domestic market open,

while vigorously pursuing antitrust enforcement in the name of competition. Rather than

resorting to bilateral trade negotiations, the

United States could continue to work toward

multilateral agreements aimed at reducing barriers to trade—in the current climate, primarily

nontariff and indirect barriers, Tax incentives

could be used to reward competitive, exportoriented firms, While more direct forms of export promotion might also find a place, direct

measures always carry the danger of becoming subsidies—which, in the name of competition, this policy orientation would seek to

avoid. Instead of protectionist measures for

aiding troubled industries, the Government

might attempt to manage decline and encourage restructuring,

If interest groups in the United States see the

Nation opening its own markets to foreign

goods and foreign investment—an intrinsic

part of the global approach—without corresponding openings in other parts of the world,

this option could invite a strong backlash, Even

if the United States persuaded its trading partners to join in a thoroughly open and competitive world market system, the accelerated

processes of domestic change might generate

strong sentiments in favor of protection as well

as adjustment assistance. Open world trade has

many attractions as one element in a more

cohesive U.S. industrial policy, but by itself

might not offer advantages great enough or

visible enough to attract the political support

needed for implementation.

The last alternative is built around giving industry a free hand, where possible, in decisions that affect productivity y and international

competitiveness. This alternative fits the recent

mood in the United States: that Government

involvement in economic affairs is counterproductive, that business activities should be deregulated, that markets work best and industries compete best when the Federal presence

is minimized. Like the global trade alternative,

it could mean more rapid rises and declines

within the U.S. economy, Unlike that alternative, it implies less attention by Government

to structural adjustment and less support for
Ch. 1—Part B: Extended Summary 5 1

the efforts of American firms to export and/or

invest overseas. Nor would protection against

import competition be looked on with favor.

Such a policy approach would have to confront and resolve the following dilemma. American businessmen direct many of their complaints at foreign industrial policies that intervene in markets by, for example, encouraging mergers or allocating capital. Spokesmen

for U.S. industry often hold, on the one hand,

that industrial policies in other countries are

not only unfair, but serve to tilt the competitive

balance by strengthening or even creating comparative advantage. On the other hand, these

same spokesmen frequently argue that Government policies could not do so here. Some of

these statements may simply express a desire

for unfettered (competition among all comers;

in other cases, they appear to imply that

government actions are counterproductive in

the United States but not overseas, In any

event, the fundamental question is: Given that

foreign governments are not likely to abandon

their industrial policies so long as they consider

them useful, can the United States counter

them simply by avoiding policy interventions?

More positively, then, this fifth policy approach might include tax incentives for capital format ion and investment, deregulation,

and free competition. Control of inflation and

macroeconomic stability would certainly remain a Federal responsibility. Closer examination of recent changes in tax policy points to

one of the central issues raised by this alternative: Can Government really be a neutral arbiter of economic competition? Past experience

gives little evidence in favor of the proposition.

The 1981 Tax Act seems on balance to have

been a move away from neutrality in treatment

of the various sectors of the economy. Noting

that accelerated depreciation has varying consequences for manufacturers of consumer electronics and semiconductors—and that these

two parts of the electronics industry are treated

quite differently than producers of heavy electrical machinery, much less nonelectrical

machinery—indicates some of the potential

problems. Differential effects on various parts

of the economy are an unavoidable con sequence of any industrial policy, and it may be

better to confront such issues directly than try

to avoid them, as this last alternative would in

general do. While true neutrality can never be

achieved, an industrial policy ostensibly intended to “get Government off the backs of

business” would more likely end up rewarding

those who could bring the most political pressure to bear. These interests would probably

be able to perturb the policymaking process--

tax policy being only one example--to their

own benefit, aided by the illusion that the

Federal presence was diminishing. Industries

with less political strength or sophistication

would, in a relative sense, fare less well.

Indeed, it seems wishful thinking to argue

against Government involvement i n economic

affairs, although not against counterproductive

or excessive involvement. The fact is, of course,

that governments here and elsewhere do intervene; it is part of their job. Moreover, as

economies grow more complex and more heavily dependent on advanced technologies, the

forces that governments seek to modify or control may become more powerful, the need for

government action greater. When, t~’here, why,

how—the circumstances in which governments intervene, the effects of the involvement—are the crucial questions.

What does this mean for industrial policy in

the United States? First, more effective policies

toward industry in the United States will require relatively broad agreement on objectives.

Second, the Federal Government would need

to develop an analytical capability adequate to

the task of reaching these objectives. Both are

efforts to which Congress could turn its attention. The first is largely a political task, the

basis of the argument that our standard of liv

ing depends on the international competitiveness of industries like electronics. The second

demands that Government go beyond the largely static and abstract economic perspective that

in many agencies is now called on to justify

policies adopted for other reasons.

The political environment in the United

States makes movement toward a more consciously developed industrial policy—following
52 International Competitiveness in Electronics ——- — — -- .

any of the five alternatives outlined above—

not only slow and painful, but an endeavor that

risks being turned to ends far removed from

economic efficiency. (This is not to imply that

economic efficiency is the only goal of industrial policy, but that one of the purposes of a

more coherent approach would be to bring this

and related objectives closer to the forefront.)

But even where decisions are made largely on

political grounds—as will frequently be the

case—a more explicit industrial policy could

help frame the questions, bound the responses,

increase the probability that individual policy

instruments function as expected and intended. Given an international economy populated by countries experimenting with industrial policies, and learning to use them more

effectively, a pragmatic orientation by the

United States, grounded in empirical analysis,

could be viewed—by Congress and the Federal

Government as a whole, and by both parties—

as a vital support for our own economy, Such

an attitude toward industrial policy would help

to ensure that the U.S. electronics industry and

other high-technology sectors would get their

fair share of the resources needed to compete

effectively in world markets, It is also the best

hope, in the longer run, for older industries

ranging from primary metals to machine tools

and textiles.
—

CHAPTER 2

Introduction
Contents

Page

Electronics as a High-Technology Industry .o. o*. o.. ... ooe. ..ooe. .*** *o. o.. *

Patterns of Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Rising Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Technological and Structural Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Importance of Competitiveness ...00.0 .0...s.. ....0..0 .0....0. ● 0.0.0. 0

Industrial Policy . . . . . . . .0.0.0.. ● ..0.0.. ● .0.00.. .....00. .00..... .0000...

Issues ● *...*** ● . .**  ● .*...*** . . . . . . . . . ... . . . . . .****...* . . . . . . . . . ● * *

56

56

57

58

60

61

62
CHAPTER 2

Introduction —

The U.S. electronics industry provides examples that can support almost any perspective

on competitive trends in the American economy over the past decade. That portion of the

industry manufacturing computers has been a

champion of U.S. economic strength both

domestically and internationally. Here and

abroad, American computer firms—particularly IBM--have been symbols of technological

prowess, market power, and multinational

marketing and production. In Europe, U.S.

computer manufacturers have been models to

be emulated—for indigenous companies like

ICL in Great Britain, or for joint ventures such

as C II-Honeywell Bull in France—and targets

to be displaced with the aid of national industrial policies. In Japan, American computer

firms have been explicitly depicted as the enemy—IBM as a stateless, global giant, with

Japanese firms urged to mount fierce efforts

against it. Meanwhile, in the United States, the

Department of Justice had in 1969 begun an antitrust suit aimed at dismembering IBM, a suit

that was finally dismissed 13 years later.

American consumer electronics firms have

been pictured much differently-particularly

the old-line manufacturers of televisions and

other home entertainment equipment, such as

Zenith and RCA, Many firms in this part of the

industry have seen themselves as victims of unfair trade practices by overseas rivals, primarily

Japanese. Foreign firms selling TVs in this

country have been accused of dumping (and

found guilty of this), attempted monopolization, and of receiving subsidies from their own

governments. To other observers, the U.S. consumer electronics industry has been a victim

of management failures, has lacked the will to

compete internationally, has ceded some segments of its markets too easily to imports, and

has lagged in adopting manufacturing methods

that could have cut costs and increased the

quality and reliability of its products,

Semiconductor manufacturers in the United

States have, over the past several years, pointed

to the consumer electronics industry as a possible harbinger of their own fate if the U.S. Government does nothing to support them in their

competitive battles with foreign (i. e., Japanese)

rivals. At the same time, American semiconductor firms share with our computer manufacturers a deserved reputation as worldwide

leaders in technology, innovation, and entrepreneurial zeal—a reputation which the 1980-

83 round of new startups in Silicon Valley can

only enhance.

These three portions of the electronics industry—computers, consumer electronics, and

semiconductors—are the focus of this report.

But other parts of the industry could illustrate

many of the same themes, Electronic component production—switches, resistors and capacitors, printed circuit boards—has been

moved to offshore locations as part of the response to competitive threats from imports.

Professional and industrial equipment—instrumentation, industrial process control, medical

electronics—is a continuing U.S. strength, but

again the technological leads that American

firms once held have narrowed. In telecommunications, American firms have lost out in several promising developing country markets.

While boundaries between information processing and information transmittal have been

blurring for years, and communications is certainly one of the central electronics-related portions of U.S. industry, this report touches on

communications only in passing—not because

this portion of the industry is unimportant, but

only to keep the study to manageable proportions.

The breadth and diversity of the electronics

industry contrasts with industries such as steel,

which are often pictured as monolithic. Even

here, however, specialty steel and nonintegrated “minimills” have proved notable exceptions to the commonly accepted notion of declining U.S. competitiveness.1 Steel is an old, ——

1 Technolog~’ andSteel ]ndt]str~’ (jornpefiti~’enes.s (Was hi ngton,

D. C,: U.S. Congress, (3 ffice of Tw:hnology Assessment, O’l’/\-

N1- 122, ]one 1980); [ ‘..S, lndostrial (;on]~)etit;t’ent?s.s: ,4 Comparison of S’tee], F,’lectrnnics, an(~ .4 utornohile.s [Washington,

[), (;.: [ i.S. (;c)ngress, of fi(;e of ‘1’echn{)lt)g} Ass[~ssment, OTA1S(:-135, JL]ly 1981),

55
56 ● International Competitiveness in Electronics

established industry compared to electronics;

yet the electronics industry has roots going

back to the early part of the century, in contrast to biotechnology and genetic engineering

—for which international competition has

hardly begun-though here, too, there are roots

in fields like plant breeding and pharmaceuticals. Emerging industries like biotechnology

are important for future economic growth;

electronics is critical right now. Moreover,

lessons learned from electronics might apply

to older, “mature” industries such as steel, as

well as to nascent sectors like biotechnology.

What can be learned from electronics, particularly the last 10 or 15 years? That is one of

the questions this report attempts to answer.

Is the apparent decline of the American consumer electronics industry irreversible? Are

the threats to U.S. computer and semiconductor firms real, or are they better considered

natural consequences of the growth and maturing of these portions of the industry? How have

policies adopted by the Federal Government

affected the industry? How do public policies

here differ from those of foreign governments,

both in their forms and in their effects? To

what extent have foreign industrial policies

succeeded in strengthening the electronics industries of other countries, in affecting the investment and export strategies of American

firms, in replacing tariff and nontariff barriers

to international trade with less visible but no

less effective constraints? Can governments

create comparative advantage? If the United

States were to pursue a more consciously developed industrial policy, what should be the

objectives in the context of a high-technology

industry like electronics? How might the policy

tools be formulated and implemented?

Electronics as a High-Technology Industry

The electrical equipment and electronics industries have been known for technical leadership and innovation since their beginnings at

the close of the 19th century. While progress

in electrical equipment—that which produces

or utilizes electric power—is now mostly incremental, electronics—referring to devices and

systems that operate on the information content rather than the power transmitted by an

electrical signal—remains a technology in rapid

flux. Developments in electrical machinery

such as practical applications of superconductivity can still promise significant gains in the

efficiency of energy conversion and power

transmission; advances in electronics will have

effects that reach further, and affect the American economy—indeed, society as a whole—

more deeply. An obvious case will be the continuing applications of distributed computing.

The impacts will be broad as well as deep–

manufacturing industries as a whole will be

transformed by applications of electronics to

automated production equipment. Productivity will rise, the skill mix needed by the work

force continue to shift, In service industries,

office and workplace automation will also displace people while creating new jobs needing

new skills.

Patterns of Development

The portions of the electronics industry

where American firms remain preeminent are

just those where the pace of technological

change continues to be most rapid—e.g., computers and semiconductors. The United States

has been a leader in both the technology and

the science that underly these sectors: electronic properties of solids and the materials sciences more generally; electrical engineering;

computer science and software engineering—

and also in the development of new and successful commercial products, Nonetheless, although Americans have been among the leaders in the technology and science of electrical

machinery and electronics, many of the impor-
Ch. 2—Introduction 57

tant prewar developments—e.g., understanding

of band gaps in solids and the dynamics of conduction--originated in Europe.

The Second World War pushed electronics

to the forefront of engineering science, creating

a momentum that still exists. Developments in

radar and computing, both analog and digital,

proved especially significant.2 Again, many of

the advances came from Europe, particularly the United Kingdom, where considerable

strides were made in radar technology, s However, American industry was in a far superior

position to capitalize on these new technologies in the aftermath of the war, By the late

1950’s, the United States had what appeared

to be an unchallengeable lead in fields such as

digital computers and semiconductors.

Hindsight shows the more temporary nature

of this lead, the result of an infrastructure for

technology and science that emerged from the

war not only intact, but strengthened, coupled

with an industrial base that was likewise far

stronger than in countries that had been either

allies or enemies a few years earlier, The push

created by new technologies, coupled with the

pull of war-starved markets in the United

States—markets that were eager recipients of

the products of these technologies, rather

than devastated—created an environment for

growth and innovation unmatched in the rest

of the world. Meanwhile, trading partners and

potential competitors such as Japan, Great Brita in, and West Germany had to rebuild. Nations

———

11 ~, H, Golds tine, The Computer FYom Pascal to von N’eumar In

([)rinf;[;ton, NJ.: Prin[ etorr [ lni~rersity Press, 1972), especla]ly

I)art Two.

‘j kra~]s, “ 1<}1[’ F3rit i~h Eledron-’r(]be and Serni[:onrluctor 111-

(III \t rt, I 9.},5-[12, l’[’(,hnolog~rand (,’u]ture, \’ol, 9, 1968, p 544,

like Taiwan, South Korea, Brazil, and Mexico

—now factors in at least the lower technology

segments of the electronics industry—were,

before 1960, simply irrelevant,

Rising Competition

Much of the impetus this strong postwar start

gave to the U.S. electronics industry has now

dissipated. Gloomy predictions for the future

competitiveness of even the strongest sectors,

such as semiconductors, have been heard. The

business press reminds us incessantly that Japanese firms captured 40 percent of the U.S.

market for 16 kilobit random access memory circuits (integrated circuits called 16K

RAMs), more than 50 percent for 64 kilobit circuits. Market analysts predict that Japanese

manufacturers could have 30 percent of the

world computer market by the end of the

1980’s.4

In the past, competitors in countries like

Japan relied to considerable extent on electronics technology first developed by U.S. firms;

now they have independent capabilities and

need not follow paths broken here, As Japanese

electronics companies have become less dependent on American technology, their exports

of microelectronic devices to the United States

have grown faster than their imports of U.S.

semiconductors. And, where once they exported mostly discrete semiconductors and the

simpler integrated circuits, now firms based

in Japan are exporting—or assembling in the

United States—large-scale integrated circuits

4“N0. 1‘s Awesome Strategy, ” Busir]es.s 11’ee~, ]UIIC 8, 1981,

p. 84.

.

Photo credit Smithsonian /nsf/fut/on

Harvard Mark I electromechanical computer, 1939-44

, !— ; i < , , —
58 International Competitiveness in Electronics

(ICs) at the leading edge of the technology. *

Japanese computer firms are not yet exporting

large numbers of systems to this country, but

clearly intend to try. The government-supported fifth-generation computer project is only

one recent signal of the seriousness of Japan’s

efforts.

Needless to say, this resurgence by America’s

competitors has not been an overnight phenomenon, nor should it be unexpected. The

Japanese presence in consumer electronics began to be felt in the 1950’s with the transistor

radio; by the late 1970’s, firms based in Japan

held strong positions worldwide in audio

equipment, digital watches, calculators, and

TV receivers. Their burgeoning capability in

high-technology electronics builds naturally on

earlier developments.

Interactions within the industry often stimulate technological and commercial developments; ICs have made possible new families

of consumer products, such as hand calculators, as well as cheaper and more powerful

computers. Semiconductor devices are becoming indispensable for the products of more and

more industries outside electronics; emissions

control systems for automobile engines depend

heavily on microprocessors and related devices; more than half the cost of an airplane

can be electronics. As one result, electronics

technology—and particularly microelectronics—has come to be widely regarded as critical

to a modern, competitive economy, hence access to this technology a vital strategic weapon

of national industrial policies. Government attention to computer industries goes back to the

early years of this technology; a number of

countries began in the 1970’s to subsidize semiconductor research and development; others

have felt applications of ICs—rather than

capability for designing and manufacturing the

circuits themselves—to be more important, and

have channeled government funds to this end.

*Small-scale ICs incorporate of the order of hundreds of circuit elements, large-scale ICs of the order of thousands to tens

of thousands, very large-scale ICs—e. g., 64K RAMs, 16 bit microprocessors—of the order of a hundred thousand. See ch. 3.

Technological and Structural Change

The rather complex structure of the electronics industry in the United States is described

in more detail in chapter 4. The diversity of the

industry has already been pointed out; there

are more than 6,000 electronics firms in the

United States. Only a small fraction could legitimately be called “high-technology” companies. But this smaller fraction—companies

building computers, designing and manufacturing large-scale ICs, supplying capital equipment such as microprocessor development systems or plasma etchers, developing software

packages for computers—is a driving force for

the rest of the industry, as well as for much of

the rest of the economy.

By the standards of computers or microelectronics, consumer electronics cannot be considered high technology. Yet the manufacture

of cathode ray (picture) tubes is a sophisticated

process, and TV receivers are now designed

around ICs, some of rather advanced design.

Digital TV and digital audio are on their way

to commercialization, while consumer products are providing some of the first applications

of speech synthesis; the same will be true of

voice recognition. Solid-state displays as replacements for picture tubes are a demanding

technical challenge. Indeed, the low costs required for practical consumer applications

create technological constraints that are, in

their own way, more severe than those imposed on designers in portions of the industry

more commonly associated with high technology. At the same time, consumer electronics

products such as table radios or conventional

TV receivers are simple enough that they can

be manufactured and marketed competitively

by firms in industrializing countries such as

South Korea and Taiwan; the same is true of

many types of discrete semiconductor devices

and small-scale ICs.

As such examples indicate, even consumer

electronics is changing more rapidly than industries like steel or automobiles. Despite the

pace of technological change, electronics is not

only much larger and better established but
Ch. 2—introduction ● 5 9

more stable and predictable than, for instance,

biotechnology. But again, the industry is far

from monolithic. Consumer electronics has origins in the 1920’s, when radio broadcasting became widespread. The computer and semiconductor sectors are basically post-world War II

phenomena, though many of the leading companics-e. g., IBM, Western Electric, Motorola

—have prewar origins. Thus, the three portions

of the industry on which this report concentrates include examples of both well-established, “mature” sectors, and more volatile,

rapidly growing, technology-driven sectors.

There are lessons to be learned from each.

One of the lessons that even a superficial look

at the computer industry teaches is the importance of marketing, sales, customer support

and service, and related nontechnical factors

even in a technology-driven industry. IBM has

been a dominant force worldwide in computers since the beginning of the 1960’s. But IBM’s

strength has been—not only hardware—but

marketing, software, and customer support. In

many cases, IBM’s competitors have offered

considerably more computing power for a given price, but IBM has only slowly lost market

share because of its many strengths beyond

hardware technology. In some contrast, other

U.S. electronics firms have sometimes seemed

to rely primarily on advanced technology to

win markets. As other countries catch up in

technical capability, a technology-based marketing strategy may no longer be enough. In

microelectronics, for example, the ability to

pack many circuit elements onto a single integrated circuit chip is still important, but competition is more and more a matter of the systems which the ICs comprise or can be integrated into. Moreover, as microelectronics

technology continues to evolve, one path to

competitive success will be the creation of new

end-products incorporating ICs. The skills required for this differ from those needed to establish and maintain leadership in the underlying technology, as shown by the examples of

pocket calculators or digital watches—and also

by the failure of the West German electronics

industry, which has access to excellent fundamental technology, to develop into a strong international competitor,

Although many of the major technological innovations in electronics have originated in the

United States—e.g., color TV, computer timesharing, most of the important developments

in semiconductor devices—American firms

have not always been the leaders when it

comes to product innovations that depend, not

necessarily on new technology, but on product

planning, engineering design, production

skills, and marketing. Although transistor

radios were developed in the United States, it

was Japanese products that reshaped the entire audio market.5 Analogous strategies—concentrating on product design and engineering,

originally perhaps imitative, rather than high

technology—have led to success by the Japanese in fields such as cameras and automobiles.

Japanese firms, aided by their skills at low-cost

manufacturing, have recently done much better at this than companies in the European nations with which the United States also competes.

h

K. R. White, “Management Criteria for Effective Innovation, ”

Technology Review, February 1978, p. 15.

Photo credjt’ Be// Laboratories

The first transistor, 1947
60 ● International Competitiveness in Electronics

Thus, overall, the cushion that greater technical capability once provided U.S. products

is eroding. And of course, in some technologies

the United States has never had an advantage.

In optical communications, for example, Japanese companies have always been near the

forefront. Leadership in electronics equipment

used for certain types of scientific research has

long resided overseas—one example being electron microscopes. That this need not always

be a handicap is shown by current developments in electron-beam lithographic equipment. Electron-beam lithography is now essential for making the masks that are, in turn, used

to fabricate large-scale ICs (in a few cases electron-beam lithography is applied directly in

fabricating the chips). Although the equipment

has its roots in technology developed for scanning electron microscopes—virtually all of

which are designed and built in Europe or

Japan–the United States has not thus far been

handicapped. Several U.S. firms are, in fact,

leaders in electron-beam lithography,

The Importance of Competitiveness

OTA’s earlier comparison of steel, electronics, and automobiles provides background and

illustrations for many of the questions concerning competitiveness, economic efficiency, and

industrial policy that remain of concern to Congress, to employees of the U.S. electronics industry, and to the public at large.6 The practical meaning of “competitiveness” in the context of electronics is discussed in chapter 5. In

essence, the term refers to the ability of electronics firms located in one country to design,

develop, manufacture, and market their products—domestically and by exporting—in competition with foreign enterprises. (For some

purposes, subsidiaries of foreign firms that produce and sell electronics products in the

United States are considered part of the U.S.

industry, but in general the consequences of

foreign direct investment must be treated on

a case-by-case basis.)

The competitiveness of an industry like electronics is important not only intrinsically, but

also because of interactions with other parts

of the economy. Still, there is no meaningful

way of measuring the competitiveness of an entire economy, Competitiveness must be examined on an industry-specific basis, although it

can also be difficult to generalize about an industry as large and diverse as electronics,

‘U. S. Industrial Competitiveness: A Comparison of Steel, Electronics, and Automobiles, op. cit.

which for many purposes must be further disaggregated.

Considering the electronics industry itself,

competitiveness is one of the factors that determines, among other things: employment patterns within the industry (size of the work

force, wage levels, skill mix); balance of trade

for electronics products; and the value that purchasers of electronics products receive for their

money. Electronics products are used by many

industries—whether components such as semiconductors costing a few cents, or capital

equipment that sells for hundreds of thousands,

even millions, of dollars—and can affect their

competitiveness. Computers are the most

prominent example, but are far from alone. Nor

do they always fill the role of capital equipment; many smaller computers are integrated

into more complex electronic systems. Industrial process control, scientific equipment, office machines, and communications apparatus

are further examples where electronics or electronics-related products can affect the competitiveness—more generally, the economic performance—of other parts of the economy.

On the broadest levels, then, the competitiveness of the electronics industry affects aggregate employment levels, trade balances (more

importantly, the ability to pay for imports), and

living standards. How this industry fares in in-
Ch. 2—Introduction ● 67

ternational competition influences the types of

jobs available, the country’s military strength,

and overall rates of economic growth. In turn,

the health of the aggregate economy, the quality and quantity of employees available to firms

in the industry, the market provided by the military, are among the factors that determine the

competitiveness of American electronics firms.

Ultimately, however, the competitiveness of

any industry—in the United States or elsewhere—depends on the efforts of individual

firms. Policies adopted by the Federal Government influence these efforts in many ways,

often indirectly. Foreign industrial policies are

part of the same context. Among the more important domestic measures are those dealing

with taxes, Government spending, and monetary policy, as well as research and development (both basic and applied), international

trade, and many types of regulatory policies.

Sometimes Federal policies affect only one or

a few industries—e.g., regulation of TV broadcasting. others are broader. Tax treatment of

income from overseas investments affects

firms with multinational operations regardless

of industry. Some policies affect the entire

economy—macroeconomic policies or those

dealing with education.

Generally within the province of individual

firms are factors associated with manufacturing—including costs, the quality and reliability of finished products, and decisions to manufacture domestically or overseas (offshore assembly, wherein some but not all manufacturing operations are carried out in other countries to take advantage of low labor costs, is

common in electronics). The ability to raise external capital—whether equity or debt—and to

generate capital for reinvestment through sales,

is crucial to firms in any industry, but particularly when markets grow as fast as those for

semiconductors and computers. As with offshore manufacturing, which is favored by U.S.

tariff laws, sources and costs of capital for electronics firms are affected by public policies—

tax policies and many others, including those

aimed at controlling inflation.

With respect to consequences of shifts in

competitiveness, employment receives the

most attention in this report—both in terms of

job opportunities and in terms of the skills

needed. This and many other topics are discussed, where possible, in the context of international comparisons drawn between the

United States and its trading partners and

rivals—usually one and the same. Japan, at

present, is the home of the strongest competitors, in electronics as in many other industries.

Japanese firms are likely to continue to be the

chief rivals for U.S. electronics manufacturers

over the remainder of the century, But several

European nations have strong technological

bases in electronics, as well as supportive governmental policies. And rapidly industrializing

countries will rise in competitive strength in

the future; TVs from Taiwan and South Korea

are growing factors in the U.S. market,

Industrial Policy

Public policies that affect competitiveness

can be considered elements of “industrial policy. “

7 The term is intended to embrace Federal

Government policies of whatever origin that

affect the activities of private industry, particularly its competitiveness, productivity, and economic efficiency,

—-—

71b id,, ch. 8.

The United States does not at present have

a coherent or consciously developed industrial

policy, in contrast to nations such as Japan or

France, This is not to imply that industrial policies like those of the Japanese are necessarily

effective in promoting international competitiveness, but simply that the United States has

not attempted to develop a coherent industrial

policy. Instead, policies affecting industries—
62 ● International Competitiveness in Electronics

and their competitiveness-have been formulated and implemented on an ad hoc basis. As

a result, industrial policy in this country has

been fragmented, sometimes contradictory,

often inconsistent and lacking in continuity.

These characteristics of U.S. industrial policy—reflecting our pluralistic political traditions—have sometimes served the American

economy well, lending flexibility and the potential for innovative response to changing circumstance. But the OTA report cited above

concluded that this approach to industrial policy—while it might have been well-suited to an

earlier period when U.S. industries were relatively isolated from foreign competition, and

possessed advantages in technology—in more

recent years has too often contributed to declines rather than improvements in competitiveness.

Foreign industrial policies often include direct subsidies to industries—perhaps to maintain employment, or for reasons of national

security. Export incentives and protection for

domestic industries are common. Foreign investors may face a complex set of carrots and

sticks. Cooperation among nominally competing firms may be encouraged. Governments in

some countries have engineered “national

champions “ in attempts to increase competitiveness. Restrictive business regulations may

be relaxed, government procurements channeled to favored companies, which in some

cases may be publicly owned. Nationalized

enterprises-an increasing presence in sectors

like banking or energy production although not

a major factor in electronics—couple industry

and government even more tightly.8 American

businessmen increasingly complain of the difficulties involved in trying to compete with such

ventures, which need not make profits, or may

have unusually long profit horizons.

The variety and complexity exhibited by

present-day national industrial policies—particularly the difficult questions of when government support measures should be judged subsidies that distort international trade—have hampered efforts by international organizations

such as the General Agreement on Tariffs and

Trade (GATT) to fit remedies for many of the

possible means of “unfair” competition into the

body of international trade agreements. As one

result, bilateral agreements are becoming more

common—exemplified by the Orderly Marketing Agreements negotiated by the U.S. Government to control imports of TV receivers from

several Far Eastern nations.

8For a survey, see R. P. Nielsen, “Government-Owned Businesses: Market Presence, Competitive Advantages and Rationales for Their Support by the State, ” American Journal of

Economics and Sociology, vol. 41, 1982, p. 17.

Issues

As emphasized above, a vast number of Federal Government policies in some way affect

the international competitiveness of the U.S.

electronics industry. Among the more important are:

●

●

Government support for commercial (as ●

opposed to military) R&D, ranging from

tax policies intended to increase levels of

research spending or encourage commercialization to direct support;

trade policies dealing with exports as well ●

as imports—e.g., the ways in which measures that affect the the electronics industry

fit within the overall framework of U.S.

foreign economic policy, the meaning of

“reciprocity” for an industry like electronics, barriers to investment in foreign

electronics industries;

Government policies affecting capital formation for the economy as a whole, and,

more directly, the ability of firms in the

electronics industry to generate and attract

capital for expansion;

regulatory policies that may affect the

competitiveness of the U.S. electronics industry—e.g., antitrust enforcement;
Ch. 2—introduction ● 6 3

the availability of enough people with ade- to firm. The remainder of this report attempts

quate levels of education and training, par- to deal with such complexities; at the same

ticularly engineers and skilled workers time, of course, public policies continue to

such as technicians, as well as the Govern- evolve and change—witness the 1981 tax act,

ment role in supporting technical educa- or the expiration in July 1982 of the Orderly

tion; Marketing Agreements covering imports of coleconomic adjustment policies intended to or TVs from Korea and Taiwan. The objective

encourage shifts of resources from declining industries to those with better prospects for future competitiveness, and to

aid workers, communities, and regions

that have suffered because of shifts in international competitiveness—e.g., in consumer electronics.

These examples all involve complex issues,

with effects that may differ among various

parts of the electronics industry, and from firm

is not to be exhaustive but selective—to try to

differentiate the factors influencing competitiveness in electronics that are primarily

under the control of managements of individual firms from those that are strongly affected

by the Federal Government, and to examine the

latter in the context of a high-technology industry that has been one of the mainstays of

U.S. competitiveness during the postwar

period.
CHAPTER 3

Electronics Technology
Contents

Page

Overview o...... ... ..... o.... e..... o. 6 7

Consumer Electronics . . . . . . . . . . . . . . . . . . 68

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . 71

Transistors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Integrated Circuits . . . . . . . . . . . . . . . . . . . . . . 72

System Design and the Microprocessor . . . . 73

Microprocessors and Memory . . . . . . . . . . . . 74

Learning Curves and Yields . . . . . . . . . . . . . . 76

Integrated Circuit Design. . . . . . . . . . . . . . . . 77

Manufacturing Integrated Circuits . . . . . . . . 78

Future Developments . . . . . . . . . . . . . . . . . . . 81

Computers ● *,*,,.. ....***.. ● .*.**... . 81

Types of Computers . . . . . . . . . . . . . . . . . . . . 82

Computers as Systems . . . . . . . . . . . . . . . . . . 83

Computer Software . . . . . . . . . . . . . . . . . . . . . 85

Growth of Computing Power . . . . . . . . . . . . . 87

Applications of Computers . . . . . . . . . . . . . . 90

Summary and Conclusions . . . . . . . . . . . . . 92

Appendix 3A-Integrated

Circuit Technology . . . . . . . . . . . . . . . . . . 93

Appendix 3B—Computer Memory . . . . . . . 99

Appendix 3C--A Process

Control Example . . . . . . . . . . . . . . . . . . . . 102

List of Tables

Table No. Page

l. Examples of Solid-State Technologies

Used in Information Processing . . . . . . . . 72

2. Cost Increases for Fine-Line Lithography 80

3. Characteristics of Different Categories of

Digital Computers . . . . . . . . . . . . . . . . . . . . 83

4. Increase in Computing Power

Over Time . . . . . . . ● .*..,,, ● ,,...,, . 0 . 8a

5. Comparison of IBM 650 and Fairchild

F-8 Microcomputer . . . . . . . . . . . . . . . . . . . 88

6. Characteristics of Generations of

Computer Technology . . . . . . . . . . . . . . . . . 90

7. Typical Applications of

Computing Capability . . . . . . . . . . . . . . . . . 91

3A-l. Common Terminology and

Classifications of Integrated Circuits . 94

3A-2. Principal Types of Memory Circuits . 96

3B-1. Computer Memory. . . . . . . . . . . . . . . . . 101

List of Figures

Figure No. Page

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

Simplified Diagram of TV Receiver

Componentry . . . . . . . . . . . . . . . . . . . . . . . 69

Comparative Feature Sizes of

Microelectronic Devices Such as

Integrated Circuits . . . . . . . . . . . . . . . . . . . 71

Controller for a Microwave Oven Based

on Single-Chip Microcomputer . . . . . . . 75

Increases in IC Integration Level . . . . . . 75

Schematic Learning Curve for the

Production of an Integrated Circuit or

Other Manufactured Item . . . . . . . . . . . . 76

Ranges in Cost and Time for Design and

Development of Integrated Circuits . . . . 77

Steps undesigning and Manufacturing an

Integrated Circuit . . . . . . . . . . . . . . . . . . . 78

Step-and-Repeat Process of

Photolithographic Pattern Formation on

Silicon Wafer . . . . . . . . . . . . . . . . . . . . . . . 79

Typical Microcomputer Intended for

Personal and Small-Business Applications 84

Typical Minicomputer Installation

Including a Pair of Terminals and a

Printer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Data Processing Installation Built Around

General-Purpose Mainframe Computer . 84

Simplified Block Diagram of a

Microprocessor System . . . . . . . . . . . . . . 84

Elements of a General-Purpose Digital

Computer System . . . . . . . . . . . . . . . . . . . 85

Relative Hardware and Software Costs

Faced by Users of Larger Computer

Systems .0..0,. . . . . . . . . .*..,... . . . . . 86

15. Minicomputer Price Trends . . . . . . . . . . . 89

16. Parallel Decreases Illustrate How Costs of

Computers Depend on Costs of

Semiconductors . . . . . . . . . . . . . . . . . . . . . 89

3A-1. - - -

3A-2.

3B-1.

3C-1.

Silicon Wafer Showing Patterns

Formed by Photolithography . . . . . . . . 97

Integrated Circuit Chip Before and

After Final Encapsulation . . . . . . . . . . 98

Performance of Computer Memory

Alternatives . . . . . . . . . . . . . . . . . . . . . . 100

Portion of Process Control System for

a Chemical Plant . . . . . . . . . . . . . . . . . . 103
CHAPTER 3

Electronics Technology

Overview

This chapter outlines the technology on

which the consumer electronics, semiconductor, and computer industries depend, covering them with enough depth to provide background for discussions later in the report concerning the role of technology as a force on

competitiveness. Except for occasional examples, competitiveness itself is left to later

chapters.

The primary function of electronic components and systems is to manipulate and transmit information in the form of electrical signals—either analog or digital, The transmission

and utilization of electric power are integral

to these processes, but constitute only secondary functions of electronic equipment. Even in

the case of a 50,000-watt radio broadcasting station, the high power simply increases the area

coverage of the information in the signal. The

information manipulated and conveyed via an

electronic system can range from a simple

sequence of numbers—e.g., a zip code, or the

balance in a checking account—to the sounds

conveyed by radio, images such as television

pictures or weather maps, or the information

contained in radar or sonar signals.

Changes in electrical voltage are the most

common carrier of information in electronic

systems. In an analog system, the signal takes

the form of a voltage or some other electrical

parameter that varies continuously over a

range, while digital information is encoded in

the form of a string of binary “bits.” Each binary bit can take on one of a pair of discrete

values, again usually voltages. The magnitude

of these is unimportant, so long as they can be

distinguished from one another. A bit can be

visualized as having values of “O” or “l, ” or

“+” as opposed to “ – .“ In a digital circuit,

the signal normally takes the form of a string

of discrete voltage levels—e.g., any voltage between –2 and i-l volts might represent a

binary “O, ” any value from + 2 to + 5 volts, a

binary “1. ”

Regardless of the simplicity or complexity of

the information content in a signal, either analog or digital technology can, in general, be

employed. The choice turns on the practical

advantages and disadvantages for a given application. A complex system may use analog

circuitry for some tasks, digital for others. In

geophysical exploration, for instance, an analog signal—essentially a mechanical pressure

pulse or sequence of pulses—is transmitted into

a geological formation. The reflected pulse

from the subsurface strata is sensed by transducers analogous to microphones. These transducers respond to the mechanical energy of the

reflected pulse by generating a proportional

analog electrical output. Analog-to-digital converters—typically integrated circuits (ICs)—

then convert these signals to digital information that can be processed and analyzed by a

digital computer.

Both analog and digital technologies have a

place in the three sectors of the electronics industry covered in this report, But while most

consumer electronics equipment is still based

on analog technology—radio and TV receivers,

phonograph records, magnetic tape players—

virtually all computers process information in

digital form. At the same time, computer peripherals such as terminals and printers contain analog circuitry, while digitally based consumer products are becoming more common.

Semiconductor devices come in both analog

(often termed “linear”) and digital varieties. A

few ICs combine analog and digital circuitry

on the same “chip. ”

67
68 ● International Competitiveness in Electronics

Consumer Electronics

The most common consumer electronic products are radios, TVs, and audio equipment such

as “stereo” systems. Electronic toys and games,

electronic watches, pocket calculators, and

home computers are other familiar examples.

These are all “systems” in the sense that they

contain more than a single electronic component, but some are much more complex than

others. An electronic watch may consist of little beyond a single IC and a display—itself a

solid-state device—plus a battery, Television

receivers contain several hundred components.

Video cassette recorders (VCRs) are complex

mechanically as well as electronically,

Radio broadcasting provided the foundation

for the development of the consumer electronics industry. Despite a real cost much

higher than today, there were well over 10

million radio receivers in use in the United

States by 1930, with annual sales exceeding $1

billion. ’

Research and development (R&D) on television began in the 1920’s, with limited broadcasting prior to World War 11. Large-scale commercialization had to await the end of the war,

but by 1949 5 million TV sets were sold in the

United States—all black-and-white. Color television—for which most of the early work was

performed by RCA—followed the next year, but

color TV sales in the United States did not pass

the 5 million mark until 1967, and first exceeded black-and-white sales in 1972.2

With more than 11 million color sets sold in

1982, and about half as many black-and-white

sets, the TV receiver remains the largest selling consumer electronics product, accounting

for nearly half the dollar value of consumer

electronics sales in the United States (ch. 4).

Monochrome TV sales have been rather static

for a number of years, with the market for color sets expanding only slowly; cable TV and

direct satellite reception may spur future sales,

but much of the growth in consumer electron-

— .

1 Electronics Apr. 17, 1980, pp. 44, 78.

z The U.S. Consumer b“lectronics Industry [Washington, L). C,:

Department of Commerce, September 1975), p. 20,

ics markets is now in new generations of products, notably VCRs. Still, in many respects

—e.g., the relatively standardized design approaches and critical importance of production

costs—color TV continues to typify consumer

electronic technologies.

Television signals are broadcast via amplitude modulation of a high-frequency carrier

signal, much like AM radio, But the bandwidth

requirements for TV are far greater—about 6

MHz, versus 10 KHz for AM radio. Bandwidth,

which is expressed in terms of frequency—6

MHz being equal to 6 x 106 cycles per second,

10 KHZ to 10 x 103 cycles per second—is a

measure of the rate at which information can

be conveyed, hence must increase with the

amount of information in a signal. The pictorial

image in a TV signal has a much higher information content than sound, hence television’s

high bandwidth requirements, In principle, the

analog information in either a radio or a TV

signal could be conveyed in digital form without changing the bandwidth requirements

greatly.

A home antenna receives the amplitude-modulated TV signal at a microvolt level (1 microvolt equals 10-8 volts). To produce a visual image, this signal is amplified to control an electron beam which scans the front of the picture

tube—or cathode-ray tube (CRT) —forming a

new image 30 times each second (the number

of frames per second can vary abroad). The circuitry in a TV receiver is quite complicated (fig.

1) and now entirely solid state (the chassis includes both discrete transistors and ICs) except

for the picture tube, The CRT is the most expensive single component in the set, accounting for about 40 percent of the cost. Producing picture tubes is a highly specialized activity; smaller firms often buy CRTs from manufacturers such as Zenith or RCA,

Conventional picture tubes are not only

bulky and expensive, but account for much of

the power consumed by TV sets; in Japan and

Europe particularly, consumer electronics

manufacturers have devoted considerable effort to reducing power consumption. This not
Ch. 3—Electronics Technology ● 6 9

t

r

I

n m /

Picture

>

tube

SOURCE” Adapted from K Henry (ed J, Radio Eng/neer/ng Handbook, 5th ed (New York McGraw HIII, 1959) ch 22

only reduces consumer electrical bills, but can vances have come from Japan as well.3 Televilead to more reliable operation—one of the advantages that TVs imported from Japan have

enjoyed over the years (ch. 6). The drawbacks

of conventional picture tubes—principally

bulk–have stimulated considerable R&D aimed

at flat-screen television displays. Flat screens

are not yet practical, but continued progress

in solid-state technology will doubtless lead to

eventual success.

Before 1960, most of the significant technical

developments in television originated in the

United States, but more recently important adsion technology is now well diffused internationally, and no one country appears to enjoy

a technological advantage. Product innovations

continue to come from U.S. firms, but also

from other parts of the world. European consumers, in particular, are often attracted by

3

1 bid,, p. 27; also “Intern, ]tional Technological Competiti\’eness: ‘1’ele\rision Recei\wrs and Semiconductors, Charles Ri\rer

Associates Inc., Boston, Llas,, draft report under National Science Foundation grant No. PRA 78-z0301, July 1 !379, ap[). 2A,

Studies of technological developments in an industry surh as

this are ine~’itably judgmental, and often biased b}. fami]iarit}

with on e‘s own count r}~,
70 . International Competitiveness in Electronics

new and different product features such as

multiple image displays (several channels

shown simultaneously on one screen). These

have become important to product development strategies of firms in Western Europe.

Continued progress in large-screen projection

TVs has been stimulated by competition between Japanese and American producers for

what could be a large new market. Japanese

firms have been leaders in reliability, and may

have tended to emphasize R&D directed at

automation—and at rationalization of the manufacturing process in general—more than

European or American producers (ch. 6). In

particular, Japanese TV makers were leaders

in adopting transistorized chassis designs in

the late 1960’s and in automating the insertion

of discrete components such as transistors, ICs,

capacitors, and resistors into printed circuit

boards.

Although TVs still account for much of the

consumer electronics market, they are a mature product in the sense that most American

homes already have one or more. Thus, the

great proportion of sales are now supplements

or replacements. The market for VCRs, in contrast, is expanding rapidly (ch. 4), US. sales of

VCRs during 1980 were less than a million

units—all imported; sales nearly doubled in

1981.

Video recording on magnetic tape was pioneered in the United States by Ampex.4 Although Ampex and RCA continue to manufacture video tape recorders for broadcast applications, consumer VCRs were developed largely

by Japanese firms (ch. 5)–which now build

about 95 percent of the world’s VCRs. In

Europe, Philips has a few percent of the market, but all the VCRs sold in the United States

come from Japan.

4“1 nteractions of Science and Technology in the Innovative

proc;e~s: Some Case Studies, ” final report, 13attelle Columbus

Laboratories, National !klence Foundation Contract No. NSF-(;

(;67, h!ar. 1~, 1973, {:h. I ~.

While the commercialization of VCR technology by Japanese manufacturers is one sign that

Japan may be taking over product leadership

in consumer electronics, video disks thus far

present a mixed, perhaps contradictory, picture. The optical video disk system developed

in Europe by Philips reached the consumer

market first. In the Philips system, a laser reads

the digitally encoded signal on a spinning disk;

microscopic depressions in the disk represent

binary “0s” or “1s.” While an elegant technical

achievement—and one with potential for highdensity digital data storage of other types (e.g.,

in conjunction with computer systems)—the

optical video disk sold in the United States by

Magnavox has not been a commercial success.

RCA’s video disk, introduced early in 1981,

functions on analog principles—more like a

phonograph record. Yet a third system, developed in Japan by JVC, may eventually reach the

marketplace. As compared to VCRs, disk systems are cheaper but can only play back, not

record. While the technology is evidently in

hand, it is too early to tell how large the market

for home video disk players will be–e.g.,

whether it will rival that for VCRs—or which

systems will survive in the marketplace.

A number of trends in consumer electronics

—e.g., recent introductions of “component”

TVs analogous to component stereo systems,

along with games and low-end home computers that use a conventional television as the

display–point toward the eventual development of more-or-less integrated home entertainment systems. Such systems might incorporate TV and audio reception and reproduction, including various kinds of information services, along with applications of computing capability—not only games, but recordkeeping, home security systems, control of

household appliances, and regulation of heating, ventilating, and air-conditioning systems.

Such developments do not depend heavily on

technological advances except as low production cost is necessary for mass market acceptance.
Ch. 3—Electronics Technology . 71

Semiconductors

Strictly speaking, the term “semiconductor”

refers only to the materials from which semiconductor devices are made. Such materials

have electrical conductivities intermediate between good conductors like copper and insulators such as glass. Silicon is the most common

semiconductor material—virtually all ICs, and

most discrete transistors, are based on silicon,

In this report, the term “semiconductor” will

be loosely applied to the products of the “semiconductor industry” as well as to the materials

that are the starting points for these products.

The broader designations “microelectronics”

or ‘‘microelectronic devices’ include semiconductor products-which have replaced vacuum

tubes in nearly all applications—as well as

other types of solid-state devices that process,

manipulate, or display information.

The most familiar example of a vacuum tube

application that solid-state technology has not

yet been able to match is the CRT—not only

the common TV picture tube, but the display

screens of computer terminals. In other cases,

solid-state devices are not only much smaller

than vacuum tubes, but cheaper, more rugged,

and longer lasting. They also offer higher operating speeds; indeed, on almost any measure

of performance, microelectronic devices offer

order-of-magnitude improvements over the

components they have replaced. Modern digital computers would be quite impossible without semiconductors. Although a computer

otherwise like current models could, in principle, function with tubes instead of ICs, such

a machine would fill a building and probably

not execute a single program without one or

more tubes failing. Solid-state circuits have

made practical many electronic systems that

would earlier have been too big, too costly, or

otherwise in fact unthinkable.

Although virtually all commercial microelectronic products are now made from semiconducting materials, considerable R&D has been

devoted to classes of solid-state technologies

with potential for transmitting and processing

information based on principles other than

conventional semiconductor physics. Such devices might function on magnetic or optical

principles, rather than being strictly “electroni c , although the materials involved are sometimes semiconductors. * Boundaries between

electronic, magnetic, and optical technologies

tend to blur as device technologies move toward microstructural and submicrostructural

size ranges. (Microstructural sizes are large

compared to interatomic distances but small

compared to objects that can be easily seen and

handled, like an IC chip itself; the feature sizes

of microelectronic devices are currently in the

range of 1 to 10 micrometers, or less than a

tenth the diameter of a human hair—fig. 2.) Because solid-state devices based on magnetic or

optical principles are often used as components in systems that are broadly electronic

in nature, no fine distinctions will be made.

“Optical data transmission can give bandwidths much higher

than electronic signals; this, along with the low raw material

cost, is one of the advantages of optical fibers. Systems hased

on laser light source~, with optical fibers for signal transmission

and thin-film integrated optical de~’ires for signal ~)ro( essing,

could replace many types of electronic circuits and s~’stems,
72 ● International Competitiveness in Electronics

Among these solid-state devices—table 1—

are:

●

●

●

●

transistors, ICs, light-emitting diodes

(LEDs), all of which are semiconductors;

bubble memories, which depend on the

magnetic rather than the electronic properties of materials;

liquid crystals (as in alphanumeric displays for watches or calculators), chemicals that change colors when their temperature changes;

integrated optics, in which information is

transmitted and processed in the form of

light, Integrated optics and prospective

future technologies such as organic semiconductors are not commercially important at present, but could have impacts on

future success in international competition.

Transistors

While most of the fundamentals of semiconductor physics were known prior to World War

II, the transistor itself was developed at Bell

Laboratories after the war, and first demonstrated in late 1947. s

In contrast to passive electronic devices such

as resistors, capacitors, and inductors—which

can only respond to electrical signals—active

circuit elements like transistors control and

5W. Sh~~kl~y, “’I’he path to the Conception of the )unction

Transistor,” IEEE Transactions on Electron Devices, vol. ED-23,

1976, p. 597; E. Braun and S. MacDonald, Revolution in hfiniature: The History and Impact of Semiconductor Lkk’ices (Cambridge, Mass.: Cambridge [University Press, 1978), ch. 4.

regulate the flow of electricity in a circuit. As

a result, they can amplify electrical signals—a

function that earlier could only be performed

by vacuum tubes.

Transistors come in many varieties to serve

different functions, just as for the vacuum

tubes they superseded, To make a transistor,

a semiconducting material such as germanium

or silicon is “doped” with small amounts of

elements—arsenic, boron, phosphorus—that locally affect its conductivity. The transistor, to

the naked eye, is then just a small piece of, say,

silicon with two or three wires attached. In

fact, however, the purity, chemical composition, and perhaps crystal structure have been

carefully tailored on a microscopic level.

Integrated Circuits

An IC is made by fabricating several circuit

elements—transistors, capacitors, and such—

on a single substrate. Integrated circuits were

independently developed in the 1950’s at Texas

Instruments and Fairchild Camera and Instrument, still two of the leading semiconductor

manufacturers in the United States (Fairchild

is now French-owned). The two companies approached the problem quite differently during

1958-59, but their developments shared the

common characteristic of an IC—two or more

distinct transistors fabricated on a single

substrate, G Thus they were monolithic circuits.

.—

6M. ~“. Wolff, ‘(’rhe Genesis of the I ntegrateci Circuit, ” IEL’E

Spectrum, August 1976, p. 45; 13raun and MacDonald, op. cit.,

ch, 8. The depths of the transistors fabricated on a chip are small

enough that ICS can be considered two-dimensional. Often the

silicon substrate—a few millimeters on a side and less than a

millimeter thick-is called a chip, as is the resulting circuit.

Table 1 .—Examples of Solid-State Technologies Used in Information Processing

Technology and examples Description Current status

Semiconductor electronics: Depends on electronic properties of semiconducting Production

Transistors materials such as silicon, germanium, gallium arsenide.

Integrated circuits

Magnetic devices: Depends on magnetic rather than electronic properties of Bubble memories in limited

Bubble memories materials. production.

Solid-state optics: Depends on electro-optical properties of materials, some of LEDs widely used for displays;

(sometimes called which are semiconductors. integrated optics

optoelectronics) experimental.

Light-emitting diodes LEDs are lighted when a current passes.

(LEDs)

Integrated optics Thin-film devices in which signals are transmitted by light

(photons) rather than electrons.

SOURCE Office of Technology Assessment
Ch. 3—Electronics Technology ● 7 3

Other types of ICs can also be built—e.g.,

hybrid or thin-film circuits—but monolithic

devices comprise the bulk of production,

At present, the market for ICs is more than

four times the size of that for discrete semiconductors. Because of this, and because very

large-scale circuits pace the industry and are

a major focus of international rivalry, this

report gives much more attention to ICs than

to other microelectronic devices.

Appendix 3A discusses IC technology in

some detail. The significance of the technology

itself for international competitiveness resides

largely in the commercial advantages that can

accrue from innovative and/or widely accepted

chip designs (ch. 5), as well as from mastery

of processing technology. Being first on the

market with a new design gives a firm the opportunity to build market share before competitors can offer similar products. The advantage

of a particularly well-accepted design is that

it may become a de facto industry standard.

A manufacturer whose design becomes such

a standard not only has the assurance of a relatively large and stable market, but also the prospect of a broad range of licensing and/or second-sourcing agreements. The firm may also

get a headstart in the competition to design the

next generation replacement. Processing capability is just as important to competitive success as design, because advanced circuit designs are often limited by what can be built at

acceptable yields. (The yield is the fraction of

“good” circuits coming off the production line.)

In semiconductors, advances in circuit design

and in processing capability are interdependent to a greater extent than in almost any other

industry.

The first of the two major types of ICs to be

developed, bipolar, has been replaced for many

applications by MOS (metal oxide semiconductor, app. 3A). Over the course of the 1970’s,

MOS technology—which is denser, cheaper,

and consumes less power, but which does not

offer speeds as high as bipolar—became dominant for large-scale integration (LSI). Very

large-scale integration (VLSI) will be mostly

MOS. Firms that were slow to master MOS

tended to fare poorly in sales growth and profitability over the past decade. For the foreseeable future, competition in ICs will continue

to center around MOS devices.

System Design and the Microprocessor

In designing a digital system, the engineer

has several options:

1. to assemble a number of standard logic circuits like those of the transistor-transistor

logic family described in appendix 3A;

2. in cases where large production volumes

are anticipated or performance requirements are specialized and demanding, to

call for one or more custom ICs;

3. to use a standard microprocessor or microcomputer with software written for the

particular application.

Assemblies of standard logic circuits—typically small- or medium-scale ICs—may be economical in limited production volumes, despite

relatively high design and development costs.

In such cases, the system is implemented in

hardware---e.,., its functioning can only be

altered by changing the circuit components

and/or their interconnections.

Specially designed custom circuits—analog

as well as digital, bipolar as well as MOS—have

a place in high-volume applications ranging

from consumer products like TVs and electronic watches to telecommunications systems.

They are also employed where performance requirements such as operating speed cannot be

met in other ways-e. g., in some military and

aerospace applications, or in mainframe computers. Custom circuit design is expensive:

hundreds of thousands of dollars, sometimes

running into millions. Here the designer is also

working in hardware, but new custom hardware rather than standard ICs.

In contrast, when a system based on a microprocessor or microcomputer is designed, the

logic is implemented largely through software

—i.e., a computer program stored in memory.

Although microprocessors and single-chip
74 ● International Competitiveness in Electronics

microcomputers can function as central processing units for general-purpose computer systems—such as the small machines sold by Apple or Radio Shack—they were originally conceived as replacements for custom ICs to circumvent the high costs of designing, developing, and producing custom parts, The first

commercial microprocessor was introduced by

Intel Corp. in late 1971 to implement the arithmetic functions in an inexpensive calculator.

Faced with the request of their Japanese customer for a group of custom chips to be used

in a line of calculators, Intel instead proposed

a simple 4-bit microprocessor chip.7 Rather

than hard-wiring the operations required for

the different calculator models—addition, multiplication, printing, and so on—software programs permanently stored in memory implemented these functions. Money was saved in

design and production compared to the custom

IC alternative.

Subsequent experience has shown that microprocessors may prove the low cost alterna7K N. Noyce and M. E. Hoff, Jr., “A History of Microprocessor

Development at Intel Corporation, ” IEEE MICRO, February

1981, p. 8. Parallel developments took place at Texas Instruments,

Photo credit Texas Insfrurnenfs

A single-chip microcomputer

tive for systems that could be built with as few

as two or three dozen standard logic circuits.

Figure 3 illustrates a typical application of a

microcomputer, control of a microwave oven,

where the chip contains memory for program

storage along with a processor. In such an application, production volumes might be high

enough to justify a custom LSI chip design—

tens of thousands of identical parts, at a minimum, are normally called for. But the microprocessor/microcomputer alternative has a big

advantage in flexibility; design changes are

simple, different models simply need different

programs. And, in the microwave oven example, there is no need for high performance.

Before the advent of the microprocessor, system designers had only two choices: assemblies

of standard parts or custom ICs. The microprocessor/microcomputer introduced a third

option, one that proved highly attractive. As

a result, several hundred different models of

microprocessors and single-chip microcomputers are now marketed (many differ only in

details), and custom microprocessors are sometimes designed for special applications.

Microprocessors and Memory

Microprocessors cannot be used by themselves; they must be supported by other chips,

at a minimum for program storage. Memory

circuits are described in some detail in appendix 3A, particularly table 3A-2. Memories, in

fact, comprise the largest single market category for ICs; the majority go into general-purpose computer systems, but large numbers are

also used in dedicated applications of microprocessors and microcomputers (i.e., applications where the computing function is invisible to the user of the system).

Technological progress is easier to measure

for memory circuits—e.g., RAM chips (random

access memory)—than any other type of IC.

Densities have increased steadily over time—

figure 4–while the cost of a chip has remained

roughly the same, As a result, the cost per bit

of information stored goes down, This opens

up new applications, not only for memory circuits, but for IC-based systems of any type that
Ch. 3—Electronics Technology ● 7 5

Line pc

Figure 3.—Controller for a Microwave Oven Based on Single-Chip Microcomputer

I

●

II

I I

1 I I

SOURCE R Walker ‘Analog/D{ g[tal LSI ‘ 1979 Electro Professional Program, New York, Apr 2426, 1979

Figure 4.— Increases in IC Integration Level

1960 1965 1970 1975 1980 1985

Year

rely on memory—notably microprocessor systems. Likewise, as semiconductor memory becomes cheaper it will continue to substitute for

alternative storage media such as magnetic

disks in general-purpose computer systems. It

was widely noted in the early 1970’s that the

cost per bit of memory had fallen below the

cost of a jelly bean. According to some estimates, a jelly bean (at 1¢) may buy as many as

1,000 (1K) bits of memory by 1990.

Memory and microprocessors are the most

visible products in domestic and international

competition. While it would be wrong to consider these the only important categories, they

do constitute half the total market for ICs.

Moreover, significant advances in both device

technologies and process technologies have

often found their way into production via circuits of these types.
76 . International Competitiveness in Electronics

Learning Curves and Yields

Making ICs is demanding, more so at higher

levels of integration, Forty or more processing

steps may be required for a VLSI chip, a figure

that will continue to grow. Designing VLSI circuits is also complex, and becoming steadily

more time-consuming and expensive, while

product design and process design go hand-inhand. For consumer electronic products like

TVs, decisions on product features often hinge

on the costs of production; for a new IC, the

first question is: Can it be made at all?

Once a semiconductor firm has designed an

IC and carried it through the pilot production

stage they can normally assume that production costs, even if initially high because of low

yields, will decrease over time. Figure 5 is a

schematic learning curve, sometimes called an

experience curve, showing cost declines with

cumulative production volume. Learning

curves typical of IC manufacture show that

when cumulative production doubles, costs

decrease by about 28 percent.8

Learning curves as in figure 5 apply to manufactured products of many kinds, but their impacts on pricing decisions have been particularly noticeable among semiconductor

firms; they are a major factor in forward-pricing—setting prices below the initial costs of

production to gain market share, Because firms

feel confident that costs will decrease as production experience accumulates, forward-pricing has been a common competitive tactic,

These cost declines—which can be considered equivalent to increases in productivity—

stem from much more than simple learning or

experience by the labor force; other causes include better equipment performance and utilization, greater understanding and control of

B“Boom Times Again for Semiconductors)” Business Week

Apr. 20, 1974, p. 65; A Report on the U.S. Semiconductor Industry (Washington, D. C.: Department of Commerce, September

1979), pp. 48-50. The 28 percent figure is an average from which

the cost experience for a given IC can deviate substantially. Production volumes typically rise rather slowly at first, because it

takes time for customers to design the new part into their

systems. In comparison to other types of manufactured products, learning curves for semiconductors are not particularly

steep, but continue to fall over very long production runs.

Figure 5.—Schematic Learning Curve for the

Production of an Integrated Circuit or Other

Manufactured Item

SOURCE Off Ice of Technology Assessment

the many steps in the production process,

smoothing of work flows, and perhaps changes

in the design of the part itself. Control of the 

process is particularly important, and often depends on subtle variations in parameters influencing phenomena such as diffusion, etching,

or polymerization (of photoresists—IC fabrication steps are described in more detail below).

In many cases, the physics and chemistry of

such phenomena are only poorly understood,

and cannot be modeled theoretically; process

control models tend to rely on empiricism,

hence on accumulated experience, Denser and

more complex ICs call for a better grasp of

processing fundamentals.

In general, learning improvements show up

as increased yield, the percentage of chips that

pass final test and function satisfactorily. When

a new IC goes into production, the yield is generally low—perhaps only a fraction of a percent—but rises as experience accumulates and

processing can be better controlled. As a ruleof-thumb, products are seldom marketed, except for sampling purposes, until yields have

risen to about 10 percent—which may take as

much as a year of production-line experience.9

For mature products, yields can rise to well

over 50 percent, Increased yields are a power-

‘R. Bernhard, “Rethinking the 256-kb RAM, ” IEEE Spectrum,

May 1982, p. 46.
Ch. 3—Electronics Technology ● 7 7

ful force in driving down the costs and prices

of ICs; in effect, doubling the yield halves the

production cost.

Because processing capability is so critical

to commercial success, the specialized equipment used in fabricating ICs is one of the keys

to competitive ability. Much of this equipment

is designed and built by independent suppliers

—many of them American firms—selling to

customers throughout the world (ch. 4). The

technological capability and competitiveness

of the portion of the U.S. electronics industry

that designs and manufactures equipment has

been just as important to the international position of the United States in semiconductors as

the efforts of semiconductor firms themselves.

Because of the interrelations of device technologies and process capability, and the dependence of costs and yields on process control, a

number of the more important steps in producing ICs—beginning with circuit design—are described in more detail below.

Integrated Circuit Design

The task of the circuit designer is to define

an arrangement of circuit elements—transistors, capacitors, logic gates, interconnections–-

that will satisfy the functional requirements of

the IC. The more complex the circuit and the

higher the level of integration (a 64K RAM contains more than 100,000 circuit elements) the

more difficult the designer’s job, and the higher

the cost of design and development. Figure 6

illustrates ranges of development time and cost

—including hardware, software, and peripheral chips—for several types of ICs.

As a rule-of-thumb, circuit design costs historically have been rather stable at about $100

per gate. Thus, a microprocessor with 10,000

gates will have a hardware design cost of perhaps $1 million, and may represent 10 manyears of effort. Software costs add to this. It

may well be possible to make chips with 1 million gates within a few years, but the costs of

designing them will be prohibitive unless the

design costs on a per-gate basis can be reduced;

one estimate has been that an IC with a density of a million devices would require about 200

Figure 6.— Ranges in Cost and Time for Design and

Development of Integrated Circuits

—

16-bit microprocessors

8-L) t

I I I I I

man-years for design and development using

the conventional methods of the past decade.10

Computer-aided design—i.e., the use of specialized computer programs by the design engineers—is the principal hope for cost reduction,

and is increasingly necessary just to handle the

logical complexity as the number of devices per

chip goes up. Designing a microprocessor with

100,000 transistors would be impractical without computer aids. R&D aimed at more regular

—even modular—chip designs is also underway, again intended to reduce the time, hence

the cost, of IC design. Modular approaches are

particularly attractive for custom logic circuits.

As pointed out above, the microprocessor

itself originated as a way to reduce the costs

of custom circuit design; in essence. choosing

a microprocessor means replacing hardware

design by software design, and in many cases

lowers costs, But as logic complexity goes up,
78 ● International Competitiveness in Electronics

the software costs for programing the microprocessor escalate rapidly. In part, this simply

reflects the more sophisticated processors—

e.g., a 16-bit rather than a 4- or 8-bit device—

needed for demanding applications. Although

software production can also be automated, the

two basic paths toward implementing logic—

hardware via custom chip design, or software

via a standard microprocessor with a program

embodying the logic—will continue to compete. Design cost, flexibility, and performance

are all factors. But if computerized design aids

for hardware and software advance sufficiently

far and in tandem it may eventually make little difference, perhaps even to the designer,

whether the logic is embodied in hardware or

soft ware.

Although much of the engineer’s work revolves around the logic that the circuit will implement, IC design also calls for intimate

knowledge of processing and fabrication11—figure 7. Designs that can be implemented in

n-MOS might be impossible in c-MOS (see app.

3A, table 3A-1, for an explanation of the types

of MOS devices). One company might have

n-MOS process capabilities beyond the reach

of another. The design team must consider factors such as the spacing between transistors

and the widths of the lines that interconnect

them. In contrast, when designing a system to

be built from discrete components it was often

11P. W. J. verhofstadt, “Evaluation of Technology Options for

LSI Processing Elements, ” Proceedings of the IEEE, vol. 64,

1976, p. 842; C. Mead and L. Conway, Introduction to VLSI Systems (Reading, Mass.: Addison-Wesley, 1980).

Figure 7.—Steps in Designing and

*

enough to be familiar with the performance

characteristics of off-the-shelf devices. At the

same time, IC designers—typically electrical

engineers—must be at home with the logical

concepts and software orientation of the computer scientist; the need for software skills will

grow as ICs come more and more to resemble

integrated systems. This melding of hardware

(including process technology) and software

skills, and the rapidity of technical change,

make unusual demands on the people who fill

such jobs—one reason that the electronics industry has been experiencing shortages of qualified engineers (ch. 8). Although neither the circuit designer nor the process specialist can be

fully conversant with all aspects of IC design

and manufacture (fig. 7), some knowledge of

each is needed.

Manufacturing Integrated Circuits12

The design process culminates in a pattern

or layout-a large drawing, several hundred

times the size of the circuit itself—that must

be translated into the “tooling” for producing

the chip. In simple terms, the procedure for

making an IC resembles a series of photographic processes—lithographic patterns are created

in layers on a silicon wafer. Each layer is made

by exposing a polymeric chemical called a photoresist to light or other radiation, the light

Izsee, in general, F. W. Vo]tmer, “Manufacturing Process Technology for MOS VLSI, ” VLSI Electronics: Microstructure Science, vol. 1, N. G. Einspruch (cd.) (New York: Academic Press,

1981), p. 1.

Manufacturing an Integrated Circuit

I Science - Processing

technology

* * , *

Design Design

Manufacture Test

technology b (product and process)

t

Product

definition

t Design 4

verification

SOURCE’ G, Moore, “VLSI: Some Fundamental Challenges,” IEEE Spectrum, April 1979, p.30,
Ch. 3—Electronics Technology 79

passing through a grid-like mask as shown

schematically in figure 8. More than a dozen

such masking steps may be needed to build up

a VLSI part. Many other processes besides

lithography are involved in IC fabrication, with

more detail given in appendix 3A, but lithography is critical for future increases in circuit

density. While advances at many stages in the

manufacturing process take place in an interdependent way—e.g., laser annealing is replacing furnace annealing because it does a better

job of restoring the crystal structure of the

silicon which is disturbed by ion implantation

—lithography is the major factor in determining how small individual devices and interconnections can be on a production as opposed

to laboratory basis. Already, transistors can be

packed much more closely in an IC than neurons are packed in the human brain; it is the

Figure 8.—Step-and-Repeat Process

of Photolithographic Pattern Formation

on Silicon Wafer

Filament

w

Light source

Lens

1 \

Len s

Photoresis t

\

Silicon wafer \

~ Stage traverse

SOURCE Office of Technology Assessment

technology of lithographic processing that

makes this possible.

Lithographic line widths in production ICs

have been reduced an order of magnitude over

the past decade, from about 20 micrometers in

the early 1970’s to 2 to 4 micrometers currently. (A micrometer is about 40 millionths of an

inch, ) Thinner lines give higher operating

speeds as well as denser packing. The 16K

RAMs designed in the early to mid-1970’s were

based on 5 micrometer “design rules,” 64K

RAMs on 3 micrometer rules (design rules,

which are directly related to lithographic line

widths, comprise the full set of geometric constraints that designers follow). The next-generation 256K RAMs are based on 1.5 to 2 micrometer design rules.13 Continued progress in

reducing line widths—more generally, feature

size—is thus a major driving force in moving

further into VLSI. For this reason, a principal

R&D target of the Defense Department’s Very

High-Speed Integrated Circuit (VHSIC) program has been lithographic technology—an objective paralleling commercial R&D efforts, one

reason the program is likely to have a positive

effect on nonmilitary portions of the semiconductor industry. The VHSIC program goals include two stages of lithographic improvements:

the first stage calling for line widths of 1,25

micrometers; the second, lines of 1 micrometer

and below.

While feature sizes of 1⁄2 to 1 micrometer are

well above the range for which the physics of

electron devices will begin to constrain performance, such feature sizes do demand significant developments in lithographic capability,

particularly for mass production .14 In the past,

-————

I“’Rethinking the 256-kb RAM, ” op. cit. On design rules, see

Mead and Conway, op. cit., p. 47.

141 E. suthe~and,C. A. M~d, and T. E, Everhart, Basic Limitations in Microcircuit Fabrication Teehno]ogjr, Defense Ach’anced

Research Projects Agency Report R-1956ARPA, November 1976;

R. W. Keyes, “The Evolution of Digital Electronics Towards

VLSI,” IEEE Transactkms on Electron Devices, vol. IiD-z6, 1979,

p. 271, The ultimate limit to reductions in the sizes of electron

devices will perhaps be thermal noise, although a variety of practical concerns may intrude first. Feature sizes are likely to decrease to the range of 0.01 to 0,1 micrometer before fundamental

physical limitations are encountered.
80 ● International Competitiveness in Electronics

visible light—generally ultraviolet—has been

used to expose photoresists (fig. 8). But even

deep ultraviolet, which has a wavelength of

about 1⁄2 micrometer, cannot produce line

widths much below a micrometer because optical considerations limit the lines to about

twice the wavelength of the radiation.

To achieve 1 micrometer lines with visible

light requires very sophisticated lithographic

equipment—positioning and layer-to-layer registration of the sequential masking steps must

be held to a small fraction of a micrometer. A

single machine of the direct-step-on-wafer type

diagramed in figure 8 now costs about half a

million dollars—table 2. As the table shows, the

earlier generations of equipment replaced by

direct-step-on-wafer machines were much less

expensive. Finer patterns will be still more

costly—whether the technology of choice is

electron-beam lithography (table 2), X-rays, or

ion beams (see app. 3A). The rapidly rising

costs of IC processing equipment—whether for

lithography, for ion implantation, or for testing

—along with higher costs for design and development, are the most important causes of the

rapidly increasing capital intensity in the semiconductor industry (ch. 7). Entry costs are now

roughly $50 million, versus $5 million to $10

million in the early 1970’s.

Some firms have already moved to electronbeam lithography for critical circuit layers.

Electron-beam lithography is also a routine tool

for making masks. X-rays and electrons have

wavelengths much less than light, and so offer

greater resolution—at the expense of high first

cost for the equipment, and low production

rates. 15 Because of its importance in driving IC —

l%. R. Ilrewer, “High Resolution Lithography,” Ektron-Beam

‘1’whnolog~r in Aficroelectronic Fabrication, G. R. Brewer (cd.)

(New York: Academic Press, 1980), p. 1.

Phofo credtt GCA Corp

Electron-beam lithography system

technology, R&D on high-resolution lithographic techniques (see app. 3A) has been a principal

target of government-funded programs in other

countries—e.g., Japan’s VLSI project—as well

as the VHSIC program funded by the U.S. military.

Table 2.—Cost Increases for Fine-Line Lithography

-—

Approximate capital requirements

Line width Throughput Approximate cost for production capacity of 1,000

Lithographic system (micrometers) (wafers per hour) per system wafer starts per week — —

Light

Contact printing . . . . . . . . . . . . . . . 10 60 $15,000 $30,000

Projection . . . . . . . . . . . . . . . . . . . . 2-5 60 $240,000 $400,000

Direct-step-on-wafer. . . . . . . . . . . . 1-2 30 $480,000 $1.6 million

Electron-beam . . . . . . . . . . . . . . . . . . 0.5-1.0 6 $1.5 million $25 million

SOURCE Adapted from A J Stein, J Marley, and R Mallon, “The Ire-pact of VLSI on the Automobile of Tomorrow, ” VLS/ E/eZt~jn/cs M/crosfruc/ure Scferrce, VOI

2, N G Einspruch (ed ) (New York Academic Press, 1981), p 295
Ch. 3—Electronics Technology ● 8 1

—

More cost comes with the “clean rooms”

needed for VLSI processing. Even micrometersize dust particles can ruin the lithographic patterns; cleanliness is vital to high yields. In a

clean room, the air is filtered and people must

wear special clothing. As circuits become denser, and feature sizes smaller, not only is cleanliness more important, but the whole range of

processing equipment used in making ICs becomes more sophisticated and expensive, adding to the capital requirements for semiconductor manufacturing, a matter discussed in chapter 7.

Future Developments

Semiconductor devices need not be based on

silicon. One alternative is gallium arsenide, a

material that offers considerable potential for

improvements in packing density and speed—

one to two orders of magnitude compared to

silicon—but is still largely a laboratory technology. Whether gallium arsenide circuits will become commercially important depends on

rates of improvement compared to silicon, and

also on developments in other prospective technologies-e. g., Josephson junctions. Josephson

device--also experimental, and much further

from demonstrated practicality than gallium

arsenide ICs—promise still better speed and

density.

To illustrate the importance of speed, as well

as power consumption, consider the technology embodied in a current-generation mainframe computer. The central processor for one

such computer—the Amdahl 470-V—employs

1,680 ICs, with a total of about 100,000 logic

gates. As is typical in large computers, the

chips use silicon bipolar technology to give

high computing speeds. Replacing these bipolar chips with gallium arsenide may offer the

potential for increasing computational speeds

by a factor of 10 to 100, and reducing the power

consumed by the processor from about 3,000

watts to perhaps 30 watts—less than most light

bulbs.16 Comparable improvements in other applications of ICs carry implications for competitive trends in many industries if some companies or some countries manage a headstart

in reducing such technologies to practice.

IHR, (;. ~:{j(,n, B. M. ~$’el(, h, R, Y.u( [:ti, a n d ,S. 1. ] ,{)n~, ‘‘‘1’he pros-

])[’t:tt i or [~ltral]igll-S[)c~[!(l t’I,Sl (;a As I)igital I.[j~i(,, ” Ifi’I;h’

‘/’l-,iIISa[;tjOJI.+ on El[~(tron ]k?tricr.s, ~’ol, EI)-26, 1979, 1). 299 Ahout

1 IIercent of tllf: elm:t rlcit}’ [on su]ne(i In the [ 1 n ltc(] Std tf~s no~~

goes to computers, mostly for (:oo]ing-’; B E NIA Pr[)d I( -

tion: Say Energy Cru n(, h Could Cut E 11 P C romth Rate 50(?h,”

h’fectrorlic ,Vews, Nla] .17, 198(1, p, 32. On Josephson jun[, tions,

see J. Matisoo, ‘*Okerk’iew of Josephson Technolo~y I.o,gic and

Memory, ” IBAf Journal of Re.sear(;h and De\’eloprnenf, to]. 24,

1980, p, 113.

Computers

Computer technology has many roots, including military needs during the Second

World War for fire control tables and other

complex and/or repetitive computations. The

United States had no great advantage over

other nations during the early development of

computers; significant innovations also originated in several European countries, particularly Great Britain .17 But as computing technology progressed, the lead swung decisively to

American firms, much as happened over

roughly the same period of time for semiconductors.

The Bureau of the Census was an early nonmilitary customer for American computers,

census data processing requirements remaining a typical example of computer applications.

When a Univac I was delivered to the Bureau

of the Census in 1951, some observers predicted that the market for digital computers

might eventually total a dozen; a few years

later, when sales to private industry began, the

estimates were that the potential market in the
82 ● International Competitiveness in Elecfronics

United States consisted of perhaps 50 corporations. 18

Needless to say, as computer technology advanced many more firms became customers,

and the ranks of computer manufacturers

swelled. Among the entrants were a number

of companies that had become established in

the office equipment market. International

Business Machines Corp., Burroughs, and National Cash Register (now NCR) joined firms

like Univac that had been set up specifically

to manufacture digital computers. By the end

of the 1960’s, computer applications had

spread well beyond numerical computations

and data processing. The great part of computing power is still devoted to data processing

for business and government—accounting,

sales, production, inventories, recordkeeping

of all kinds—and to scientific and engineering

calculations. In addition, many individual computers, mostly microprocessors and microcomputers, now perform “invisible” functions in

applications ranging from aircraft flight control systems to the microwave oven example

shown in figure 3.

The spread of computing power has sometimes been technology-driven, sometimes driven by user demands. Technology-driven developments arose when more computing capability was available than people knew how to use

productively—i.e., before the applications were

well-defined. Under these circumstances, the

availability of more powerful machines or

greater performance per dollar tends to generate new applications, or, more broadly, serve

needs earlier unmet. As in many instances of

technological change, what the technology

could do, at any given time and for a given cost,

evolved in conjunction with applications, with

one or the other temporarily in the lead, Much

the same has been true for ICs. In the period

when demand from military and space programs in the United States was high, the

market drove the technology; but leaders in the

semiconductor industry have periodically worried that applications for the full capabilities

“L. M, Branscomb, “Electronics and Computers: An Overview, ” Science, Feb. 12, 1982, p. 755.

of new circuits containing greater numbers of

devices, now VLSI, might not appear. Such

fears seem to have vanished from the computer

business, though not the perennial questions

of which firms will get the largest share of the

new markets.

Types of Computers

As pointed out in the earlier section on “System Design and the Microprocessor, ” the essential elements of a small digital computer (exclusive of power supply and input/output devices) can be placed on one IC to create a single-chip microcomputer. A microprocessor is

more limited in function, but when combined

with the necessary memory and peripheral

chips on a printed circuit board becomes a

single-board microcomputer. From such products—selling for around $100 without cabinets

and other auxiliaries—digital computers range

upwards in size, speed, and cost to “supercomputers.” Intended for complex scientific and

technical calculations-e. g., modeling the

Earth’s atmosphere, designing airfoils or

nuclear weapons—supercomputers are made

by only a few manufacturers, and cost in the

vicinity of $10 million each.

In between board-level microcomputers and

supercomputers come a number of broad categories of machines: personal and small business computers like those made by Apple; minicomputers of various types; general-purpose

mainframes. The latter, typified by many of

IBM’s larger models, can handle many different tasks at once. Table 3 outlines some of the

conventional distinctions among these categories. The differences are not always clearcut and will blur even more as microcomputers

become more powerful, computing power still

cheaper, and computers of all types more versatile.

The central processing unit (CPU) for a simple computer—in fact, just a microprocessor—

is shown schematically in figure 12. A microprocessor functions like the CPU of any computer—it brings information (in the form of binary bits) into an arithmetic logic unit, manipulating the bits in accordance with instructions
Ch. 3—Electronics Technology ● 8 3

Table 3.—Characteristics of Different Categories of Digital Computers

——

Family/Distinguishing features ‘-- ——. .———.—

Microcomputer: The central processing unit (CPU) consists

of a microprocessor or single-chip microcomputer, sometimes several. The most common microcomputers use an

8-bit word and sell, without peripherals but otherwise complete and ready to operate, for under a thousand to a few

thousand dollars. They will typically fit on a desk top—

fig. 9—and do not require special training to operate. Examples include popular models sold by Apple and Radio

Shack, along with the IBM Personal Computer,

Machines based on microprocessors or microcomputer

chips with 16-bit word lengths are beginning to appear, particularly for business applications. These are nearer in performance to low-end minicomputers than to the &bit microcomputers originally developed for the hobbyist and personal computer markets.

Minicomputer: Microcomputers, by the definition above,

could not have existed before the development of the

microprocessor— i.e., before the early to mid-1970’s. Minicomputers, in contrast, stem from the 1960’s. A popular

early mini introduced in 1965-the PDP-8, built by Digital

Equipment Corp.—was the first low-cost, mass-produced

computer of any type. It was designed around a 12-bit word

and discrete transistors.

Minicomputers are small compared to mainframes,

which can fill a room, As fig. 10 indicates, minicomputers

are often about the size of a desk. Although not as portable

as micros, many minicomputer models can be moved relatively easily within an office or factory environment.

Minis found much of their market as dedicated processors designed into more complex systems, or in specialized data processing tasks —e.g., industrial controllers,

data acquisition systems for laboratory research, inventory

management in factories. While such applications remain

common, minicomputers ———are also widely used for general- —

SOURCE Office of Technology Ass@sment

from a program stored in memory, and sends

information back to the memory or to an output device, The stored program, which made

the modern digital computer possible by providing a means for telling the computer what

to do without the need for hardware changes,

accounts for a good deal of the information that

enters and leaves the CPU. Even rather simple

computer systems—figure 9—typically use several types of memory, which are described in

more detail in appendix 3B.

Computers as Systems

In addition to CPU and memory, a computer

system needs input and output devices (fig. 13).

In small computers, all the components may

be integrated into a single self-contained unit.

purpose data processing. Often mainframes were needed

i n such applications only a few years ago; minicomputers

tend to supplement rather than displace them.

At the lower end, it is increasingly difficult to distinguish

minicomputers from the more powerful microcomputers.

Many less expensive minis now rely on a single-chip processor. However, the smaller minicomputers typically use

16-bit words—e.g., the currently popular PDP-11 models

made by Digital Equipment, or the Nova series of Data General. Larger, more powerful machines—sometimes called

“superminis’’--normally have a 32-bit word length. Examples of superminis are the Data General Eclipse series or

the VAX models of Digital Equipment. In the 1960’s, 32-bit

words were found only in mainframes.

Most minicomputers carry prices in the $10,000 to

$100,000 range. A principal distinction between minicomputers and mainframes is that minis seldom require either

operators with a great deal of training or specially constructed facilities. Mainframes, in contrast, must usually

be permanently installed; some large computers dissipate

so much heat that air-conditioning is needed even in midwinter.

Mainframes: The CPU for a mainframe typically contains several thousand logic chips, usually bipolar for speed. Word

lengths are commonly 32 to 64 bits. Mainframes often support multiple terminals and peripherals-fig. 11 —and generally require trained personnel onsite.

While IBM is the world’s largest producer of mainframe

computers, more than a dozen other firms build machines

comparable in computing power. Mainframes can sell for

$10 million or more–exclusive of peripherals–but the

more popular general-purpose machines typically cost

under $5 million.

Peripherals such as disk and tape drives, terminals, and printers are made by large numbers of independent vendors, as well as by computer manufacturers. Nearly 90 American

firms were producing terminals as of 1980,

about half of these “smart” by virtue of embedded microprocessors, while nearly 30 had

announced their intention to build 8-inch Winchester disk drives, a product just beginning

to reach the marketplace at that time.19 The

market dynamics associated with the computer

industry—rapid growth, intense competition,

new entrants with new products—characterize

peripherals and software as well as processors.

—.——

I“’The Digital Age,” E]ectrwnics, Apr. 17, 1980, p. 387; G. S]utsker, “28 Rivals Eye &Inch Disks But None Lands Big OEM Pact

Yet, ” Electronic News, Jan. 21, 1980, p. 40.
84 ● International Competitiveness in Electronics

Figure 9.—Typical Microcomputer Intended for

Personal and Small-Business Applications

Photo credit App/e Computer, /nc

Figure 11.— Data Processing Installation Built Around

General-Purpose Mainframe Computer

Photo cred~f’ Contro/ Data Corp

Figure 12.—Simplified Block Diagram of a

Microprocessor System

Address bus

(to call

instructions and

data)

Figure 10.—Typical Minicomputer Installation

Including a Pair of Terminals and a Printer

1

r

--- -

I

Photo credit D/g/ta/ .@)prnent Corp

I I

D/A = Digital/analog conversion

A/D = Analog/digital conversion

ROM = Read-only memory

RAM = Random access memory

SOURCE Off Ice of Technology Assessment
Ch. 3—Electronics Technology 85

Figure 13.— Elements of a General-Purpose Digital

Computer System

Input/output

Terminal(s )

Tape, disk drives

Central

processing

unit

(CPU)

—

1

outpu t

Printe r

SOURCE Off Ice of Technology Assessment

Technological change in computing has been

rapid since the beginning of commercial production in the 1950’s, but now the industry is

perhaps facing the most comprehensive set of

changes yet, These stem from “distributed intelligence," the dispersal of computing power

to many farflung locations, In some respects,

this trend began with the development of timesharing in the early 1960’s. Time-sharing permits users at remote terminals to interact directly with a central processor, extending the

capabilities of a powerful computer to many

people simultaneously, It also uses the processor more efficiently, Even during big jobs the

CPU may be idle much of the time; with timesharing, system software keeps the CPU busy

by dividing its processing power among many

people, each of whom is unaware of the others.

Conceptually, the next step beyond timesharing—for which each user needs only a

“dumb” terminal (an input/output device with

no function other than to communicate with

the central processor)—is to link a central computer to satellite machines which can share the

processing load. Many such distributed processing schemes are possible, among the more

common being a mainframe supported by

minicomputers. A mainframe or mini can also

communicate with “smart” terminals that

carry out limited computations, compile programs, and otherwise relieve the central or host

computer of some of the work. Point-of-sale terminals found in retail stores often function as

parts of distributed systems. The terminal not .

only acts as a cash register, but sends data on

purchases to a central computer that can manage inventory, compare sales volume by brands,

and provide other information to managers.

Automatic banking machines are another familiar example; each automatic teller functions

as a smart terminal linked to the bank’s central computer(s). These systems may include

hundreds of machines spread over several

States.

Networking is a related term, referring to dispersed machines that communicate with one

another but are each autonomous. Any one machine can transmit data to any other; control

of the network maybe distributed over the system or may reside in a designated processor.

In some but not all cases, networked computers

not only communicate and share control, but

also share the processing load. Local networks

serve a limited group of users, such as a single

office. At the other extreme, a multinational

corporation might link computers located in

many countries to form a worldwide network.

Computer Software

Physical equipment, or hardware—ranging

from ICs, to disk drives, to networks—has been

the primary subject above. But modern computers depend just as heavily on software. The

programs that stand between user and CPU tell

the hardware what to do. Arrayed in several

levels, they range from applications software

written in languages such as Fortran or Cobol

—the only type of program that the typical user

ever sees—to operating systems that supervise
86 ● International Competitiveness in Electronics

and coordinate both hardware and software

elements. It is the software-architecture, operating system, compilers—that allows complex

networks of computer and communications

components to control steel mills, regulate air

traffic, determine the path of a guided missile,

distribute social security checks. Hardware

and software in conjunction determine system

performance, and customers weigh both aspects when making purchase decisions. In

some cases this may entail buying software and

hardware from different vendors and assembling a unique system. The spread of distributed intelligence, new applications of computers in homes and offices, shopfloor automation,

computer-aided engineering analysis and design—all depend more heavily on versatile, reliable, user-friendly software than on hardware.

Since the beginnings of large-scale commercial production, computer hardware has become steadily cheaper relative to software.

Costs for hardware have decreased by a factor of at least 1,000, holding processing power

constant, over the past 25 years. 20 In marked

contrast, software costs have not decreased appreciably, and may even have risen in real

terms. A single line of programing, as a ruleof-thumb, costs in the range of $10 to $50—after

inflation, about the same now as in 1955.21 As

~“Missing Computer Software,” Business Week Sept. 1, 1980,

p. 46. The magnitude of the improvement depends on the type

of system assumed.

Zlwhi]e productivity in programing-as measured in hes of

code per unit of time—has probably increased, the rate of increase has been orders of magnitude slower than for hardware

performance. Birbaum, for instance, points out that while programer productivity has increased by about a factor of 3 since

1955, system performance-tocost ratios have gone up by roughly

105 over the same time period—J. S. Birbaum, “Computers: A

!~urvey of Trends and Limitations, ” Science Feb. 12, 1982, p. 760.

In some programing tasks, productivity has probably remained

rather stable—perhaps even decreased. Applications programing may now be somewhat more efficient because of improvements in higher level languages. Productivity in systems programing, or developing software for dedicated microprocessors,

microcomputers, and minicomputers, has probably not improved

as rapidly; when systems become more complicated, many of

the stages in program development—from conceptual design to

debugging—become more aduous. Even a relatively simple program may have of the order of 1020 different execution paths,

depending on the number of loops, branches, and subroutines.

Costs per line can escalate as program size and complexity increase. Another common rule-of-thumb is that a man-month of

effort is required to demonstrate that 100 lines of code is, for

practical purposes, error-free and functionally correct.

a result, the largest part of the total cost to the

user of a large computer system is now software, rather than hardware--figure 14. The

chart applies to both purchased software-from

computer manufacturers or independent vendors–and to user-developed programs; software maintenance is also included. At one

time, many computer manufacturers provided

system software such as control programs,

language processors, and utilities free to hardware purchasers. Now, separate charges are

the rule. For example, IBM currently sells

about $1 billion worth of software per year, accounting for a little over 5 percent of the firm’s

total revenues; in newer systems such as the

IBM 4300 series, nearly half the price of a typical installation is for software.22 Similarly,

more than half of the R&D commitment of a

typical computer firm—measured either in

terms of total expenditures or in terms of manpower—goes toward software.23

Cost trends for the development of software

for dedicated applications—e.g., the logic for

an embedded microprocessor—are similar.

Even the simplest such application will require

debugging and testing of the program to verify

that it functions as desired. Software development for a microprocessor application may

————

“’’Missing Computer Software, ” op. cit.

“’’Computer Technology Shifts Emphasis to Software: A Special Report,” Electronics, May 8, 1980, p. 142.

Figure 14.—Relative Hardware and Software Costs

Hardware

Software

1960 1980 2000

Year

SOURCE’ Office of Technology Assessment.
Ch. 3—Electronics Technology 87

/%IOtO Cr8d/t ~ektrOf)/X, /f7C

Microprocessor development system

cost several hundred million dollars, with

estimates for 1985 running to $3 million or

more .24

The rising relative costs of software have

been one factor in the rapid growth of independent firms that develop and market programs of all types. Many computer manufacturers have traditionally been rather hardwareoriented, leaving an attractive market for vendors who concentrate on software (see app. C,

“Computers: A Machine for Smaller Businesses," on the role of “systems houses” in the

development of the minicomputer market).

Even IBM—which has built its market dominance in larger machines on software as much

as hardware—has turned to independent software firms to supply programs for its personal

computer. Independent software vendors sell

—24’’ hlissing Computer Software, ” op. cit. One supplier of micro-

[jr{jcessors and microcomputers has estimated that a typical

mid-l 970’s application carried a software development cost of

about $20, oOO ($20 per 1 ine of code], but by 1980 the cost was

$100,000 t{) near]} half a million dollars ($35 per line c)f code,

I)ut also many more lines], Meanwhile the hardware costs have

rema incd about the same—in the vi[, init y of $100 per unit, See

J G. Posa, “Intel Takes Aim at the ‘80s, ” Electronics, Feh. 28,

1980, p. 89.

perhaps $1 billion in off-the-shelf programs per

year, and twice that amount in custom programing. 25

Growth of Computing Power

Figure 14 gave one picture of the rapidity of

change in computer technology, and in the

computer industry in general. But change extends far beyond the relative costs of hardware

and software, the rapid growth in the microcomputer market (now about 50 percent per

year), or continued increase in performance

cost ratios for computer systems. And, while

distributed intelligence may eventually have

broader and deeper effects on the way people

live and work than big machines, the absolute

rise in computing power delineated in table 4

illustrates simply but dramatically how rapidly the capabilities of the most powerful digital

computers have increased—nine orders of

magnitude since the close of the Second World

War, six orders of magnitude in the 30 years

since the introduction of the first commercial

machine, the Univac I. All the computers listed

in table 4 would be classed as mainframes, and

those of recent years as supercomputers—representing the maximum in computing power

available at a given time. *

While the biggest computers have been growing in speed, smaller machines--like all computers—have been growing in performance per

dollar. Table 5 compares an 8-bit single-board

microcomputer representative of 1970’s technology to the IBM 650—a first-generation vacuum tube processor of the mid-1950’s. The two

machines are roughly comparable in computing power, but the modern microcomputer is

orders of magnitude smaller and cheaper,

‘SW. D. Gardner, “The Key to [~reat~r Pr~~ucti\’it\,” llUII

Review, August 1980, p. 74, The total kall)c of computer software in use worldwide probably ew:eeds $200 billion.

*Arithmetic operations per second, th~~ measurt~ used in the

table for comparing computing power, is not a IJerfect yardsti(;k

because man~’ data-processing programs are Iim]ted by operations other than arithmetic-— e,g., inverting matrices, h40re sophisticated compariwns employ “benchmark” programs base(l

on representative tasks. Arithmetic operations as used in the

table have the advantage of being easy to understand and applicable to early model computers, some of which could not execute modern benchmarking programs.
88 ● international Competitiveness in Electronics

Table 4.—increase in Computing Power Over Time

Computational speed

(arithmetic operations

Year Model per second)

1944 – Harvard Mark I ‘- ‘

-

(electromechanical) 0.4

1946 Eniac 45

1951 Univac I 270

1953 IBM 701 615

1961 IBM 7074 33,700

1963 CDC 3600 156,000

1965 IBM 360/75 1,440,000

1972 CDC Cyber 176 9,100,000

1976 Cray 1 80,000,000

1981 CDC Cyber 205 800,000,000

SOURCES J R Bright, “Technology Forecasting Literature Emergence and impact on Technological Innovation, ” P Kelly and M Kranzberg (eds ),

Tecfrrrdogical /rrrrovaf/on” A Crifica/ Review of Currerrf Know/edge

(San Francisco. San Francisco Press, 1978) p 300, “The Digital Age,”

E/ecfrcaics, Apr 17, 1980 p 382, P J Schuyten, “The Battle in Super.

computers “ New York T/rnes. July 22, 1980, p D1

and—at least as significant—vastly more reliable.26 Note that these computers are separated ——.—— 25] nt~~r~t~(j (;lrCultS typlCdlly ~~hi~ it reliabilities—measured

as mean times between failurv (ch. 6)—of the order of 1011 hours/

gate, Thus, a ty[]ica] microprocessor containing 10,000 gates

might have a mean time between failures of about I () million

hours, or 1,000 years. In contrast, mean times between failures

for discrete transistors are about 108 hours, for vacuum tubes,

less than 108 hours, See, S, Nliddelhoek, ]. t3. Angell, and K), J,

W, Noorlag, ‘microprocessors Get Integrated Sensors, ” IEEE

.S@(;tru~]], F’ebruary 1980, p. 42.

in time by only two decades. Figure 15 gives

an alternative picture of growth in performance per dollar. The plot shows the decline

in price for a minicomputer family—after 1965

the pioneering PDP-8, although the first several

years apply to an earlier model–the rapid fall

stemming in part from learning curve phenomena as for semiconductor devices. Drops in

prices for the semiconductors a machine contains—figure 16—also lead to cost reductions.

Digital Equipment Corp. introduced the PDP-8

at $18,000; by the early 1970’s some versions

were priced as low as $2,500.27

“Generations” of computers can be distinguished based on advances in the technology.

For example, the IBM 650 (table 5) represents

a first-generation machine, the F-8 microcomputer third generation. Zeroth-generation systems were similar to the 650 in using vacuum

tubes, but early computers such as Eniac

lacked the ability to execute stored programs,

the hallmark of the modern digital computer.

To change a program in Eniac meant altering

“~. I,ewis, “Small (l)mputers, ” Ekx:trooic ,N’ei~rY Jiin. 25, 1982,

St!c. 1 I, p. 70.

Table 5.—Comparison of IBM 650 (1955) and Fairchild F-8 Microcomputer (1970’s)

IBM 650 F-8 Remarks

Physical volume (ft3

) . . . . . . . 270 0.01 F-8 about 30,000 times

smaller

Weight (pounds) . . . . . . . . . . . 5,650 1

Power consumption (waits) -17,700 2.5 F-8 consumes 7,000 times

less power

Memory (bits) . . . . . . . . . . . ~ 3K main, 16K ROM, 8K RAM

100K secondary

CPU . . ..,-. ..., . . . . . . . . 2,000 vacuum tubes 20,000 transistors 650 also needed many

discrete resistors and

capacitors

Time for adding two

numbers (microseconds). 750 150

Reliability (mean time

between failures) . . . . . . . . Hours Years (3 million to 10 million hours F-8 at least 10,000 times

is a typical mean time between more reliable

failures for a current microprocessor—more than 300 years—but

the subsystems with which the

microprocessor communicates—

e.g., terminals, printers—may be

much less reliable)

cost . . . . . . . . . . . . . . . . . . . $200,000 (1955 dollars) Under $1,000 with terminal

SOURCES IBM 650 information from “1978 First Quarter and Shareholders Meeting Report, ”Texas Instruments, Inc Falrch!ld F.8 lnformat!on from” J G Linvlll and

C L Hogan, “intellectual and Economic Fuel for the Electronics Revolution, ” ScIerrce, Mar 18, 1977, p 1107
Ch. 3–Electronics Technology ● 8 9

Figure 15.— Minicomputer Price Trends (12-bit

Digital Equipment Corp. models, PDP-8s after 1985)

30

25

20

15

10

5

0

Without input/output

peripherals \

1965 1970 1975

Year

SOURCE C G Bell J C Mudge, and J E McNamara, Computer Engineering

(Bedford Mass Dlgltal Press, 1978), p 194

thousands of patchcords—in essence changing

the hardware—a task that could take several

days.

Current machines represent generation

three-and-a-half or four, table 6, although the

notion of generations has lost much of its

meaning with the rise of distributed processing, A good deal of attention has recently focused on planning within Japan for fifth-generation technology—which, as the table indicates,

might be characterized by major advances in

software associated in a general way with “artificial intelligence.” Among the goals of Japan’s

fifth-generation computer project are input and

output in natural language—as ordinarily spoken or written. As the table indicates, the next

generation may also be identified with new

methods for communicating among computers, and perhaps some replacement of silicon

ICs with higher speed devices. Hardware developments such as Josephson junctions would

Figure 16.— Parallel Decreases Illustrate How

Costs of Computers Depend on

Costs of Semiconductors

? Computing costs

10 0

0

10

~.

01 1 I

0 5 10 15

Years (normalized)

100 million

100000

SOURCE I M Mackintosh, “Large-Scale Integration Intercontlnenlal Aspects,” /EEE Spectrum, June 1978 p 53

make natural language programing and related

developments such as voice recognition easier

to achieve by speeding the processing of the

very complex algorithms required.

As noted in the table, the current generation

is one of specialization, characterized by continuous rapid development on many fronts:

minicomputers, microprocessors and microcomputers, distributed processing, new programing languages, improved peripherals, special-purpose machines such as array processors. As a result, it makes less sense to speak

of “generations. ” Computing power is becoming so widespread and pervasive that to focus

on the characteristics that different systems

have in common may obscure the true significance of specialization, and the distribution of

machine intelligence to new applications—

many of them quite different from those originally associated with “computers. ”

I ~– 1 1 1 ) – > –
90 ● International Competitiveness in Electronics

Table 6.-Characteristics of Generations of Computer Technology

Representative

Generation Period models Description Typical applications

Zero 1940’s Eniac No stored program capability; vacuum tube Preparation of ballistics tables.

processor.

One Early 1950’s Univac I Stored program, but in binary machine lan- Scientific and technical calculations (aerody -

guage only. Vacuum tube processor. namics, nuclear weapons design) business

(accounting, Inventories, payrolls); Government (census).

Two Late 1950’s IBM 7090 Higher level languages such as Cobol; CPU As above, but much more widespread.

uses discrete transistors. Magnetic core

memory common, along with line printers

for output. Punched cards used for data

Three

entry.

1960’s IBM 360 series; Hybrid ICs—combining discrete transistors Continuing spread of data-processing

Burroughs 6500 and integrated circuits on a single sub- applications as costs decrease. Real-time

strate (IBM 360 series) or small-scale ICs processing becomes more common.

(Burroughs 6500 and others) used in CPU.

Time-sharing available.

Three-and- Late 1960’s IBM 370 series; Large-scale ICs; distributed processing, net- Great Increase in specialized, dedicated

a-half or to present DEC PDP-11 working. Proliferation of special purpose applications, particularly for minicomfour computers; rapid growth of minicomputer puters. Data base management systems

markets. Microcomputers developed. spread. Networking and distributed processing point toward merging of data processing and data communications, typical

applications being electronic funds transfer, Microprocessors make many products

“smart, ” as well as substituting for custom

logic,

Five Late 1960’s ? Natural language programing; voice recognior 1990’s tion, speech synthesis. Gallium arsenide

ICs or Josephson junction devices may

replace silicon ICs in CPUs.

SOURCE: Office of Technology Assessment. See, in general, S Rosen, “Electronic Computers: A Historical Survey, ” Computing Surveys, vol 1, 1969, p 1, J T Soma,

The Computer Industry” An Econorn/c-Lega/ Analysis of Its Technology and Growth (Lexington, Mass. Lexington Books, 1976), PP 9-30, “Digital Computers:

History,” Errcyc/oped/a of Computer Sc/ence, A Ralston and C. L. Meek (eds ) (New York: Petrocelli/Charter, 1976), pp 474-495.

Applications of Computers

As pointed out earlier, the microprocessor

was originally developed as an alternative to

custom ICs for a line of hand calculators—an

example of a dedicated or embedded application where the computer is invisible to the user,

Such applications of small processors far outnumber generalized data processing. In most

dedicated systems, the programs are permanently stored, and the user interacts with the

machine through switches, control knobs, or—

as in the case of a word processor—a keyboard.

A large commercial aircraft may contain a

dozen or more computers, but the pilot need

never know of their presence. His interfaces

are instruments and flight controls. In the same

way, when a minicomputer or mainframe supports word processing applications, the typist

may never see or be aware of the computer.

As this example shows, dedicated applications

need not be restricted to small machines. Furthermore, the distinction between dedicated

and general-purpose applications is not always

clear-cut. A mainframe computer might support dozens of word processing stations, while

at the same time running data processing programs in both batch and time-sharing modes.

Table 7 illustrates something of the range of

current applications of computing power,

while an example from the field of industrial

process control is described in more detail in

appendix 3C. Note that even in the rather arbitrarily defined data processing category, several of the familiar examples—airline reservations and tickets, point-of-sale terminals—

depend on dedicated machines. Also note that

dedicated applications help make the dataprocessing systems themselves function; controllers for disk or tape drives are often based

on microprocessors.

Leaving aside the overlaps among categories

—because so many technologies blur and

merge as intelligence is added—the breadth of
Ch. 3—Electronics Technology 91

Table 7.—Typical Applications of Computing Capability

Example Usual Type of Computer

Data processing

Business records (accounting, payroll, order processing and

billing, production control, inventories, taxes, banking).

Government records and statistics (census and other data bases,

tax records, social security, economic data).

Scientific and technical (social science data bases, engineering

calculations, modeling of complex systems).

Medical records.

Airline reservations.

Point-of-sale terminals, electronic cash

Communications and control

Multiplexing and transmission of voice

Telephone exchanges.

Private exchanges (PBX, PABX).

Facsimile transmission.

Teletext, viewdata.

Air traffic control.

Military systems

Signal processing (radar, sonar).

Navigation

Fire control.

Flight control.

Industrial systems

registers.

and alphanumeric data.

Batch process control (machine tools, assembly robots, heat

treating, materials handling, steelmaking, typesetting).

Continuous process control (petroleum refining, rubber and

synthetic fibers, basic chemicals, paper products, foods).

Computer-aided design.

Energy production, conservation and control (turbine startup,

electric utility load management, process heat, building heating,

ventilation, and air-conditioning).

Environmental monitoring and pollution control.

Education and training (computer-assisted instruction).

Measurement and testing (medical diagnostics, nondestructive

inspection, chemical analysis).

Office automation

Word processors.

Copiers.

Calculators and accounting machines.

Consumer products

Automobiles (engine control, driver information, diagnostics).

Home entertainment (electronic and video games, personal

computers).

Appliances (refrigerators, microwave ovens, sewing machines).

Thermostats and environmental controls.

Calculators.

Cameras.

Electronic watches.

Mainframe, mini, or micro, depending on size of

business.

Mainframe.

Mainframes for batch and interactive processing;

micros and minis for laboratory automation as

well as specialized applications such as modeling chemical reactions.

Mini or mainframe.

Mini or mainframe.

Micro, but may be part of distributed system.

Varies.

Mainframes.

Micros and minis.

Minis and micros.

Micros.

Mainframes.

Mainframe or mini, depending on need for portability.

As above, or micros.

As above, or micros.

Micros.

Minis and micros.

Mainframes and minis.

Mainframes and minis.

Varies.

Minis and micros.

Varies.

Minis and micros.

Micros and minis

Micros.

Micros.

Micros.

SOURCE Office of Technology Assessment

applications is striking. In fact, it is difficult computer was incorporated. 28 Some observers

to think of manufactured products or processes have predicted that a typical home will conthat could not use computing power in some tain a dozen or more computers by the 1990’s

form. In a recent 35mm camera design, the

number of mechanical parts dropped from “’’Canon’s Fujio Matarai: Strate~i~s for the CJ. S. Market, ”

nearly 1,300 to 900 when a single-chip micro- World Business tV’eek]~, Oct. 19, 1981, p. 20.
92 ● International Competitiveness in Electronics

—a proliferation often compared to that of the

fractional horsepower electric motor, Limitations on such new and specialized applications

often stem from software engineering problems

or total system hardware cost—but seldom the

cost of the computing power itself. For example, to extend the use of microprocessors in

automobiles to nonskid braking systems is possible, even straightforward, from an engineering standpoint, but nonetheless expensive—

primarily because of the cost of the sensors and

actuators required. On the other hand, the design of a practical collision avoidance system

for ordinary driving is still limited by engineering problems that, broadly speaking, can be

considered software. It is quite difficult to

develop algorithms for unambiguously detecting collision hazards, and for adapting the output of a collision hazard identification system

to the controls facing the human operator—

steering wheel, accelerator, brakes.

Summary and Conclusions

Electronics technology—used for transmitting and manipulating information via electrical signals-has been evolving from analog

toward digital, driven in the broadest sense

by applications of computing power. Digital

communications have advantages over analog,

and as both computing and communications

have moved toward digital technologies, the

semiconductor industry has been called on to

provide new kinds of building blocks, Even in

the consumer electronics industry, digital

equipment is being developed.

Although new products such as video cassette recorders and video disks have reached

the marketplace in recent years, consumer electronics technologies move slowly compared to

semiconductors or computers. Commercial

viability depends on consumer appeal, which

can come from technology but also from many

other sources. The success of the Sony Walkman—a personal audio tape player—is more

the result of a good match between the marketplace and the engineering development laboratory than of new technology. Coming generations of consumer electronics products—e.g.,

integrated home entertainment systems—-will

continue to stand or fall on product design and

marketing, with technology as only one dimentor radio—and extending to the digital technology embodied in video games, pocket calculators, and electronic watches—products that

people see and use every day are practical only

because of semiconductors. As microelectronics technology has progressed from discrete

transistors to small-scale ICs and then very

large-scale circuits, new applications in electronic systems of all types have emerged. The

growth of the computer industry has followed

advances in semiconductors, as have military

applications ranging from missile guidance to

war gaming,

VLSI has brought forth the “system-on-achip”--a prime example being the single-chip

microcomputer. While one IC can now accomplish more than a room full of computing

equipment three decades ago, microprocessors

and microcomputers are also used in large

numbers for quite different purposes—namely

for replacing “hard-wired” logic, Engineers

can trade off the hardware costs of custom

design and manufacture against the software

costs of developing programs to be permanently stored in the memory associated with a dedicated microprocessor or microcomputer. The

programed logic can then control a microwave

oven or fly an airplane.

sion. With advances in density and performance

have come higher costs for IC design, and for

Still, the products of the consumer electron- the sophisticated processing equipment needed

ics industry have been transformed by semi- to make VLSI devices. These have driven the

conductor devices. Beginning with the transis- capital requirements for entering the semicon-
Ch. 3—Electronics Technology ● 9 3

ductor industry upward; firms striving to compete at the leading edge of the technology now

depend on both computer-aided circuit design

and computer-aided process control. In semiconductor processing, as in the development

of computer software, fundamental understanding from the viewpoint of engineering

science has lagged practice. Semiconductor

fabrication is an art, as is programing, Putting

these two technologies on firmer underpinnings will be critical for avoiding future bottlenecks in the development of the semiconductor

and computer industries.

As digital computers evolved they grew bigger in processing power, smaller in size. The

range in size and capability of digital computers is now truly awesome—from single-chip

microcomputers costing $100, to supercomputers like the Cray-1 that operate at speeds limited in a very real sense by that of light (because

electrical signals propagate at speeds that can

be no greater, and the time to move signals

within the processor limits computational

speed). At the same time, the seemingly mundane problem of transferring the heat dissipated in the chips out of the system is one of

the critical elements in the design of a highperformance machine.

Applications of computers have sometimes

been driven by the availability of the technology, and its continually decreasing costs,

sometimes by newly recognized needs—forces

that interact continuously. A great deal of techPhoto credtt Cray Research

Central processing unit for a supercomputer

nical ferment is presently centered on software

of all types, Markets for small computers—intended for personal use as well as applications

in business and industry—are expanding rapidly. The most pervasive trend is the widespread

distribution of intelligence to the points where

needed. Machines of all types are getting

smarter and more specialized, and computers

(including microprocessors) already outnumber people in industrialized countries like the

United States.

Appendix 3A.— Integrated Circuit Technology

Types of Integrated Circuits

Table 3A-1 outlines some of the principal

varieties of ICs.

As table 3A-1 indicates, ICs come in two major

varieties: MOS and bipolar. Many small- and

medium-scale circuits are bipolar, as are some LSI

chips, but over the course of the 1970’s MOS technology became dominant for LSI. Bipolar chips are

less dense than MOS, typically by factors of about

four—i.e., transistors and other circuit elements

cannot be located as close together; they also consume more power—one of the reasons that the circuit elements cannot be packed more closely is the

need for heat dissipation. The greater number of

circuit elements that can be placed on a given area

of silicon using MOS technology often leads to

significantly lower costs. By contrast, the chief advantage of bipolar technology has been high operating speed. However, the speeds of MOS ICs have

been improving more rapidly than the speeds of bipolar devices. Where high speed is critical—as in
94 ● International Competitiveness in Electronics

Table 3A-1 .—Common Terminology and Classifications of Integrated Circuits

.—— —

Assembly

Monolithic--all circuit elements fabricated on a single semiconducting substrate (usually silicon).

Film—conducting layers are deposited on an insulating substrate to form the circuit.

Hybrid—combines several ICs and/or discrete transistors in

a single package, often using film technology for components and interconnections.

Input-output Characteristics

Analog (also called Iinear)—levels (e.g., voltages) of input and

output signals vary continuously over a range.

Digital—input and output signals have values limited to either

of a pair of nominally discrete values (e.g., voltage levels

of O or +5 volts).

Transistor technology

Bipolar—conduction takes place through motion of both electrons and holes (a hole is an electron vacancy—the absence

of an electron where one would ordinarily be; the same current can be carried by electrons moving in one direction,

by holes moving in the opposite direction, or by a combination of electron and hole motion); control of the transistor

is through a current signal.

MOS (metal -oxide-semi conductor)— MOS transistors are unipolar rather than bipolar; conduction is by either electrons

or holes, but not both, and the transistor is controlled by

an impressed voltage (MOS transistors are actually subsets

of the broader class of field effect transistors (FETs), but

the MOSFET is by far the most common type of FET).

Digital device applications

Logic circuits— both bipolar and MOS ICs are used for digital

logic circuits; the logical operations are performed by arrays of gates, each of which implements a Boolean function such as AND, OR, NOR, NAND; the gates themselves

consist of groups of circuit elements typically including

one or more transistors plus resistors and capacitors.

Bipolar transistors can be grouped by logic families such

as TTL (transistor-transistor-logic) and I2

L (integrated-injection-logic), the names of which characterize the gate

circuitry.

MOS circuits are classed somewhat differently; n-MOS,

the most common, refers to circuits using “n-channel”

MOSFETs, where the current is carried by electrons, p-MOS

to “p-channel” technologies where the current is carried

by holes, and c-MOS to “complementary” MOS where nand p-channels coexist in the same IC.

Microprocessors—digital logic circuits that can serve as

processing units for digital computers—i.e., can execute

programs; most microprocessors are MOS ICs.

Microcomputers— ICs that contain a processing unit plus

memory circuitry.

Memory--lCs that can store digital data in an array of logic

gates, each storage location containing a “bit” of binary

(“O” or”1”) information; the number of bits stored in a single IC presently ranges up to more than 64,000 (in a 64K

random access memory (RAM)). (See table 3A-2 for more

detail on memory circuits. Some types already have higher

capacities than the 64K RAM.) Most memory chips are MOS

ICs.

Circuit density

Levels of integration, or packing density, for ICs are grouped

by order of magnitude of the number of devices on a chip.

Discrete—single individual y packaged active device—e.g.,

a transistor.

Small-scale integration (SSI)—refers to ICs with of the order

of 10 active devices.

Medium-scale integration (MSI)— ICs containing of the order

of 100 devices. The simplest gates used in dynamic random access memory (RAM) chips consist of one transistor

plus one capacitor, and IC density is sometimes referred

to in terms of gates per chip rather than devices per chip.

Because some gate designs use several active elements,

devices per chip is more meaningful.

Large-scale integration (LSI)–lCs with roughly 1,000 to 10,000

or more devices. A so-called 1 K RAM can store 210 or 1,024

bits of digital information. Each memory cell includes at

least one gate. Thus, a 1 K RAM, which needs other devices

for getting the bits into and out of the chip, is an LSI circuit. So is a 4K RAM, which includes about 5,000 devices.

16K RAMS (close to 20,000 devices) are usually considered

LSI circuits, with 64K RAMs (216 or 65,536 memory cells,

plus several thousand devices for getting the bits into and

out of the chip) the lower end of very Iarge-scale integration.

Very large-scale integration (VLSI)—ICs containing of the

order of 100,000 devices. In addition to 64K RAMS-which

entered mass production during the late 1970’s—other VLSI

devices include 16-bit microprocessors such as the

Motorola 68000, which contains about 69,000 devices. By

1982, the densest circuit produced was a microprocessor

built by Hewlett-Packard with 450,000 devices. Pilot production of next generation RAMs—256K chips—began during 1983. ICs containing on the order of a million devices

will probably be given a name such as ultra large-scale

integration.

—-

SOURCE: Office of Technology Assessment

processors for large computers—bipolar ICs remain

the technology of choice. For consumer products

such as calculators and watches, for primary read/

write memory in computer systems, and in other

applications where cost is more important than

speed, MOS is generally specified. Some of the

distinctions between bipolar and MOS technologies

may blur and disappear as IC technology continues

to advance, with much of the impetus for such developments likely to come from R&D efforts focused on improvements in MOS.

A principal application of bipolar chips is digital

logic; bipolar logic circuits are often used in conjunction with MOS microprocessors and memory

circuits as parts of complex systems including

many ICs. There is considerable demand for bipolar small- and medium-scale devices that can serve

as universal building blocks; here, their low pack-
Ch. 3—Electronics Technology ● 9 5

ing density is not necessarily a handicap. The great

majority (perhaps 90 percent) of standard bipolar

logic circuits belong to the TTL—or transistor-transistor logic—family (table 3A-l). Typical examples

of small- and medium-scale TTL circuits would be

counters, buffers, and digital/analog (D/A) or

analog/digital (A/D] converters. Buffers store strings

of binary data for short periods of time; they are

used to adjust and coordinate data rates between

different parts of a system. D/A and A/D converters

serve as interfaces with analog components that

provide input signals to the system or receive its

output. A common output device is a cathode-ray

tube, which must be driven by an analog signal and

thus depends on D/A converters when fed digital

information from a computer or word processor.

A/D and D/A converters are also used in conjunction with many types of sensors and actuators (a

familiar example of a sensor is a thermometer; an

electric motor can function as an actuator).

How Microprocessors Work

A typical microprocessor is an MOS IC including

an arithmetic logic unit, several registers, control

logic, and paths for moving data among these (fig.

12). Within the arithmetic logic unit, groups of

binary bits called words (or bytes) are added and

subtracted by moving and manipulating the

strings of bits among the registers. These operations

are all performed on numbers represented in binary

form; the conventional decimal (base 10) number

6, for example, is written in binary (base 2) as 0110.

In a 4-bit microprocessor, the standard word consists of 4 binary bits; an 8-bit microprocessor has

a word length of 8 bits. In general, the longer the

word, the faster and more powerful the microprocessor—but also the higher the costs for programing and system development, as well as for production or purchase. Four-bit microprocessors are

suited to inexpensive pocket calculators or controlling a simple system like a microwave oven. Microprocessors with longer word lengths are used for

more demanding applications. The most complex

microprocessors now in common use have 16-bit

words; 32-bit chips will follow. Large mainframe

computers such as those produced by IBM are typically designed around words having 32 or more

bits.

The control logic in a microprocessor [fig. 12) regulates the flow of binary information within the

chip. Many microprocessors include a clock that

synchronizes the operations performed, although

sometimes a separate clock chip must be provided.

The faster the clock speed, the faster the microprocessor can manipulate information, everything else

equal, Typical 8-bit microprocessors operate at

clock speeds in the range of 5 MHZ—5 million

cycles per second—which does not mean that they

can perform computations at this rate. The various

instructions that the microprocessor carries out

normally take several clock cycles, and the logical

operations that these implement depend on the instruction set—more generally, on the architecture

of the processor. These features of the design determine the permissible ways that binary data can be

manipulated. The tradeoffs involved in defining the

architecture and instruction set for a microprocessor mean that some microprocessors perform certain kinds of tasks faster or with simpler programing than others. But because all the binary operations performed in the arithmetic logic unit are

primitive, a microprocessor with a clock rate of 5

or 10 MHz executes functions such as subtraction

or multiplication at rates which are only a small

fraction of this.

The microprocessor must also be able to pass binary information back and forth to chips that provide memory, A/D or D/A conversion, and a variety of specialized functions. This is done through input/output (1/0) ports, The circuit paths along

which the bits travel are called buses (fig, 12). As

implied, a microprocessor cannot function by itself,

but must be supported by other circuitry. As a minimum, the microprocessor has to communicate

with a memory sufficiently large to hold the program being executed, (A single-chip microcomputer includes on-chip memory for program

storage, in contrast to a microprocessor, which

does not have built-in memory.) The program itself

consists of a set of instructions, coded in binary

form, which tell the processor how to manipulate

the bits in its registers, The processor uses an address to fetch the appropriate information from

memory or to send information back to memory

locations. Likewise, 1/0 buses and ports have

associated addresses. Many of the operations performed by the processor are simply matters of getting the string of bits into or out of the registers.

In addition to memory, a microprocessor must

be connected to a power supply, and it often communicates with external devices—e.g., sensors or

transducers that generate electrical signals corresponding to the magnitude of parameters such as

temperature, position, or pressure. Usually the

transducer output is an analog signal—for example, a resistance thermometer produces a continuously variable voltage—and an A/D converter must
96 International Competitiveness in Electronics

be interposed. This can be built into the transducer–some microcomputers are also available

with built-in A/D and D/A converters—but is usually an independent circuit. A/D converters (and D/A)

tend to be limited in speed and precision; they are

also expensive—a single converter may cost more

than the microprocessor it is used with.

Peripherals are information-handling equipment

external to the central computer, whether it be a

microprocessor or a larger machine. Examples of

peripherals are bulk memory (in the form of arrays

of IC chips, or magnetic disks and tapes), terminals

(typically keyboards with or without CRT display

screens), and printers. Interfaces are generally

needed to allow a microprocessor or computer to

communicate with the peripherals. While in the

past, most interface circuits were custom-designed

from SSI and MSI chips, LSI parts are now available in standard form to implement common functions such as interfacing with and controlling a

CRT terminal. Typically, interfacing is much more

demanding from a software than from a hardware

standpoint.

Memory Circuits

Microelectronic devices–generally ICs–that

store information in binary form come in many

varieties, as outlined in table 3A-2. Declining prices

for RAMs, in particular, have led to rapid increases

in demand for applications in computer-based systems of all types. As specialized memory chips—

for instance, erasable-PROMs—become cheaper

and easier to use, still more applications for

microprocessor systems will open.

How Integrated Circuits Are Made

Circuit fabrication begins with a silicon wafer

sawn from a carefully grown cylindrical crystal.

The wafer itself is a fragile disk, as thin as 0,010

inches, on which hundreds of ICs will be simultaneously created before being cut apart into individual

chips. Although a few large manufacturers grow

their own crystals, most semiconductor-quality silicon is produced by independent firms. The composition—particularly the oxygen content—must be

carefully controlled, as must the flatness of the

wafers, which is critical for high yields in the subsequent lithographic processing. At present, the most

common wafer diameter is 4 inches. Bigger wafers

reduce production costs because more circuits can

be made at once; therefore, as IC fabrication technology advances, wafer diameters tend to grow.

Table 3A-2.—Principal Types of IC Memory Circuits

Designation/Function

Read-only memory (ROM): Contents are permanently stored

during manufacturing; memory can thereafter be read but

not altered. Commonly used for program storage in microprocessor-based systems, the memory contents in a ROM

are normally determined by the masking patterns used in

fabricating the circuit (IC manufacture is described in the

next section).

Read-write memory (RWM): Memory contents can be written

over and changed, as well as read. Applications include

storage of data, output, programs, and other general memory requirements.

Random-access memory (RAM): Common name for IC readwrite memory chips. Strictly speaking, random-access

means only that any particular memory cell can be addressed directly and the contents retrieved. By this meaning, ROM chips, for example, are also random-access.

Nonetheless, in common usage the term random-access

or RAM now applies only to read-write memory.

In contrast to IC RAMs, a bubble-memory device is not

random access because data is stored in a string of magnetic bubbles which can only be read or written sequentially by passing the string through a detector until the

desired address is located. The time to access any memory

location in a RAM is nominally the same; in a serial device

such as a bubble memory, the time depends on where in

the string the memory location happens to fall with respect

to the detector.

RAM circuits can be static or dynamic. The basic difference is that dynamic RAMs store data in memory cells that

rely on capacitance. As the charge gradually leaks off

capacitors, they must be “refreshed” several times a second by a voltage pulse. (Many microprocessors provide

built-in refresh capability because the need is so common.)

Static RAMs, in contrast: do not require refreshing; each

cell will retain its contents as long as power is supplied

to the chip.

Both static and dynamic RAMs are volatile memory

devices. This means that their contents are lost when electrical power is removed. In contrast, magnetic tapes or

disks are nonvolatile because they retain the data stored

whether or not supplied with power. Bubble-memory

devices are nonvolatile, as are ROMS and magnetic core

memory.

Programmable read-only memory (PROM): ROMs with memory cells in which data can be stored after manufacture are

called—in contrast to a ROM—PROMS. Some PROMS are

permanently programed by a process analogous to blowing fuses, after which the contents of the memory cells cannot be altered. In other types, the contents of the cells can

be erased—e.g., by exposing them to ultraviolet light—

and then rewritten. PROMS are widely used in system

development—i.e., preparing the software on which a

microprocessor-based system functions—as well as in low

and medium volume production applications.

In a typical development project, software is stored in

PROMS for testing and debugging. Once the software functions properly, and the system is ready for production, programs might continue to be stored in PROMS, which would

be programed during the manufacture of the system. Alternatively, they could be transferred to ROMs. The choice

between PROM and ROM is a matter of manufacturing cost.

PROMS are generally cheaper in small volume production,

ROMs at high volumes.

SOURCE Off Ice of Technology Assessment
Ch. 3—Electronics Technology 97

Limitations centered around wafer flatness and

lithographic capability prevent more rapid movement toward large wafer diameters. -

After polishing, an epitaxial layer is sometimes

grown on the wafers, followed by heating in a furnace to produce a layer of silicon dioxide, Oxidation produces the insulating layers that separate

various parts of the circuit from- one another, Portions of the oxide layer are later selectively etched

away, leaving windows open to the silicon beneath.1 As well as isolating various parts of the circuit from one another, the oxide serves to protect

parts of the wafer from dopants during diffusion

or ion bombardment (see below).

IA. R. Reinberg, “Dry Processing for Fabrication of VLSI Devices,”

VLSI Electronics: Microstructure Science, vol. 2, N. G. Einspruch (cd.)

(New York: Academic Press, 1981), p, I,

In preparation for lithographic pattern formation

(illustrated earlier in fig, 8), the wafer is next coated

with a thin layer of photoresist—a material analogous to a photographic emulsion which changes

chemically when exposed to light (or occasionally,

beams of electrons, X-rays, or ions—the latter mostly in laboratory stages of development, as indicated

below). The masking and lithographic steps must

create the same patterns many times over—figure

3A-1. Masks are typically glass, carrying a grid-like

pattern of aluminum or chromium so the mask is

transparent to radiation in some areas, opaque in

others. SSI and MSI circuits can be made with

masks containing hundreds of identical patterns,

one for each IC; the entire wafer is then exposed

at once. While such a procedure is fast, it cannot

produce the narrow lines needed for VLSI; instead,

Figure 3A-1.— Silicon Wafer Showing Patterns Formed by Photolithography

\

Photo credit. General Mofors Corp
98 . International Competitiveness in Electronics

the step-and-repeat approach diagramed in figure

8 is commonly adopted. The mask—which maybe

10 times the size of the image on the wafer—creates

patterns for only one circuit at a time, after which

the wafer is “stepped” beneath the mask and lens.

As this process is repeated, a series of identical images in the resist layer is created. The equipment

must precisely position and aline the wafer.

Exposure to light or radiation chemically alters

the polymeric photoresist. The next step is to dissolve away those portions of the photoresist that

have been exposed, creating a pattern identical to

that carried by the mask—or, alternatively, to dissolve away those portions that were not exposed.

The purpose of creating patterns in the resist is to

permit selective etching and doping through the

windows that remain. Etching is used to dissolve

away material—e.g., portions of the oxide layer—

accessible through these windows. In addition to

removing oxide, sections of metal layers that have

been deposited earlier can be etched away. The

metallic layers—fabricated by processes called

metallization—produce electrically conductive

paths to interconnect circuit elements. Doping

refers to the controlled introduction of foreign

elements for altering the conductivity of the silicon.

The dopants—e.g., boron, phosphorus—enter the

silicon via diffusion or ion bombardment.

During the steps described above, termed wafer

fabrication, the entire wafer is processed as a unit.

While wafer fabrication can be automated, hand

labor is still common; even with automation, the

human element is just as important to high yields as

the equipment used. When the steps which create

the electronic devices and interconnections within

each circuit have been completed, the circuits are

individually tested—before separation from the

wafer—via probes that make input/output connections. Circuits that fail these tests are marked and

discarded when the wafer is sawn or broken apart

to separate the individual chips. Each good chip is

mounted on a chip carrier, which includes pins or

prongs for connections to external circuitry, then

packaged. An encapsulated IC is shown in figure

3A-2.

By far the largest fraction of defective circuits—

hence yield losses—are uncovered at the conclusion

of wafer fabrication. These often originate with

mechanical flaws such as dust particles settling on

the resist, pinholes in the mask, improper spacing

of devices so that adjacent circuit elements interfere

with one another, or oxide layers that are too thin

to provide the necessary insulation, Most such

flaws originate in lithography; as the overall size

of the chip increases, the probability that it will con-

‘I!b

Photo credits: /r?fe/ Corp

tain a flaw also rises. This is one of the pressures

that leads to greater levels of integration—i.e., making the devices and interconnections on the chip

physically smaller, rather than making the chip

itself larger, A variety of tradeoffs exist; as chip

size increases the yield tends to decrease, but the

chip can contain a greater number of functions.

When 16K RAMs were coming into mass production, balancing these factors pointed to a chip that

was 7 to 8 millimeters square; this gave yields in

the range of 20 percent and minimized costs.2

Beyond the testing that occurs when the wafer

is probed before sectioning lie other inspection and

testing steps ranging from visual inspection to functional performance checks after the chip has been

~], A. Rajchman, “New Memory Technologies,” Science, Mar. 18, 1977,

p. 1223,
Ch. 3—Electronics Technology ● 9 9

packaged. As ICs become more complex, such

tests—many of which are performed under computer control—also become more complicated and

expensive. It may be impractical, for instance, to

check each memory cell in a large RAM or ROM

under conditions that simulate actual operation,

much less check all the possible operating states of

a VLSI microprocessor. * Algorithms and sampling

procedures are used to shorten testing while exercising circuits in realistic fashion. As integration

levels increase, designers have greater incentives

for building test logic onto the chip to make it selftesting. A parallel trend is to add redundant circuit

elements that can be called into play in the event

of partial failures.

The lithographic processing described earlier is

now done mostly using light. Sometimes critical circuit layers are defined by electron beams, and electron-beam lithography is also used for making

masks; in either case, a narrow (micrometer width)

beam of electrons “writes” directly on a resistcovered wafer or glass substrate (for mask-making),

much as the beam in a cathode-ray tube writes on

the phosphor-covered screen. This process is inherently slower than focusing a broad beam of light

through a mask to expose the entire chip at once.

Moreover, the throughputs—in terms of wafers per

hour (table 2)—that can be achieved with electron

beam systems are limited by the characteristics of

the available resists. Chemical resists that are sensitive to exposure by electron beams require lengthy

—.

● A 16K RAM can take on 2‘h 3W different loglcal states—an immense

number, nearly 105 ‘“”) Fortunately, the only likely interactions between

memory (ells involve those ad ]acent to one another, pra[;tical ways do

exist to determ I ne whether turning “on” one cell will affect data stored

near It ‘[’he problem 15 much more complicated for microprocessors or

random Iogi(; ( hips, whlc h lack the regular, repetitive structures

character ]st]c of memory.

exposure times, limiting the speed at which the

electron beam can write. Electron beams are not

the only alternative to light. Among the other candidates are X-rays and ion beams.3 X-rays have

potential advantages in throughput compared to

electrons because area exposure through a mask is

possible. Unfortunately, intense X-ray sources are

not widely available; as for electron beams, resists

that can be exposed with X-rays are relatively insensitive, and require long exposures unless the

X-ray intensity is high. One source is a synchrotron ring, as used for research on the structure of

matter—a very expensive piece of equipment.

Although synchrotron-based lithography for fabricating ICs would be even more capital-intensive

than electron-beam lithography, the potentials of

X-rays have stimulated considerable R&D. X-ray

lithography is likely to become a production tool

in the future; electron-beam equipment is already

available, and X-rays may move out of the laboratory by the late 1980’s. Ion beams have received less

attention thus far, but might be able to give resolutions—hence line widths—considerably smaller

than either electrons or X-rays.4 R&D in high-resolution lithographic techniques has been a principal

target of government-funded programs in other

countries—e.g., the VLSI project in Japan—as well

as the VHSIC program funded by the U.S. military.

3M. P. Lepselter and W T I.yn(. h, “Resolution Llmitatlons ]n SL]l)-

mlcron lithography, ” \’1.S1 Electronics’ ,Wi[.restructure ScIenCw, \ol 1,

OP. c it , p. 83, R. K Watts and J R Maldonado, ‘‘X-Ray l,lthogra[)hy,,

1’LS’I .Electron]cs. Af]crostru[; ture Scienre, VOI 4, N. G Elns[)ru, h [td )

[New York: Academic Press, 1982), p 55

‘M P. I,epselter, “Submicron L.ithograpb} –L]mlts of Resolution, ” Fre

~:eed1ng5, NSF Workshop on Opportur]]t~es for ~!fi(’rc)strl)[-t[lr(]s Jrl

%ience, Engineer~ng and Techno/og~, Alr]le, [’a., h’o~’ 1 {1-22, 1978, p.

187.

Appendix 3B.—Computer Memory

Computer systems make use of different kinds of

memory or data storage for different purposes.

High-speed cache memory—figure 13 (p. 85)— provided in more powerful computers typically consists of bipolar RAM chips. As figure 3B-1 indicates, these give the fastest practical access times—

needed, for instance, for buffering between the

main memory and the central processing unit

(CPU). Main or primary memory–for storing programs, along with the data being manipulated—

generally consists of MOS RAM chips. As figure

3B-1 shows, MOS RAMs are considerably less expensive than bipolar RAMs, though not as fast. A

typical IBM model 370/168 mainframe—a large,

general-purpose data-processing computer—might

have a main memory capacity of 6 megabytes. A

byte is equal to 8 bits; thus, the main memory

capacity consists of 48 X 106 bits—which would require 3,000 16K RAM chips. In contrast, the cache

memory for this machine holds 32 kilobytes, or a

little over a million bits. The access time for the

bipolar cache memory is 80 nanoseconds (80 x
100 ● International Competitiveness in Electronics

100

10

1

Figure 3B-1 .—Performance of Computer Memory Alternatives

I

MOS

and

RAM

core

\

MOS

ROM

Ietlc bubbles

head disk

Tape

cassette

Automate d

tape file

cartridge L

(medium only)

Access time, seconds

SOURCE G C. Feth, “Memories Smaller, Faster, and Cheaper, ” /EEE Spectrum, June 1976, p 36
Ch. 3—Electronics Technology 101

Photo credlf Ted Spiege/, 1983

Disk pack for computer data storage

10-9 seconds)—corresponding to the cycle time for

the 120,000 logic circuits in the CPU—compared

to an average of 400 nanoseconds for the MOS

main memory.l In earlier years, primary memory

consisted of magnetic cores (table 3B-1, also fig.

3B-1), wound wire magnets for which the direction

of magnetization corresponds to a “O” or a “l. ” By

the mid-1970’s memory chips had become cheaper

than magnetic cores, largely replacing them except

for nonvolatile storage.

IC RAMs are generally supplemented by magnetic disks of various types—table 3B-1. These can

store large amounts of information inexpensively;

they also provide a form of random access, but are

much slower than IC or magnetic core memory (fig,

3B-1).2 Magnetic tapes are slower yet, but cheaper;

large data bases, or records that must be retained

for long periods of time, are often stored on tape.

In the future, archival storage may be even

cheaper using optical disks. Similar to the Philips

video disk, a laser-scanned optical disk about the

size of a phonograph record could hold more than

1010 bits of information.3 The 20 million books in

the Library of Congress could in principle be stored

on 7,000 such optical disks.4

1 W. Anacker, ‘‘Computing at 4 Degrees Kelvin, ” IEE~” Spectrum, May

1979, p 25.

‘See, in general, R. B. J. Warnar, P. J. Calomeris, and S. A. Recicar,

Computer Peripheral Memory System Forecast, National Bureau of

Standards special publication 500-45 [Washington, D. C.: Department of

Commerce, April 1979),

3K Bulthuls, et al , “Ten fld]ion Bits r)rr a Disk, ” IEEE Spectrum, August

1979, p 26.

4See L. M Bran~[.omb, “Future Computer, ” Across the Board, March

1979, p 61, who estimates that the hooks in the Library of Congress are

equ I\, alent to ahout 70 X 1012 hits,

Table 3B-1.—Computer Memory

Magnetic core: Small wire-threaded toroids are switched between binary states (“O” and “1”) by reversing the direction of magnetization. Developed during the 1950’s, and

now largely replaced by MOS RAMs, magnetic cores were

the first inexpensive computer memory that offered fast

access times (i.e., microseconds).

Semiconductor: While computer memory could in principle

be designed and built using discrete transistors, this would

have been much more expensive than magnetic cores. Only

when MOS integrated circuit RAMs became avaiIable at low

cost in the early 1970’s did semiconductor memory come

into widespread use. By the mid to late 1970’s, ICs had

become the technology of choice wherever relatively high

speeds were called for. Other solid-state storage technologies —e.g., magnetic bubbles—have yet to prove competitive for computer memory.

Magnetic tape: First used with the Univac I in 1951, tape

memories are relatively slow but provide inexpensive

storage for large amounts of data. The tape is read or written by a recording head much as in an analog audio or video

recorder; 1/2 -inch tape drives recording on either seven or

nine tracks are common.

Magnetic disk: Digital data can be stored magnetically on

rigid or flexible disks. Magnetic drums are also used in

specialized applications.

Rigid disks, introduced in 1956, consist of a metal platter coated with a magnetic medium. The disk surface is

divided into tracks, which are read and written by a head.

In some disk drives, the head is fixed, while in others it

moves with respect to the disk surface. Access to particular

blocks of data is much faster than for a tape, which must

be scanned sequentially.

Removable, or cartridge, disks remain the most common

variety of rigid disk, but hermetically sealed ‘(Winchester”

drives have also been widely accepted. These can store

more data on a disk of given diameter, and are relatively

inexpensive, but the disk media cannot be removed for archival storage.

Flexible or floppy disks are made from mylar (a plastic).

In function they are similar to rigid disks, but have much

lower storage density; they are inexpensive as well as easy

to handle and store

SOURCE Office of Technology Assessment
102 International Competitiveness in Electronics

Appendix 3C. —A Process Control Example

Many of the illustrations of computer applications given earlier in table 7 involve multiple processors, either networked or in distributed processing systems. Typical examples include electronic

mail or a word processing system with a minicomputer supporting several work stations, Multiple

computers are also common in process control. Figure 3C-1 diagrams a portion of the control system

for a chemical plant that converts petroleum feedstocks into products like ethylene and butadiene—

the latter, in turn, feedstocks for making plastics.

Sensors measure parameters such as temperature,

pressure, and chemical composition on a continuous basis and send electrical signals to the process control computer. This computer employs a

process model and control algorithm—the latter a

program that compares the sensor outputs to target

values and calculates appropriate adjustments—to

monitor and regulate the process in real time. As

such, it is a typical example of a feedback control

system built around programmable logic rather

than hard-wired controllers, Future process control

systems will incorporate distributed logic to a

greater extent, including smart sensors and actuators, and local controllers linked through networks.

Included in figure 3C-1 is an orifice for measuring flow rate, along with a flow-control valve. The

transmitter sends a signal—in this case a voltage

proportional to pressure drop across the orifice

plate—to the control instrument, which converts it

to a flow rate (e. g., pounds per minute). To do so,

the control instrument logic must include the relationship between voltage and pressure drop, and

the relationship between pressure drop and flow

rate—the latter depending on the characteristics of

the orifice, In the past, a control loop of this type

would normally have relied on analog technology—perhaps even manual readings and adjustments. Now, hard-wired analog systems can be

replaced by microprocessor-based digital controllers which are not only much more flexible but

also more precise.

The controller in the figure could have a display -e.g., a panel meter—for the plant operators

to read, but its primary function is to transmit flow

rate data on a continuous basis to the process control computer. This computer monitors many such

instruments that read temperatures, pressures,

chemical compositions, liquid levels, and other

process parameters and adjusts the process according to the control algorithm. In this example, if the

flow rate was too high, the computer would return

a signal commanding a lower value. The control

instrument would convert this to a message that

would close down the valve.

In addition to sensors, a typical process control

system also includes a number of interlocks analogous to safety valves. If the pressure or liquid level

in a reaction vessel or distillation column exceeded

preset limits—indicating that the process was out

of control, and that the computer had been unable

to return the system to the desired condition—the

system would automatically shut down so that the

plant operators could diagnose the problem, Feedback loops and interlocks improve the control over

the composition of the product, as well as helping

to maximize yields, efficiency, and safety of operations. Redundancy, reliability, and a system design

that allows the plant operators to take manual control quickly and directly in the event of system failures are critical requirements.

The process-control computer—still in figure

3C-1—can also gather, analyze, and report information on a continuing basis, transmitting it, for example, to the office computer. Once stored, it

becomes available for purposes such as recordkeeping or analysis by the engineering department,

along with information from the group of other

process-control computers spread over a large

chemical plant. The instrument CRT in the figure

permits a remote operator to monitor a group of

control instruments, while the computer CRT is the

primary 1/0 device for the plant technicians. The

analyzer computer provides off-line modeling and

analysis of the process as necessary.

Despite the considerable sophistication of systems like that shown in figure 3C-1, and the further

advances expected in the future, some engineers

are less than optimistic about the prospects for

fully automated plants and factories–where the

human operators would be out of the control loop

except in emergencies, their usual responsibilities

limited to oversight and maintenance. Computerized process control is a field where progress has

seldom lived up to expectations; reliability has been

a particular problem, and the software available has

seldom permitted systems to perform up to the levels promised by hardware developments.1 The

—..———

‘] ] Casso, “Developing a Successful Prm,uss (J[)r[]putcr Systvrr], ” ,ldt :~n[;ci {n com~u (Pr ‘1’e(. hn{~][~gj;-- 1980, \ U[ z (h’[’!\ }’[]rk ,1 [ncr]{ ,in

SIN i[;tf of ~fw tldnl(,dl Erlgirleer5, 1 980), p 10 9
Ch. 3—Electronics Technology ● 103

Three Mile Island nuclear powerplant accident pro- definition system failures—if the process algorithm

vides a good example, Total reliance on a com- were adequate, and the system sufficiently robust

puterized system for controlling a nuclear (or to withstand equipment failures, control would not

nonnuclear) powerplant was then—and is still—im- be lost. When system control is lost, human operpossible. Processes that go out of control are by ators must intervene,

Figure 3C-1.— Portion of Process Control System for a Chemical Plant

T [ I

— . — — — — — — — ——— ————
CHAPTER 4

Structure and Trade in the

International Electronics Industry

Contents

Page

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

The U.S. Electronics Industry: Introduction 108

Consumer Electronics. . . . . . . . . . . . . . . . . . 112

The United States, With Particular Attention

to Color Television . . . . . . . . . . . . . . . . . . 112

The Japanese Consumer Electronics Industry 119

Consumer Electronics Industries in

Western Europe . . . . . . . . . . . . . . . . . . . . . 123

Consumer Electronics in Other Parts

of the World . . . . . . . . . . . . . . . . . . . . . . . . 126

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . 129

The Semiconductor Industry in

the United States . . . . . . . . . . . . . . . . . . . . 130

Semiconductor Manufacturing in Japan . . . 137

The Semiconductor Industry in Europe. . . . 141

Semiconductor Manufacture Elsewhere. . . . 143

Semiconductor Manufacturing Equipment . 144

The Computer Industry . . . . . . . . . . . . . . . . 145

The Computer Industry in the United States 145

Computer Industries in the Rest of the World 150

Summary and Conclusions . . . . . . . . . . . . . 156

List of Tables

Table No. Page

8. U.S. Sales and Imports of Selected

Consumer Electronic Products, 1982 . . . 112

9. U.S. Production and Imports of

Color TV Receivers . . . . . . . . . . . . . . . . . . 113

10. Firms With Color TV Manufacturing

Facilities in the United States . . . . . . . . . 114

11. Profitability in U.S. Color TV

Manufacturing . . . . . . . . . . . . . . . . . . . . . . 115

12. Color TV Imports into the United States 116
13.

144

15.

16.

17.

18.

19.

20.

21.

22.

22.

25.

26.

27.

28,

29.

30.

31.

U.S. Imports of Complete Color TVs

Compared to Incomplete TVs and

Subassemblies . . . . . . . . . . . . . . . . . . . . . . 117

Imports of Color and Monochrome TVs,

Plus Subassemblies, Under Item 807.00

of the U.S. Tariff Schedules. . . . . . . . . . . 118

Worldwide Production of Color TV

Receivers by Firm, 1978 . . . . . . . . . . . . . . 123

Consumer Electronics Markets in the

United States, Europe, and Japan . . . . . . 124

Electronics Firms Ranked by

European Sales . . . . . . . . . . . . . . . . . . . . . 126

Wage Rates for “Skilled” labor in Asian

Countries Compared to Japan . . . . . . . . . 127

Foreign Capital, Production, and Exports

in Asian Electronic Industries, 1979 . . . 128

South Korea’s Electronics Production . . 129

Semiconductor Sales in the United States,

Western Europe, and Japan . . . . . . . . . . . 130

Merchant Semiconductor Sales of Ten

Largest U.S. Suppliers . . . . . . . . . . . . . . . 131

U.S. Semiconductor Sales by Type. . . . . 131

World Integrated Circuit Output by

Headquarters Location of

Producing Firms . . . . . . . . . . . . . . . . . . . . 133

Estimated Production Levels for Captive

Manufacturers of Integrated Circuits . . . 134

Sources of U.S. Imports of

Semiconductor Products . . . . . . . . . . . . . 136

Origin by Country of U.S. Imports of

Semiconductor Products . . . . . . . . . . . . . 136

Total Sales and Semiconductor Share for

Major Japanese Producers . . . . . . . . . . . . 138

Major Producers of Semiconductors in

the United States and Japan at the

End of the 1950’ s.. . . . . . . . . . . . . . . . . . . 140

Japan’ s Semiconductor Trade . . . . . . . . . 141

32. Total Sales and Semiconductor Share for

European Manufacturers . . . . . . . . . . . . . 142

33. Merchant Semiconductor Sales by Region

for Selected Manufacturers, 1978 . . . . . . 143

34. Semiconductor Equipment Manufacturers

Ranked by Worldwide Sales . . . . . . . . . . 144

35. Sales of Computers and Equipment in the

United States . . . . . . . . . . . . . . . . . . . . . . . 146

36.

37.

38.

39.

40.

41.

42.

U.S. Computer Manufacturers Ranked by

1982 Worldwide Sales.... . . . . . . . . . 147

Major U.S. Manufacturers Ranked by

1982 Worldwide Minicomputer Sales... 148

Major U.S. Manufacturers Ranked by

1982 Worldwide Microcomputer Sales . 149

Worldwide Computer Installations, . . . . 151

World Computer Markets . . . . . . . . . . . . , 151

Non-U.S. Computer Manufacturers

Ranked by 1981 Sales. . . . . . . . . . . . . . . . 152

Total and Computer-Related Sales for

Japanese Manufacturers . . . . . . . . . . . . . . 156

List of Figures

Figure No. Page

17. Sales Trends in the U.S. Electronics

Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

18. Value Added in U.S. Manufacturing . . . 110

19. Price Index for TVs Compared to All

Consumer Durable. . . . . . . . . . . . . . . . . . 115

20. U.S. Exports of Color TV Receivers. . . . 119

21. U.S. Exports and Imports of

Color TV Receivers . . . . . . . . . . . . . . . . . . 119

22. Japanese Production and Exports of

23,

24,

25,

26.

27.

28.

29.

30.

Color TV Receivers . . . . ...;..... . . . . . 120

End Uses of Integrated Circuits Sold

Worldwide in the Merchant Market, 1980 132

U.S. Imports and Exports of

Semiconductor Products . . . . . . . . . . . . . 135

Semiconductor Production in Japan and

the United States . . . . . . . . . . . . . . . . . . . . 139

U.S.-Japan Trade in Integrated Circuits. 141

U.S. production of Computer Equipment 146

U.S. Exports and Imports of Computers

and Equipment . . . . . . . . . . . . . . . . . . . . . 150

Japanese Production, Imports, and

Exports of Computers and Equipment,

Including Production and Exports of

U.S.-Owned Subsidiaries . . . . . . . . . . . . . 154

Japanese Computer and Equipment

Exports by Firm. . . . . . . . . . . . . . . . . . . . . 155

31. Japanese Computer Sales, Including

Exports, By Firm . . . . . . . . . . . . . . . . . . . . 157
CHAPTER 4

Structure and Trade in the

International Electronics Industry

————.. .. . . .. ..——

Overview

The wide international dispersion of manufacturing and sales in electronics means these

activities take place in an environment heavily conditioned by global political currents and

the industrial policies of competing nations,

Episodes such as the NTT (Nippon Telegraph

and Telephone) procurement dispute, which

came to symbolize a much broader range of

U.S.-Japan trade frictions, are only one example. More striking is the rhetoric common in

the Japanese press, in which international competition in electronics is continually described

in terms of the “semiconductor war” or the

‘‘computer war. ‘‘1 The context for investment

and production, as well as trade, can be highly

politicized. In developing countries, investment may be contingent on performance requirements calling for certain percentages of

local value-added, export targets, or employment levels. Companies that do business on a

worldwide basis try to manipulate these political currents to their own advantage.

American firms have frequently transferred

labor-intensive production operations to lowwage countries as a means of cutting costs;

prominent examples include assembly of circuit boards and chassis for television receivers,

as well as wire bonding and assembly of integrated circuits (ICs). Sometimes overseas

production contributes to foreign sales; American firms can market within the European

Economic Community more easily if they

produce there rather than exporting. Along

with foreign investments for manufacturing,

U.S. semiconductor companies have estab1 S(:(!, f I ] r [~ x,] m I) I [:, ~cj~~,i ~) Rf:/)f/r(, ]( j I n t [‘III I I I ( a t I ( I I I \ R f’ it’d r( I I

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lished R&D centers in Europe, with similar efforts in Japan planned or underway; a number

of American computer firms also maintain substantial engineering operations in Europe. The

patterns are quite different in consumer electronics, where U.S. companies operate offshore

assembly plants but market almost exclusively at home.

Just as American electronics firms market

and invest overseas, foreign-owned enterprises

are extending their activities to the United

States. Of the 15 manufacturers of TVs in this

country, 11 are now foreign-owned (3 of the

4 largest remain American). All the consumer-model video cassette recorders sold in the

United States—including those marketed by

GE, RCA, and Zenith—are made in Japan, Japanese semiconductor manufacturers not only

distribute their products here but are setting

up assembly plants and R&D organizations.

Several leading American semiconductor companies have been purchased by European concerns. Japanese computer manufacturers are

selling in the United States through joint ventures with American firms like National Semiconductor, while planning independent marketing efforts for the future. As good an example as any of the ties linking electronics industries in various parts of the world can be

found in the genesis of the computer language

Ada—recently adopted by the U.S. Department

of Defense as a standard, Ada was developed

in France by an employee of CII-Honeywell

Bull, a company at the time owned 47 percent

by the American computer manufacturer

Honeywell.

Electronics technology now flows both into

the United States and out, although transfers

overseas by American firms remain much

more frequent. Semiconductor patents owned

10’7
108 ● International Competitiveness in Electronics

.- — . —— —.

by Bell Laboratories have been licensed

worldwide. RCA continues to receive about

$50 million per year from Japan consumer electronics firms for its color TV technology, a sum

comparable to RCA’s annual profits from making and selling television sets. Computer manufacturers in many countries—including the

Soviet Union–design systems to run on IBM

software. Apple computers have been widely

counterfeited in the Far East. Japanese firms

are accused of purchasing stolen information

concerning IBM computers, Much of the lithographic equipment for fabricating large-scale

ICs is produced in the United States by firms

that depend on Japan and West Germany for

optical components; one major producer is

based in Liechtenstein. ICs that sell in large

volume—such as microprocessors or computer

memory chips—become commodity items produced to essentially the same specifications in

the United States, Japan, and Europe, Sometimes the circuits are identical because of formal licensing agreements, occasionally because the designs have been copied. In other

cases, chips may differ internally but function

interchangeably, Second-sourcing of ICs often

entails agreements for the design and development of peripheral or support chips. Licensing and alternate sourcing arrangements of all

types link semiconductor firms throughout the

industrialized world; these linkages help define

the forms of competition without affecting its

intensity.

In such an environment—one increasingly

common to many sectors of the world economy, automobiles as well as electronics—issues

of international competitiveness and national

interest are seldom clear-cut. Trade flows, one

of the traditional measures of international

competitiveness, can become ambiguous when

substantial fractions of imports and exports

consist simply of intracorporate transfers.

What does it mean when Japanese firms export

ICs to the United States that were originally

designed here, or when competitors like National Semiconductor and Oki Electric announce a joint venture in which National will

manufacture Oki-designed 64K RAMs (random-access memory circuits) in the United

States? Should it matter to the Federal Government that TV or semiconductor plants formerly

controlled by American interests now belong

to Japanese or European concerns? If U.S.

companies chose to export nonmilitary technologies, is this anyone else’s business?

Organized labor would answer yes to this last

question, out of concern for American jobs. So

might some businessmen—but more likely with

reference to a rival’s exports of technology than

their own.

This chapter explores the background for

such questions without attempting to answer

them (they seldom have definitive answers). As

for the preceding chapter, the approach is

largely descriptive, aimed at giving a picture

of the world electronics industry that will serve

to frame issues of policy and competitiveness.

The U.S. Electronics Industry: Introduction

Electronics is, first of all, a large and diverse

industry. Sales of the more than 6,000 electronics manufacturers in the United States exceeded

$125 billion in 1982 and are growing rapidly;

the industry employs more than 11⁄2 million

people. Most of these 6,000 plus companies are

small. Nearly three-quarters have annual sales

of less than $5 million; about half produce components of various types. As figure 17 indicates, domestic shipments—the plot includes

the value of both imports and exports—have

expanded more than 25 times over the past 30

years, an annual growth rate exceeding 11 Percent, Recent expansion has been even faster:

the growth rate over the past decade reached

nearly 15 percent. U.S. output of durable goods

came to about $500 billion in 1982; thus electronics, broadly defined, accounted for nearly 25 percent of the total.2

2Economic Report of the President (Washington, D. C.: U .S,

Government Printing Office, February 1983), p. 170. If nondurable are included, electronics output accounted for about

10 percent of U.S. manufactures. Sales of communications equipment and other classes of electronics products that are not the

subject of this report are included in these comparisons and in

figure 17 to illustrate the overall size of the industry.
Ch. 4—Structure and Trade in the International Electronics Industry ● 109

Figure 17. —Sales Trends in the U.S. Electronics Market

Communications

equipment

Data

processing

equipment

Components

Consumer \

electronics

o

1955 1960 1965 1970 1975 1980

Year

SOURCE” Electronic Market Data Book 7982 (Washington, D.C Electronic Industries Assoclatlon, 1982), p, 4.

In fact, the sales totals in figure 17 involve

some double counting because manufacturers

of final products purchase components from

other electronics firms. Examining value-added

data, figure 18, which subtract the value of intermediate goods inputs from final sales figures, shows the industry to be somewhat smaller but the growth trend remains about the

same.

Throughout its history the electronics industry has been one of the most technologically

dynamic in the U.S. economy. Applications of

computing power and smart electronics have

become widely diffused both within the industry and outside it—products from supermarket

checkout terminals to Boeing 767s now depend on microprocessors.3 The diversity found

sAbout 180 microprocessors go into each 767, A Cadillac Seville uses 10, along with nearly 100 other ICs, an even larger

among American electronics firms is, in its

own way, as impressive as the technical virtuosity of the industry’s products. These products—which range from CB radios to satellitebased communications systems, carbon resistors to vastly powerful computers—are probably distributed more widely through the rest

of the U.S. economy than the output of any

other industry. This pervasiveness has the corollary of involving almost all parts of the Nation’s distribution system. There are few manufacturing firms, even fewer wholesalers and

retailers, virtually no individuals, who do not

buy electronic products.

number of discrete transistors, and about 1,000 other electronic

components. See A. R. Karr, “FAA Is Making Stiff Demands

on Boeing To Prove the Safety of Its New 767 Jetliner, ” Wall

Street ]ourna~ July 23, 1982, p. 36; L. Givens, “Engineering Highlights of the 1983 Automobiles, ” Automotive Engineering, October 1982, p. 31.
110 ● International Competitiveness in Electronics

Figure 18.—Value Added in U.S. Manufacturing

All manufacturin g

14

12

10

8

6

4

Computers

(Sic 3573)

SOURCE 1977 Census of Manufactures, 1980 Annual Survey of Manufactures

Because of this diversity, the industry cannot be meaningfully discussed as a whole—a

difficulty even more acute when the topic is

international competitiveness, which implies

examining the behavior of individual corporations to at least some extent. This is not the

steel industry—where the firms active in a

given market are easily defined, their competitive postures well known, the paramount

considerations production costs and delivery.

Nor is it automobiles, where the domestic industry consists of three or four corporations—

again with clear identities, well-understood

strengths and weaknesses—and their suppliers.

Among the companies that populate electronics, some are as large and well known as U.S.

Steel or Ford, while others—including many

of the technological and market leaders—are

small concerns with relatively specialized

product lines, companies little known to out1970 1980

I I

Consumer electronics Semiconductors

(SIC 3651) (SIC 3674)

—

siders. Three random examples: VisiCorp,

which supplies software for small computers;

GCA Corp., which designs and builds semiconductor fabrication equipment; John Fluke Manufacturing Co., specializing in instruments.

While electronics is certainly better defined

than the emerging biotechnology industry, in

a sense there is little point in speaking of an

electronics “industry” at all. Rather, there is

a large group of companies sharing certain

characteristics such as the relevance of their

products, whether hardware or software, to the

processing and transmission of information.

Moreover, when subsets of the larger group are

examined, boundaries shift and blur as a result

of time and technical change—semiconductor

firms move into systems, computer firms into

data communications. As a result, classifications and subclassifications for reporting production and trade data are not always useful,
Ch. 4—Structure and Trade in the International Electronics Industry . 111

sometimes lagging years behind

opments in the industry and its

In part for such reasons, OTA’s

major develproducts. *

examination

of electronics covers only three portions of the

industry: consumer electronics, semiconductors, and computers. In capsule form, these can

be described as follows:

Consumer electronic products are sold

through retail distribution channels; they

include radios, TV sets, sound reproduction equipment, video games, digital

watches, and calculators, Most of these

products fit within the “home entertainment” category. Personal computers—

which could be classed as consumer products—also have utilitarian applications, In

this report, personal computers are included with other data processing systems

because–except at the very bottom of the

price range—they are similar to machines

sold for business applications.

Semiconductors are one species of electronic component, sold to manufacturers

of final products or used internally (30 to

40 percent of U.S. output falls in the latter category, produced by “captive” facilities). Included are discrete devices, such

as power transistors, as well as an immense variety of ICs, some of which were

described in the preceding chapter. Need-

— ——

“Beyond the official 4-digit SIC system (Standard Industrial

Classification; see ch. 9 where employment is discussed by SIC

category) for reporting production and consumption within the

United States, the Department of Commerce has subdivided the

category for Semiconductors and Related Devices (SIC 3674) into

27 narrower subgroups. Of these, six apply to bipolar ICs, only

three to MOS ICs—despite the fact that the latter have long since

reached greater sales levels. For computers, the SIC subdivisions

have not kept up at all: of the two categories, virtually all

computers-from 8-bit personal machines costing a few thousand dollars to supercomputers—fall in SIC 357311 (general purpose); the second category is reserved for military and other

specialized systems, Much the same is true of the somewhat different classifications and categories used by the United States

for imports and exports (other countries have their own reporting systems). One result is that data on production can seldom

be directly compared with that for trade; although concordances

are available, one-to-one correspondence does not always exist, Apparently, none of the systems as yet makes explicit provision for software except as a service item, yet software accounts for a substantial and increasing fraction of the value of

computer systems and is frequently sold separately from

hardware.

●

less to say, marketing and distribution

channels for semiconductors differ greatly from those for consumer electronics.

Because of their importance for competitiveness, semiconductor equipment manufacturers–firms that develop and supply

the equipment needed to produce

microelectronic devices—are discussed

separately below.

The computer industry, for purposes of

this report, includes ‘manufacturers of

mainframe machines, minicomputers, and

personal or desktop units, as well as peripheral equipment. While peripherals are

not covered in detail—nor are independent

software vendors—the many smaller firms

in these portions of the industry are an important source of competitive strength for

the United States. Except for personal machines, data processing equipment manufacturers sell almost exclusively to other

businesses, as well as to institutions such

as Federal, State, and local governments.

With the dramatic cost reductions of recent years, computers are now found in

even the smallest organizations, personal

machines, sold both for business and

household use-–mostly through retail

channels—promise a further enlargement

of information processing markets.

Many electronics firms do business in more

than one of these sectors of the industry. IBM

makes both computers and semiconductors, as

do NCR, Digital Equipment Corp., and Texas

Instruments, The latter firm also sells consumer products, Zenith builds personal computers as well as TVs; although 80 percent of

its business is in TV, the company is trying to

diversify. RCA is a major force in satellite

communications as well as consumer electronics; in fact, the company is a conglomerate with

substantial interests quite divorced from electronics. Hewlett-Packard makes a variety of instrumentation and measuring equipment, as

well as computers—and, like many other electronics companies, some of its own semiconductors. Firms like IBM, GE, and Texas Instruments have substantial military sales, while

some companies thought of mostly as defense
112 ● International Competitiveness in Electronics

—— —

contractors play small but significant roles in

the broader world of commercial electronics.

Hughes and Lockheed, for instance, are known

and respected for their R&D in microelectronics; research performed by aerospace contractors often finds eventual commercial application, although in recent years more electronics technology has flowed from commercial developments into military hardware and

software than the other way.

These three portions of the electronics industry are described next in more detail, from

the viewpoint of structure and on a world basis.

Consumer Electronics

The United States, With Particular

Attention to Color Television

American consumer electronics firms have

had great difficulty retaining their competitiveness. U.S. producers of TVs and other home

entertainment equipment have shared the

plight of firms manufacturing components like

capacitors, switches, and circuit boards: these

rather simple products can be made overseas

with the aid of cheap labor at highly competitive costs. Of a total consumer electronics market exceeding $20 billion, a market that recently has been expanding by nearly 10 percent annually, imports today account for the majority of sales in many product categories (table

8),4 Virtually all production of some types of

4

For radios and TVs as defined by SIC 3651, the value of imports exceeded !io percent of the value of total sales for the first

time in 1981—1982 U.S. Industrial Outlook (Washington, D. C.:

Department of Commerce, January 1982], p. 344. Note that data

collected and reported by different organizations may represent

different definitions of consumer electronics. For instance, the

$21.4 billion figure given by Electronics magazine for 1982 sales

is about a third greater than that reported by the Electronic Industries Association (EIA) largely because the magazine’s survey

covers many product categories left out of the EIA total—E)ectronics, Jan. 13, 1983, p, 136.

consumer goods—portable radios and video

cassette recorders (VCRs) are examples—takes

place abroad, mostly in the Far East. For other

products, such as black-and-white TVs, American manufacturers remain viable competitors

in only narrow segments of the market. A parallel decline in color TV production was

averted in part through orderly Marketing

Agreements (OMAs) which limited imports

from three Asian nations. OMAs encouraged

investment in the United States by Japanese

and Taiwanese manufacturers of color televisions. *

The remaining American consumer electronics manufacturers have been forced by the

pressure of import competition—pressure that

has led to frequent accusations of unfair trade

practices, including charges of dumping that

were upheld after lengthy investigations (see

*The 3-year OMA with Japan was allowed to expire in 1980

after a finding by the U.S. International Trade Commission that

the domestic industry had adjusted so that protection was no

longer needed. At that time, the OMAs with South Korea and

Taiwan were continued, one reason being the much lower labor

costs these countries enjoyed compared with Japan, giving them

potentially greater competitive advantages; these two OMAs expired in July 1982 and were not renewed. Events leading up to

the import quotas are discussed in ch. 11.

Table 8.—U.S. Sales and Imports of Selected Consumer Electronic Products, 1982

US. sales Imports Import penetration

(millions of dollars) (millions of dollars) (percent) a

Color television . . . . . . . . . . . $.4,253 $546 12.80/o

Black-and-white TV . . . . . . . . 507 344 67.9

Video cassette recorders. . . 1,303 1,032 100.0a

Home and auto radiosb . . . . 1,579 1,207 76.4

Stereo systemsc . . . . . . . . . . 1,754 1,342 76.5

$9,396 $4,471 47.60/o

aBecause many items Imported in a given year are not sold until the following year, dividing imports during a given calendar

year by sales in that same year may ghre only a rough indication of import penetration, for instance, all video cassette recorders

sold in the United States are imported even though 1962 sales figures exceed 1982 import figures.

blncluding auto tape players.

concluding audio tape units and other component equipment

SOURCE” Hectrodc Market Data Book 1983 (Washington, DC. Electronic Industries Association, 1963), pp 6, 19, 23, 31
——

Ch. 4—Structure and Trade in the International Electronics Industry ● 113

-—— — ———.

chs. 5 and 11)—to switch tactics in order to survive, The two largest American manufacturers

of color TVs, Zenith and RCA, now carry out

many of their assembly operations abroad, The

move to offshore assembly, although resisted

for some years by Zenith, ultimately became

necessary to lower costs.

Americans buy more color TVs than any

other consumer electronic product (table 8);

televisions have also been a center of controversies over U.S. trade policy. For many purposes, color TV can stand for the U.S. consumer electronics industry as a whole. Table

9 summarizes data on domestic production and

imports of color sets, broken down into three

screen-size categories. The figures show that

market growth—in terms of both domestic production and imports–has come in the small

and intermediate screen sizes, while production of large screen sets has dropped considerably since the late 1960’s. In 1967, when imports took only a little over 5 percent of the

market, large screen models accounted for

more than three-quarters of all sales. By 1981,

the market share of large screen color sets had

dropped to less than one-quarter; meanwhile,

the overall color TV market had more than

doubled. From the beginning, imports have

been concentrated in the smaller screen models

where sales have been growing. Most large sets

are still made in the United States, but as sales

swung toward second and third sets where

portability and low cost are major selling points

the large screen market shrank.

Table 9 also illustrates the effects of OMAs

which took effect in 1977 (with Japan) and 1979

(with Taiwan and South Korea). Imports of

small- and medium-size sets dropped by more

than a million units between 1977 and 1979,

a decline of nearly 50 percent. Imports have

since stayed well below the 1977 level, but

assembly in the United States by foreign firms

has made up much of the difference:

Table 9.—U.S. Production and Imports of Color TV Receivers (thousands of sets)

Screen sizea

——

1967 1969 1971 1973 1975 1977 - ‘197 9

Small

—. .—

U.S. production . . . . . . . . . . . . . . . . . . . . . . . . 373 579 645 1,267 905 1,040 1,710

Imports . . . . . . . . . . . . . . . . . . . . . . . 157 480 780 936 637 1,148 818

Total small . ... . . . . . . . . . . . . . . . ’530 1,059 1,425 2,203 1,542 2,188 2,528

Imports as percent . . . . . . . . . . . . . . . . . . . 29.6°/0 45.30/0 54.7% 42.5% 41.3% 52.5%

Medium:

32.4%

U.S. production . . . . . . . . . . . . . . . . . . . . . . . 624 1,000 1,851 3,182 2,167 3,014 4,559

Imports . . ... , ... . . . . . . . . . . . . . . . . . 171 399 413 379 562 1,350 49?

Total medium . . . . . . . . . . . . . . . . . . . . . . . 795 1,399 2,264 3,561 2,729 4,364 5,050

Imports as percent . . . . . . . . . . . . . . . . . . . . 21.5% 28.5% 18.2% 10.6% 20.6% 30.90/0 9,70/0

Large:

U.S. production . . . . . . . . . . . . . . . . . . . . . . . 4,295 3,653 3,379 2,317 2,951 2,743

Imports ., ... . . . . . . . . . . . . . . . . . . . . . . . . — 2

b 16 40 60

Total large ... ... . . . . . . . . . . . . ... . . 4,295 3,655 2,333 2,991 ‘2,803

Imports as percent . . . . . . . . . . . . . . . . . . . . . — 0.050/0 0.7% 1 .3 ”/0 2.1 %

All sizes:

U.S. production . . . . . . . . . . . . . . . . . . . . . . . . 5,292 5,232 5,398 7,828 5,389 7,005 9,012

Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 881 1,193 1,315 1,215 2,538 1,369

Total all sizes . . . . . . . . . . . . . . . . . . . . . . . 5,620 6,113 6,591 9,143 6,604 9,543 ~i3,381

Imports as percent . . . . . . . . . . . . . . . . . . . . 5.8% 14.40/0 18.1 % 14.40/0 18.4% 26.6% 13.2 %

1981

2,220

1,238

3,458

35.8 %

5,668

503

6,171

8.2 %

2,626

—.——116

2,742

4.2%

10,514

1,857

12,371

1 5.0%

%creen sizes are defined as follows Small: 1%7, 1959-16 inch and under 1971$1–17 inch and under Mad/urn: 1%7, 1%9–17 19 Inch 197181-18 and 19 Inch

~Laqp All years—20 inch and over

Not available but very small

SOURCES. 1967, tW9—Te/evtsforr Receivers and Certain Parts Thereof (Washington, D C U S Tariff Commission Publication 436, November 1971), p A.57

1971 -79- Te/ewsion Fiece)wng Sets From Japan (Washington, D C U S International Trade Comm~sslon Publication 1153, June 1981), pp H+3, H.7, H-1 7, H-18

1971 and 1973 Import data— Television Rece/vers, Color and Monochrome, Assembled or Not Assembled, F/n/shed or Not Finished, and Subassemblies

Thereof (Washington, D C U S International Trade Commission Publlcatlon 808, March 1977), p A.91

1975 hmporf data—Co/or Te/ev/s/on Receivers and Subassernb/ies Thereof (Washington, D C U S. International Trade Commission Publication 1068, May

1960), p D-7

1981 product/on-Co/or Telewwon Receivers U S Production, Shipments, Inventories, Exports, Employment, Manhours, and Prices, F/rsf Ca/endar Ouarter

1982 (Washington, D C U.S international Trade Commission Publication 1245, May 1982), table 1

’981 /mporLs — E/ectron/cs Fore(gn Trade Fwe- Year Summary 1977- f98 f (Wash ington, D C Etect ron IC Industnes Assoc Iatlon, March 1982), p 49
114 . International Competitiveness in Electronics

Employment

Even while domestic production and sales

of TVs have expanded, employment has, since

the mid-1960’s, been falling (see ch. 9, especially fig. 57). There are two major reasons: increases in productivity and in foreign valueadded. Productivity growth has come from

simplifications in chassis design and from

automation, both reducing labor content. At

the same time, U.S. firms have moved some of

their operations offshore, reducing domestic

employment. Assembly in the United States by

foreign firms compensates only in part; foreign-owned plants import many components

and subassemblies. Although import quotas

were justified in part on the basis of preserving American jobs, the employment data examined in chapter 9 shows that the OMAs had

little apparent effect in arresting job losses.

Structure

Domestic TV production has most recently

been accounted for by about 15 companies (the

roster is fluid) that undertake some part of their

manufacturing in the United States. These

firms are listed, with their approximate share

of color TV sales and the locations of their principal U.S. production facilities, in table 10.

Zenith and RCA have, between them, held

around 40 percent of the color TV market for

many years. Imports and foreign manufacturers with production facilities here have

taken sales primarily from smaller American

manufacturers.

These sales have recently been growing a

good deal more rapidly than many observers

had anticipated, confounding those who predicted that the market was approaching saturation. The Electronic Industries Association

forecast for 1980 had been 9.2 million color

sets, a figure that was exceeded by nearly 11⁄2

million. Sales in 1981 and 1982 were likewise

affected much less by economic conditions

than might have been expected. One reason

seems to have been new demand stimulated by

video games; rather than tying up the family

TV, many households purchased second (perhaps third) sets. Derived demand of this type

is at work in numerous electronics markets;

home computers may also help expand color

TV sales.

Table 10.—Firms With Color TV Manufacturing Facilities in the United States

Approximate market

Company Ownership

share, 1982

Location(s) (percent) a

RCA Corp. Us . Bloomington, Ind. 20.0%

Zenith Radio Corp. Us . Chicago, Ill. 19.4

General Electric Co. Us . Portsmouth, Va. 8.0

Curtis Mathes Manufacturing Co. U s . Dallas, Tex. 1.2

North American Philips Corp. (Magnavox, Sylvania) Netherlands Jefferson City, Term. 11,5

Smithfield, N.C.

Matsushita Industrial Co. (Quasar, Panasonic) Japan Chicago, Ill. 7.5

Sony Corp. of America Japan San Diego, Calif. 7.0

Hitachi Consumer Products of America, Inc. Japan Compton, Calif. 2.3

Sharp Electronics Corp. Japan Memphis, Term. 2.0

Sanyo Manufacturing Corp. Japan Forrest City, Ark. 1.5

Mitsubishi Consumer Electronics America, Inc. Japan Santa Ana, Calif. 1.5

Toshiba America, Inc. Japan Lebanon, Term. 1.4

Gold Star Electric International, Inc. South Korea Huntsville, Ala. 0.8

Sampo Corp. of America Taiwan Atlanta, Ga. 0.5

Tatung Co. of America, Inc. Taiwan Long Beach, Calif. 0.3

Private brands:

Sears (mainly Sanyo) 7.3

Montgomery Wards (mainly GE, also N. A. Philips) 2.5

J. C. Penney (RCA and others) 1.5

aCompany market shares do not include private brand sales. Market share figures do not total to 100 because of uncertainty concerning private brand market shares

and suppliers of private brand sets. Nor are Importers without U.S. production facilities listed,

SOURCES Televlslorr Recelvlng Sets From Japan (Waahlngton, D.C : U.S. International Trade Comrnlssion Publication 1153, June 1981), p, A.13; information from Department of Commerce and individual firms. Market share estimates from Te/evlsion D/gest surveys, July 1981 .June 19S2
Ch. 4—Structure and Trade in the International Electronics Industry 115

— —

Competition has kept margins between

prices and costs in color TV small. Absent data

on manufacturing costs, this can be gaged in

at least two ways. First, profits have been

modest compared with other sectors of the

economy. Net operating profit as a percentage

of sales—not a particularly good measure, but

the only one available (return on equity or on

total capital would be better)—has been substantially lower than in most other U.S. industries. As table 11 shows, profitability in TV

manufacture has, since the early 1970’s, been

far below that in electrical and electronic

equipment, which itself has shown profitability

levels quite close to the average for all U.S.

manufacturing. An expanding market has not

meant high profit margins for American producers.

The second indication of the efficiency of the

market comes from data on relative price

movements. Figure 19 shows retail prices on

an index basis for TVs (both monochrome and

color) compared with other consumer durables. The flat price history for TVs demonstrates that productivity improvements have

been passed through to consumers as lower

prices. This figure—along with the profitability data in table n-indicates the strength of

Table 11 .—Profitability in U.S. Color TV Manufacturing

Net operating profit (or loss) as a

percentage of net sates

All U.S. electrical and

All U.S. color TV electronic equipment

Year manufacturers manufacturers

1971 . . . . . . . . 8.7% 7.0 ”/0

1973 . . . . . . . . 5.8 8.4

1975 . . . . . . . . 0.6 6.2

1977 ......, . 2.8 8.7

1978 . . . . . . . . 1.5 8.1

1979 . . . . . . . . 0,8 7.5

1980 . . . . . . . . 7.5

1981 . . . . . . . . 7.3

9ncludes monochrome IV manufacturing for 1971 to 1975. Covers firms manufacturing In the United States regardless of count~ of ownership.

SOURCES 1971.75—Televlslon Receivers, Color and Monochrome, Assembled

or Not Assembled, F/n/shed or Not F/n/shed, and Subassernb//es

Thereof (’Washington, D. C.” U.S. lnternatlona[ Trade Commission

Publication &Xl, March 1977), p. A.59

1077M– Televlslon Recelvlng Sets From Japan (Washington, DC :

U S. International Trade Commission Publication 1153, June 1981),

pp A-53, A-56,

f9#f snd mdsod f978-Co/or Te/ev/slon Race/vers: Cwartefiy Profits

and Capsdty and Certain Annual Expenditures of U S Producers

(Washington, DC. U S. International Trade Commission Publlca.

tlon 1235, March 1982), table 1

Figure 19.— Price Index for TVs Compared to

All Consumer Durables

1973 1974 1975 1976 1977 1978 1979 1980 1981

Year

SOURCES Consumer Durab/es– Econorn/c Reporf of the Pres/dent T982

(Washington, D C U S Government Prlntlng Office February

1982), p 294

Televisions —E/ectron/c Market Data Book 1982 (Wash lngfon, D C

Electronic Industries Assoclatlon 1982), p 29

the competitive forces at work. Fierce price

competition has been a characteristic of the TV

industry in the United States for many years.

This competition has led rather directly to

major structural change in the U.S. industry:

replacement of American-owned by Asian- and

European-owned production facilities. Japanese and Taiwanese companies that previously

exported to the United States have established

assembly operations here; foreign interests

have also purchased existing plants. The

OMAs encouraged both types of investments,

but at least some would have been made in any

case. Sony’s factory in San Diego antedates the

OMA with Japan by 7 years. Matsushita’s purchase of Motorola’s Quasar operations came

in 1974, and Sanyo’s rescue of Warwick Electronics, a primary supplier to Sears, in 1976,

The American TV plants purchased have

generally been in competitive difficulty and

seeking some sort of financial reprieve. When

Motorola decided to leave the consumer electronics business, the company approached

both RCA and Zenith before finding a buyer

for its Quasar division in Matsushita. North

American Philips purchased Magnavox in

1974, while taking over GTE-Sylvania’s consumer operations, consisting of the Philco and

Sylvania brands, in 1981, Thus, the color TV

business has been one in which large foreign
116 . International Competitiveness in Electronics

multinationals have absorbed smaller and financially weaker U.S. companies. This is not

to say that the U.S. operations of foreign firms

have fared much better; they do not seem to

have been any more profitable than American-owned TV manufacturers, perhaps less so

(table 11 averages profit data for companies

with plants in the United States whether American- or foreign-owned).

What are the implications of these changes?

On the one hand, foreign takeovers point to the

fact that some U.S. companies, for whatever

reasons, have simply been unable to maintain

their competitiveness. It seems likely that even

purely domestic competition would, sooner or

later, have led to a series of failures among the

smaller American color TV manufacturers,

From the point of view of the consumer, that

foreign enterprises purchased and modernized

these plants has probably yielded a more competitive industry; certainly the concentration

has not changed appreciably (the 15 TV manufacturers at present compare with 16 a decade

ago), On the other hand, many of the higher

skilled jobs remain overseas, along with management control.

The distribution network for TVs has mirrored broader trends in the structure of

American retailing rather than changing in any

fundamental way as a consequence of foreign

competition. Furniture and department stores

have become less important as outlets, while

sales have increased through appliance and

discount retailers, along with chains like Sears

and J. C. Penney. These shifts have multiple

causes: heightened price competition; changing consumer preferences leading to much

greater sales of small, easily portable sets (table

9); improvements in reliability, a consequence

of solid-state chassis designs (chs. 3 and 6)

lessening the need for after-sales service and

repair. The opening of the distribution structure has added to price competition in the TV

market.

Imports and Offshore Assembly in

Color Television

International trade flows in color TV show

two more or less concurrent trends: imports

of complete sets into the United States by

foreign firms, with subassemblies coming later,

accompanied by re-imports from U.S.-owned

subsidiaries following offshore assembly.

As table 12 demonstrates, by 1976 one-third

of the U.S. color TV market was being supplied

by shipments from the Far East. American producers had seen—some had experienced—earTable 12.—Color TV Imports Into the United States

Number of color TVs imported Imports from all sources

by origin (thousands) as a percentage of

Year Japan Taiwan Korea Total a U.S. consumption

1967 . . . . . . . . . . . . 315 – — 318 6.7%

1969 . . . . . . . . . . . . 879 22 — 912 15.7

1971 . . . . . . . . . . . . 1,191 85 – 1,281 18.9

1973 . . . . . . . . . . . . 1,059 325 2 1,399 15,8

1975 . . . . . . . . . . . . 1,044 143 22 1,215 17.9

1976 . . . . . . . . . . . . 2,530 235 47 2,834 33.0

1977 . . . . . . . . . . . . 1,975 318 92 2,476 27.0

1978 . . . . . . . . . . . . 1,434 624 437 2,775 26.4

1979 . . . . . . . . . . . . 513 368 314 1,369 13.6

1980 . . . . . . . . . . . . 435 303 293 1,288 11.7

1981 . . . . . . . . . . . . 727 514 393 1,946 15.6

alncludes imports from countries not listed individually

SOURCES 1967, 1969 -Te/evislon Receivers arrd Certain Parts Thereof (Washington, D C : U S Tariff Commission Publica.

tion 438, November 1971), p A-82.

1971, 1973— Televlslon Receivers, Color and Monochrome, Assembled or Not Assembled, Finished or Not F/n/shed,

and Subassernb/ies Thereof (Washington, D C U S International Trade Commission Publication 808, March 1977),

pp. A-W, A-99.

1975.79-Co/or Tefews)on Recewers and Subassemblies Thereof (Washington, D C U S International Trade Corn.

mission Publication 1088, May 1980), p D%,

19LM— Te/ev/sion Recefvlng Sets From Japan (Washington, D C U S. International Trade Commlsslon Publication

1153, June 1981), p H.21

198f-information from Department of Commerce
Ch. 4—Structure and Trade in the International Electronics Industry ● 117 —— —

lier incursions in portable radios and monochrome TVs; as early as 1970, half the blackand-white sets sold in the United States were

imports. The sentiment in the U.S. industry

was that if import trends in color TV continued

this far more lucrative market would also be

taken over.

It makes little difference now whether or not

such perceptions were accurate: increasing import penetration was the proximate cause for

negotiation of the 1977 OMA with Japan. But

what table 12 also shows is that no sooner did

imports from Japan drop—in 1978—than imports from South Korea and Taiwan jumped,

Although taking a slightly smaller fraction of

the market, the number of imported color TVs

actually grew in 1978. Only in 1979, when

quotas with Taiwan and Korea took effect, did

the import share come down.

This period, the late 1970’s, coincided with

the beginning of large-scale Japanese production here; color TV output in the United States

by Japanese-owned firms went from 1.2 million

sets in 1977 to 3,2 million in 1980—mostly final

assembly operations which substituted imports

of components for imports of complete sets. As

table 13 shows, not only have subassemblies

gone from half of all color TV-related imports

by value to more than three-quarters, but the

total value of color TV imports including sub

assemblies increased, despite the OMAs, (Imports of incomplete TVs—as well as certain

types of subassemblies —were restricted by the

quotas, and remained small, but other subassemblies were uncontrolled.)

Table 13.—U.S. Imports of Complete Color TVs

Compared to Incomplete TVs and Subassemblies

The second major effect on the import side

of the ledger has been the rising quantity of

what are known as 807 imports. There are certain conditions to be satisfied—described in

chapter n-but in essence item 807.00 of the

U.S. Tariff Schedules allows an American company to export components for further processing abroad, then re-import them while paying

duties only on the value added in the offshore

facility, Absent this provision, tariffs would be

assessed on the total value of re-imported

goods. Labor cost savings have been the primary reason for moves offshore, with item 807

making the choice more attractive. In most

cases, final assembly has remained here. All

the major U.S. color television manufacturers

have taken advantage of item 807 in their efforts to keep labor costs down, with Zenith being the last to moves

Table 14—which includes black-and-white

TVs, although these are small compared to 807

imports of color sets—shows that offshore assembly and re-importation account for a substantial fraction of imports. In 1980, 44 percent

by value of all U.S. imports of TVs and subassemblies entered under the provisions of item

807,00. (This does not mean that 44 percent of

the value was added overseas, but that 44 percent of imports had some value added in other

countries after originating here, In 1980, foreign value added came to about 11 percent of

the total value of all imports, ) As table 14 indicates, Mexico accounts for the majority of 807

imports, with Taiwan in second place. Mexico is unique in being almost exclusively an offshore assembly site for U.S. firms, which operate factories close to the border. The concurrent trends of foreign investment in U.S. plants

and American investment in offshore producValue of imports

(millions of dollars)

1976-” 1978 1980

Complete color TV receivers . $ 520 $ 577 $ 311

Incomplete receivers and

subassemblie s

a 

. . . 527 748 1,112

$1,049 $1,335 $1,427

aMore than 98 percen[ subassemblies mostly clrcult boards and picture tubes

Incomplete sets are valued at only a few mllllon dollars annually

SOURCE Te/ev/s/on Rece/v/ng Sets From Japan (Washington, D C U S Inter

national Trade Commlsslon Publlcatlon 1153 June 1981) pp t- 20 H 22

H-23

5Zen ith’s decision to transfer much of Its p r[j[i U( t io n to h! ex -

ico and Taiwan, entailing layoffs to more than 5,000 CJ, S,

workers, came at the end of 1977—’’Sltuation R(’port: color

Television, ” Department of Commerce, Nlay 1978, p. 4, The ( ompany evidently judged both the risks and co>ts of mo~ing offshore to be less than for automation of its domestic produ{; tion

facilities. App, B discusses the costs and benefits of offshor[;

man ufactu ring from a n economic perspective.

Item 806.30 of the U.S. Tariff Schedules permits re-importing

with duties charged only on foreign \’a lue added u rider a
118 International Competitiveness in Electronics

— —

Table 14.—lmports of Color and Monochrome TVs, Plus Subassemblies,

Under Item 807.00 of the U.S. Tariff Schedulesa

Value of imports (millions of dollars)

Source 1976 1978 1980

Japan:

Total imports

807 importsb

Taiwan:

Total imports

807 imports .

South Korea:

Total imports

807 imports .

Mexico:

Total imports

807 imports .

Singapore:

Total imports

807 imports .

from Japanb 

. . . . . . . . . . . . . . . . . $ 666

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6

from Taiwan . . . . . . . . . . . . . . . . . 287

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

from Korea . . . . . . . . . . . . . . . . . . 36

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5

from Mexico . . . . . . . . . . . . . . . . . 261

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

from Singapore. . . . . . . . . . . . . . . 25

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

$ 627

3.6

416

184

137 —

348

347

77

17

$ 435

5.7

354

169

164

1.5

536

513

185

64

Other countries:

Total imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 81 94

807 imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 60 26

All sources of imports:

Total imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,304 1,687 1,770

807 imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 611 780

807 as percent of total . . . . . . . . . . . . . . . . . . . . 32.80/o 36.20/o 44.1 %

aBreakdowns for color and black.and.white sets covering subassemblies (and incomplete sets) are not available; however,

the vast majority of 807 imports are color subaasemblles-mostly clrcult boards.

%otal import figures consist of the value of all imports entering from the source country; 807 imports consist of the total

value of imports entering under item 807.00 from the source country, not the duty-free value, which IS only a fraction of this

Greater detail is available in the report cited below.

SOURCE” Television Receiving Sets From Japan (Washington, D.C. US International Trade Commission Publication 1153,

June 1981), p. H-30

somewhat different set of conditions than for item 807.00. For

practical purposes, 806.30 imports of televisions are negligible.

The table below lists several offshore plants operated by

American firms, indicating the kinds of products that are shipped

to the United States—mostly components and subassemblies for

color sets; some black-and-white TVs are made overseas, but few

complete color sets. North American Philips has also established

overseas facilities.

Offshore Manufacturing Plants of Major

U.S. TV Manufacturersa

Year

Company Location established Products

General Electric . . . Singapore 1988 TV parts and

subassemblies

RCA. ., . . . Taiwan 1969 TVs, subassemblies,

parts

Mexico 1969 Subassemblies

Zenith . . . Taiwan 1971 Complete

monochrome TVs;

circuit boards,

parts,

subassemblies for

color TVs

Mexico 1978 Circuit boards, parts,

subassemblies,

chassis

aBecause of the fluidity of offshore manufacturing activities, the information ‘n

this table is not necessarily complete or current.

SOURCES Annual reports, R. W Moxon, “Offshore Production in the Less.

Developed Countries by American Electronics Companies, ” DBA

thesis, Harvard University, 1973

tion have caused the rapid shift in composition

of U.S. color TV imports toward components

and subassemblies illustrated in table 13.

U.S. consumer electronics manufacturers

have been able to reduce production costs

through offshore assembly. To the extent that

their ability to remain competitive has depended on transferring some operations

abroad, American workers have lost job opportunities. On the other hand, a total collapse of

color TV production in the United States would

have cost more jobs—a point explored in greater depth in chapter 9 as well as appendix B.

Exports

Despite the large negative U.S. trade balance

in consumer electronics—which, depending on

year and the definitional bounds employed, has

been in the range of $3% billion to $6 billion

annually—and the continuing pressure generated by imports, the U.S. industry has managed

to export growing numbers of color TVS. Figure 20 shows the export trend in numbers of

color sets, while figure 21 compares imports
Ch. 4—Structure and Trade in the International Electronics Industry . 119

Figure 20.— U.S. Exports of Color TV Receivers

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

Year

SOURCES 1977 79— Color Telev/s/on Rece/vers and Subassemblies Thereof

(Washington D C U S International Trade Commlsslon Publlca

ton 1068 May 1980), p A 25

1980, 1981 — Elecfron/cs foreign Trade F/ve Year Summary

19771981 (Washington, D C Electronic Industries Assoclatlon,

March 1982), pp. 38, 50

Figure 21 .—U.S. Exports and Imports of Color

TV Receivers (complete sets only)

0

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

Year

SOURCE Consumer E/ecfron/cs Annua/ Rev/ew (Washington D C Electronic

Industries Assoclatlon, 1982), p 37

and exports of complete TVs in terms of value.

Two-thirds of U.S. color TV exports have recently gone to Latin American countries, in a

number of which color broadcasting has only

recently begun.6

e 1981 U.S. industrial Uut)ook (Washington, D. C.: Department

of Commerce, January 1981), p. 441. The remainder are sold

mostly in Canada. No information is available on the fraction

of exports originating with the U.S. operations of foreign-owned

firms.

The Japanese Consumer

Electronics Industry

The market for consumer electronics in

Japan is now second only to that in the United

States, with 1982 sales of $10.9 billion, about

half the level here.7 This was certainly not

always the case; in 1965, when U.S. output was

approaching 3 million color TVs, Japan produced less than 100,000. How did the Japanese

consumer electronics industry grow in size and

competitiveness so that it could ship more than

a million color sets to the United States by 1971

(table 12)–at which time Matsushita was already the largest consumer electronics producer in the world?

Early Development

In fact, the United States had a good deal to

do with the development and expansion of

Japan’s consumer electronics industry.’ After

World War II, the Japanese economy was in

shambles. The government could not stimulate

developments in electronics through defense

spending, but had clearly decided by the end

of 1953—when television broadcasting began

in Japan—to promote consumer electronics as

a road to overall strengthening of the industry.

In November of that year, the Ministry of International Trade and Industry (MITI) announced a policy aimed at increasing production capacity for TVs. One step was to restrict

imports. The government also encouraged acquisitions of foreign technology, most of which

came from American firms.

7Electronics, Jan, 13, 1983, pp. 136, 154. While other sources—

defining consumer electronics more or less inclusively–give different magnitudes, the relative sizes of the U.S. and Japanese

markets remain about the same. The figures cited later in this

paragraph come from The U.S. Consumer Electronics Industry

(Washington, D. C.: Department of Commerce, September 1975),

pp. 20 and 24, and “International Technological Competitiveness: Television Receivers and Semiconductors, draft report

CRA 425 prepared by Charles River Associates, Inc. for the National Science Foundation under NSF grant No. PRA 78-

20301, July 1979, p. 2-19.

eMuch of the material that follows is drawn from ‘‘Sources

of Japan’s International Competitiveness in the Consumer Electronics Industry: An Examination of Selected Issues, ” prepared

for OTA by Developing World Industry and Technology, Inc.

under contract No. 033-1010. o.
120 . International Competitiveness in Electronics —- ———————— —

U.S. servicemen stationed in Japan after

World War II and during the Korean War

proved an attractive market for Japanese consumer electronics manufacturers. Both fledgling companies like Sony and larger firms with

prewar roots like Matsushita swiftly expanded

their outputs of radios and audio tape recorders. Sometimes U.S. products brought to Japan

by servicemen were reverse-engineered. By the

mid-1950’s, production was growing at very

high rates; Japan’s output of TVs doubled from

613,000 sets in 1957 to 1.2 million the next year,

reaching 2.8 million in 1959.9

High-volume production of color sets began

in 1964, spurred by the televising of the Tokyo

Olympics. Exports followed, as shown in figure

22, with a large though variable fraction—in

some years as much as half—of Japan’s color

TV production shipped abroad. During the

1960’s, almost all these exports were destined

for the United States, many to be sold by

private brand retailers such as Sears; by the

turn of the decade, Japan was producing as

many color TVs as were made here. More recently, Japanese firms have also shipped large

numbers of TVs to Western Europe and other

parts of the world; in 1977, 95 percent of Japan’s color TV exports reached the United

States but 3 years later half were shipped to

other Asian nations, Canada, and Western Europe—another consequence, at least in part, of

the OMA limiting Japan’s access to the U.S.

market.

Within Japan, consumer electronics firms

have competed strongly among themselves. Although the larger, more diversified enterprises—well-known companies like Matsushita

(which markets in the United States under

Panasonic, Quasar, and National brand

names), Hitachi, and Sony—have had secure

positions for many years, smaller firms have

come—and mostly gone—depending on economic conditions and technological or market

opportunities. The number of companies making radios in Japan dropped from 80 in 1948

to 18 in 1950. The more than 30 entrants in the

“’Fifty Years of Japanese Broadcasting, ” Japan Broadcasting

Corp., Radio and TV Culture Research Institute, 1977, p. 227.

Figure 22.—Japanese Production and Exports of

Color TV Receivers

5

4

3

2

1

0

1964 1966 1968 1970 1972 1974 1976 1978 1980

Year

SOURCES Exports-1964.67-Japan Econom{c Yearbook, 1968, p 171

1968.70–Japan Economic Yearbook, 1971, p 208

7971.75–Japan Economic Yearbook, 1976/77, p 133

1976—Japan Econom/c Journal, February 15, 1977, p 8

Production—7962.70-Japan Economic Yearbook, 1971, p 289

1971.75–Japan Economm Yearbook, 1976/77, p 215

7976–Japan Economic Journal, February 15, 1977, p 8

Exporis and production—1977.79–Japan Econom!c Yearbook

1980/81, p 125

Exports and product/on—1980—Japan E/ectron/cs A/manac 1982

(Tokyo Dempa Publlcat!ons, Inc , 1982) p 129

TV market in the early 1950’s were likewise

quickly winnowed down by competitive forces;

after a decade, virtually all of Japan’s output

of TVs was accounted for by the top 10 manufacturers. 10 At present, the Japanese TV industry is dominated by a few large vertically

integrated firms which make many of their

own components. Some of these firms also

manufacture broad ranges of other electrical

and electronic products—e.g., semiconductors,

computers. Matsushita, the largest in terms of

consumer electronics sales, has held around 30

percent of the Japanese color TV market in recent years.

Japan’s consumer electronics firms based

many of their product developments on technologies developed first in the United States.

From 1960 through 1967 alone, Japanese comlocj~ut~u ~nyo n. &njo to Kongo no Mondai (Technological

Imports and Future Problems] (Tokyo: Ministry of International

Trade and Industry, 1963), pp. 723-725. The number of color TV

manufacturers in Japan has continued to decrease, from 22 in

1963, to 15 in 1972, to 11 in 1978—’’Sources of Competitiveness

in the Japanese Color Television and Video Tape Recorder Industry, ” Developing World Industry and Technology, Inc., for

the Department of Labor, Oct. 16, 1978, p. 100.
Ch. 4—Structure and Trade in the International Electronics Industry ● 121

.-

panies negotiated nearly 200 licensing agreements with RCA.11 Until the 1970’s, most of the

flow of TV technology into Japan contributed

to incremental improvements in existing products and processes. At the same time, Japanese

companies actively sought more advanced

technologies, realizing that imitation and

refinement could only take them so far. Sony,

for example, took out a license from Western

Electric covering transistor technology in 1954;

10 years later, Toshiba was negotiating to purchase video tape recorder technology from Ampex.

Government Supports

While the aid given consumer electronics by

Japan’s Government–through policies encouraging exporting as well as protection from outside competition—has helped the industry,

Japanese industrial policy, here as elsewhere,

has been more notable for careful targeting of

critical areas than for the overall magnitude of

assistance. The success stories of individual

firms reveal a host of factors contributing to

growth, only one of which is government support. Continuing attention to manufacturing

technologies, reduced costs through economies

of scale and rapidly increasing productivity,

innovative product designs and marketing

strategies, home-grown R&D—all have made

contributions.

MITI’s role—discussed more extensively in

chapter 10—is not restricted to supporting the

industry. Faced with the 1977 OMA, it was

MITI that allocated export quotas among Japanese TV manufacturers. Earlier the agency not

only set price levels for exports to Western

Europe, aiming to alleviate protectionist pressures, but in 1974 negotiated a quota on shipments.12 In the wake of the increasing difficulty

Japanese TV manufacturers faced in exporting,

— llsee ‘l SourCeS of Japan’s International Competitiveness in the

Consumer Electronics Industry: An Examination of Selected

Issues, ” op. cit., app. D, for a list. RCA established a small engineering laboratory in TIJLYIO as early as 1954, primarily to assist

lt \ I icensees.

12 ~’e~ev~.sjon Digest, June 27, 1977, p. 7.

the ministry established a Plant Export Policy Committee intended to guide and encourage

overseas investment. It is no surprise that when

Japanese consumer electronics firms have been

accused of price-fixing and other unfair trade

practices, the allegations have often focused on

MITI as coordinator.13

Industrial Structure

The three-tiered structure that characterizes

many Japanese industries—large end-product

manufacturers supplied by an array of small

firms, many of them affiliates, the third tier

consisting of even smaller suppliers and subcontractors—is found in consumer electronics

as in the Japanese electronics industry at large.

The structure differs from that of other countries mostly in that second- and third-tier firms

tend to be more closely linked to end-product

manufacturers, the links ranging from longstanding buyer-seller relationships to partial

ownership. According to many Western observers, relationships between vendor and

vendee—which tend to be arms-length in the

United States, typified by hard bargaining over

price—are more cooperative and supportive in

Japan. Moreover, the second- and third-tier

firms act as “shock absorbers” over the course

of the business cycle, being the first to hire or

fire and thus adding to the flexibility of the

system. * Japanese firms are said to gain a variety of advantages compared to American companies, even where the latter, on the usual

quantitative measures of vertical integration,

exhibit a greater degree of internal production

and value added. Of course, just as in the

United States—where Zenith’s component production is smaller than RCA’s—Japan’s consumer electronics producers differ significant-

—.——

lssee, for example, J. Nevin, “American-Built Consumer Electronics: Can the Species Be Saved?” Appliance Rlanufacturer,

February 1977, p. 74. At the time, Nevin was president of Zenith,

*I)iscussion of ties among purchasers, suppliers, and affiliates

in Japan suffers from an unfortunate lack of empirical analysis;

as a result, it is difficult to evaluate these arrangements, particularly from the viewpoint of the economy as a whole rather

than the corporations which have developed them. On employment stability and layoffs in Japanese companies, see ch. 8.
122 ● /international Competitiveness in Electronics —

ly in effective levels of integration. Matsushita

makes perhaps 90 percent of its own TV components; worldwide, only Philips, the Dutch

multinational, comes close to this figure. *A

Names like Sony, Pioneer, and Toshiba have

now become well known in the United States,

indeed throughout the world. Many of these

corporations are not only integrated in consumer electronics but highly diversified. Mitsubishi makes cars, steel, and ships as well as

a wide range of consumer products. Yamaha

builds pianos and motorcycles along with stereo equipment, Companies like Matsushita and

Hitachi are leaders in home appliances; the latter, frequently compared to GE, gets about 20

percent of its sales in consumer goods ranging from TVs and stereos to washing machines.

Hitachi is also a major producer of computers

and semiconductors, as well as heavy machinery, both electrical and nonelectrical.15 Even

at Sony, revenues from TVs account for only

about a third of sales, with another third from

other consumer electronics products.16 In part

because of their diversified businesses, Japanese consumer electronics manufacturers—

more so than most of their American counterparts—had begun to design and manufacture

their own semiconductors by the 1960’s; even

today, half of Japan’s output of microelectronics devices goes into consumer products,

versus only 15 to 20 percent in the United

States.

As early as 1971, 5 of the 10 largest consumer

electronics producers in the world were Japanese, led by Matsushita and including Hitachi,

Toshiba, Sony, and Mitsubishi. The Japanese

consumer electronics industry was already

considerably larger than the American, with

more than twice as many employees and—although productivity had not yet reached the

“’’Sources of Competitiveness in the Japanese Color Television and Video Tape Recorder Industry, ” op. cit., p. 148.

15N. Pear] stine, “That Old Nobushi Spirit, ” Forbes, July 23,

1979, p. 42.

ln4’Sources of Competiti\’eness in the Japanese Color Television and Video Tape Recorder Industry, op. cit., p. 143; ‘‘Sony

I {cads Ha{:k to Broadcast Market, ” Electronics, Mar. 27, 1980,

p. 98.

U.S. level—a much higher rate of growth in output per man-hour.17 The larger Japanese consumer electronics firms have by now become

true multinationals; not only do 7 of Japan’s

11 color TV manufacturers operate plants in

the United States, Japanese companies manufacture TVs in countries such as West Germany, Spain, and the United Kingdom, along

with developing nations in Asia and South

America. Matsushita has approximately 40

manufacturing plants outside Japan, mostly in

developing countries. Sanyo and Matsushita

are the leaders in foreign investment, with each

accounting for about $1.5 billion in overseas

production during 1980, much of this in other

Asian nations.18

Japan’s dominance of consumer electronics—now global though facing increased challenges from other Asian countries—extends

well beyond TVs; Japanese corporations account for about 60 percent of world production of audio equipment, as well as virtually

all VCRs. Philips is the only non-Asian company with its own technology for consumer

VCRs—a product which, after a very long gestation period in the R&D laboratories of several

Japanese companies, notably Sony and Matsushita (see ch. 5), was initially slow to find a

a market. Now that sales are booming, Japanese firms are reaping the dividends, building

virtually all their VCRs at home and exporting

about 80 percent of them.19 In this new generation of consumer products, Japan has taken a

leadership position—although their designs

were originally based on American technology,

they have been through several generations of

ITThe U.S. Consumer Electronics Industry, op. cit., Pp. 24, 26.

From 1972 to 1976, employment in TV manufacturing in Japan

declined by almost half although output grew substantially—(’Colour Television: Japan’s Global Strategy Adapts to New

Realities, Part II, ” Multinational Business, No. 4, 1978, p. 18,

“J. Marcom, Jr., “Japanese Consumer Electronics Firms See

Room To Expand Plants in Southeast Asia, ” AsiHn Wall Street

Journal Weekly, Mar. I, 1982. Total production outside Japan

in 1980 for the five largest Japanese consumer electronics firms

came to about $4,3 billion.

“’’Stagnant Export Industries Outlined, ” /apan Report, Joint

publications Research Service JPRS 1./10639, July 7, 1982, p. 56.

Japan’s estimated 1982 production of VCRs was 12.2 million

units, with 9.7 million scheduled to be shipped abroad. Two

Korean firms also build VCRs.
Ch. 4—Structure and Trade in the International Electronics Industry ● 123

.— . — — .—

independent development already—rather than

following behind American or European firms

as had been the case with TV receivers.

Consumer Electronics in

Western Europe

Table 15 compares relative sizes, as of 1978,

of color TV manufacturers with headquarters

in various parts of the world, While production levels will have changed, it is unlikely that

positions have altered greatly except in the case

of Philips—which, with the acquisition of GTESylvania’s TV operations by Magnavox in 1980,

has probably moved into first place. Note that

among the lower volume producers of TVs

lumped under the “other” category are a

number of large, diversified concerns with

relatively small consumer electronics operations—e.g., General Electric.

The 13 color TV producers listed in table 15

include 5 Japanese companies, 3 American (of

which only 2 now remain), and 5 European

(counting ITT in this category)-–the latter all

rather small except for Philips. The Dutchbased multinational has been a dominant force

in European consumer electronics markets for

years, but in color TV as in electronics as a

Table 15.—Worldwide Production of Color

TV Receivers by Firm, 1978

Annual production

Company Headquarters (millions of color TVs)

Matsushita, . . . . . . Japan 3.60 (12.50/o)

Philips a . . . . . . . . . . Netherlands 3.50 (12.1 %)

RCA . . . . . . . . . . . . . United States 2.00 (6.90/o)

Zenith . . . . . . . . . United States 1.97 (6.8%)

Sanyo . . . . . . . . Japan 1.95 (6.8°/0)

Sony . . . . . . . . . . Japan 1.70 (5.9%)

Toshiba . . . . . . . . Japan 1.50 (5.20/o)

Grundig . . . . . . . . . West Germany 1.40 (4.80/o)

Hitachi . . . . ... . Japan 1,25 (4.3°/0)

GTE-Sylvania a . . . United States . 1.20 (4.2%)

AEG-Telefunken . . West Germany 0.98 (3.4%)

Thomson-Brandt . France 0.94 (3.3%)

ITT b

. . . . . . . . United States 0.78 (2.7%)

Other . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (24.60/o)

28.9 million

aFlgures

— —

for Philips Include Magnavox but not GTE Sylvan la, whose U S TV

facllltles were purchased by Magnavox (n 1981 Saba, a German TV producer

was sold by GTE to Thomson Brandt the same year

b

lTT IS an American based conglomerate that produces televisions In Europe but

not the United States

SOURCE Ffnancfa/ TIrnes NCJV 18 1980

whole the European industry includes many

small-scale producers; more than 30 in the case

of TVs. This dispersion of production capacity mirrors the relatively isolated markets that

continue to characterize Western Europe a

quarter-century after the establishment of the

European Economic Community (EEC).

As a whole, the European consumer electronics market is nonetheless large. Table 16

gives approximate 1982 sales by major product

category for the United States, Japan, and

Europe. European consumers buy more TVs

and VCRs than Americans, and almost as

much audio equipment (radios, stereos, etc.).20

Only in the “other” category of table 16 is the

U.S. market much larger—a reflection of affluence and appetite for products like electronic

toys and games; Americans bought more than

10 times as many toys and games as Europeans

last year,

In contrast to the color TV markets of the

United States and Japan, where most sales are

replacements or additional sets, only about 60

percent of Western European households have

color sets. In some countries—even France—

the penetration is far less. While these large

and still-expanding markets have attracted nonEuropean firms, importers have faced an uphill

battle; local producers are shielded by an array of trade barriers, with broadcasting standards the strongest,

Technologies for receiving European broadcast signals—particularly the PAL (Phased

Alternating Line) system used everywhere except in France—are covered by a wide array

of patents. Initially, the owner of the PAL

patents, the West German firm AEG-Telefunken, refused licenses to all Japanese companies,

Eventually licenses were granted allowing imports of smaller screen models only, or local

production by Japanese manufacturers.21 In adZ“west ~ermany is the ]a rgest count ry market, ,i bso rh i n g 2.6

million color TVs in 1979, Sales in Italy during 1 $)~~-where Lolor broadcasting beg. a n only 3 years earlier—totaled l.9 mllli(ln

sets, while consumers in the L’nited Kingdom bought 1,8 mdllon

and i n I;ra n(; e 1.5 million The 1979 figure for the U n I ted States

was about 10 m i I I 1( J n, \l ightl} bet o~i’ total 1 European sales of 10.5

m i I 11(I n, SW F’inanr ia 1 Tlmt’s, .Nok 1 H, 1980, p. 18.

~1 1 n t ht: [ J I] 1 t CC] ~ I ng{]om, for t;xa m p! c, ~ets with S(; re[> 11 s i Les

c~~[>r 20 I n( hes ( a II not b(’ i m~)ort(;(l from ]dpa n. ‘‘ SP( tora] Stu( 1 }
124 . International Competitiveness in Electronics

Table 16.—Consumer Electronics Markets in the United States, Europe, and Japan

1982 sales (billions of dollars)

Video cassette

Color TV Monochrome TV recorders Audio equipment Other Total

United States. . . . . . . . . . . . . . . $4.4 $0.5 -. - -— — _—

Europe . . . . . . . . . . . . . . . . . . . . 5.0 0.4

Japan . . . . . . . . . . . . . . . . . . . . . 2.6 0.02

$1 .3 $5.7 $9.5 $21.4

2.4 5.2 1.5 14.5

1.8 3.6 2.9 10.9

SOURCES: Electronics, Jan. 13, 1963, pp 136, 146, 154; Mar. 10, 1963, p. 6,

dition to the protective effect of broadcast

standards and patent licenses, tariffs into the

EEC are relatively high—14 percent for color

TVs—while value-added taxes can be as much

or more. Some European countries have, from

time to time, also adopted import quotas.

Just as they did in the United States, Japanese

color TV manufacturers have established European production facilities to circumvent market restrictions, Five Japanese firms assemble

color sets in Britain either through joint ventures or wholly owned subsidiaries, with much

of this output being exported to other EEC

countries. 22 Sony was the first to build TVs in

the United Kingdom, just as it led the way into the United States; its British plant opened

in 1968. While most of the foreign investment

in the EEC has flowed to Britain, Japanese

firms have holdings in countries like Italy and

Spain as well—the latter particularly attractive

because wage levels are comparatively low.

The first of more than 75 PAL patents lapsed

in 1981; all will expire during the current decade. With considerable anxiety, Europe’s color TV manufacturers are awaiting stiffer Japanese competition in the lucrative large screen

No. 2: Transfer of Technology in the Consumer Electronics Industry-The Television Sector,” Organization for Economic Cooperation and Development, Paris, Sept. 14, 1979, p. 16. Korean

firms have been denied PAL licenses of any type.

Color broadcasting in the United States, Japan, and South

America is based on the NTSC (National Television System Committee) system, developed here and approved in 1953 by the Federal Communications Commission after several years of controversy—” In the Wake of the Transistor,” Electronics, Apr. 17,

1980, pp. 281, 284. France has its own SECAM (Sequential and

Memory) system, also used in Eastern Europe.

~ZThe companies are Sony, Matsushita, Toshiba, Mitsubishi,

and Hitachi—’’Sources of Japan’s International Competitiveness

in the Consumer Electronics Industry: An Examination of

Selected Issues, ” op. cit., pp. 124-125.

market. For some—i.e., Telefunken, which entered bankruptcy in August 1982 after a period

of poor financial performance extending over

nearly 10 years—even the protection available

in the past has not been enough. 23

The fragmented character of the industry

and market in Europe has created competitive

problems for consumer electronics firms that

cannot generate the revenues to support ongoing R&D and investments in up-to-date manufacturing facilities. Besides Philips, the principal exception has been the French company

Thomson-Brandt, the consumer arm of the

Thomson group, Both Philips and Thomson

have recently moved to increase the scale of

their European operations, aiming to position

themselves for competition with the Japanese.

Philips has solidified its ties with the West German firm Grundig—of which it purchased a 25-

percent share in 1979—in part through joint efforts to improve the Philips VCR system.24

Thomson-Brandt—although losing money in

recent years—invested more than $150 million

between 1978 and 1980 in acquisitions of West

German consumer electronics firms.25 The

company’s aim—which the French Government actively supported even before Thomson

was nationalized under Mitterrand—has been

ZtSee, for example, “Germany’s Telefunken Insolvent: Huge

Concern Discloses Debt of $1.84 Billion, ” New York Times, Aug.

10, 1982, p. Ill. The company had not paid dividends since 1974.

“’’Philips: An Electronics Giant Rearms To Fight Japan, ” Business Week Mar. 30, 1981, p. 86. A major difference between

Philips’ strategy and that of Japanese color TV manufacturers

like Toshiba or Matsushita has been the siting of foreign manufacturing facilities. Almost all of Philips’ operations are in industrialized countries, mostly in Europe (North American Philips

is legally independent although closely tied to the Dutch firm].

In contrast, Japanese companies have moved aggressively into

developing country markets.

25J. Tagliabue, “Europeans Battle Japanese TV Tubes, ” New

York Times, Feb. 10, 1982, p, D4.
Ch. 4—Structure and Trade in the International Electronics Industry ● 125

21.

&

c ’

Photo credit” IBM

Small general-purpose computer system

to expand from its base in France to other parts

of Europe.

In common with major Japanese producers,

the larger European electronics manufacturers

tend to be diversified. Philips makes computers

and semiconductors, as does the largest of the

West German entrants, Siemens—although Siemens has only a small consumer electronics

business. Table 17 illustrates something of this

diversification. The table ranks firms by sales

in electronics—worldwide sales for European

companies, sales only in Europe for American

producers. Note first that U.S. firms have about

30 percent of the total European electronics

market—mostly in computers, semiconductors,

and other nonconsumer products. No European country can claim a share of total European electronics sales approaching that of the

United States.26 Second, although Japan’s electronics manufacturers are perceived as rapidly increasing threats, as yet no Japanese firm

has European sales in the top 20. Finally, the

the low profit levels of the European companies in the table offer a striking contrast to

American corporations like IBM or Xerox. The

predominance of computer firms in table 17

demonstrates the size and importance of the

information processing market in industrial-

%. de Jonquieres, “U.S. Dominates Europe’s Electronics Markets,” Financial Times, July 9, 1982, p. 7. Twenty-eight of the

hundred largest firms ranked by electronics sales (defined as

in table 17) are American. Sales for the 28 American companies

came to $31.5 billion, with West German companies following

at $19.2 billion; the top 100 firms had sales totaling $100 billion.

Figures for the United Kingdom and France came to $12.3 billion

and $11.3 billion, respectively. Japanese companies did $3.7 billion of business in Europe. (The totals are annualized for slightly

different periods within the calendar years 1980 and 1981.)
126 ● International Competitiveness in Electronics

—.——— —

Table 17.—Electronics Firms Ranked by European Salesa

Electronics sales Electronics as a percent Pre-tax profits as a

Company Headquarters (billions of dollars) of total company sales percent of sales

Philips ., . . . . . . . . . . . . . . . . . . . . . . Netherlands $11.1 600/0 1 .9 ”/0

IBM . . . . . . . . . . . . . . . . . . . . . . . . . United States 9.4 99 22.5

Siemens . . . . . . . . . . . . . . . . . . . . . . West Germany 8.7 49 5.0

lTT . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 8.6 50 6.7

Thomson . . . . . . . . . . . . . . . . . . . . . . France 6.5 75 3.1

GEC b . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 3.8 47 13.7

AEG-Telefunken . . . . . . . . . . . . . . . . West Germany 2.9 36

Ericsson . . . . . . . . . . . . . . . . . . . . . . Sweden 2.0 70

CGE . . . . . . . . . . . . . . . . . . . . . . . . . . France 1.9 18 6.3

Xerox . . . . . . . . . . . . . . . . . . . . . . . . . United States 1.9 80 16.5

Olivetti . . . . . . . . . . . . . . . . . . . . . . . . Italy 1.7 68 6.8

Plessey . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 1.7 85 10.0

ICE . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 1.7 100 3.5

Grundig . . . . . . . . . . . . . . . . . . . . . . . West Germany . 1.5 100

ClI-Honeywell Bull . . . . . . . . . . . . . . France 1.5 100

Thorn-EMl . . . . . . . . . . . . . . . . . . . . . United Kingdom 1.5 27 4.2

Bosch . . . . . . . . . . . . . . . . . . . . . . . . West Germany 1.4 21 6.0

Hewlett-Packard. . . . . . . . . . . . . . . . United States 1.1 100 16.9

Racal . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 1.1 90 13.6

Honeywell . . . . . . . . . . . . . . . . . . . . . United States 1.1 100 8.2

%heflgures andrantingsafeforelectronlcs sales oniy, but inclucte electronic products of all types. For European firms, wwldwldo sales are li@ed, for American

companies, only saleewlthln Europe—whether through local production or imporfs. Sales figures areon an annualized basis but cover sllghtly different time periods

between January 19B0 and June 19B1.

~%:S3rltish General Electric Co. (GE~ is not related to the American firm of the same name.

SOURCE: G. de Jonquieres, “U S. Dominates Europe’s Electronics Markets,” F/rrancla/ Times, July 9, 1982, p 7 Based on “Mackintosh European Electronic Companies

File, 1981-82 “

ized economies. Not only do IBM, HewlettPackard, and Honeywell get much of their European revenues from computer sales, but several European companies in the table—ICL,

CII-Honeywell Bull—are primarily computer

manufacturers. Siemens and Olivetti are more

diversified, but also among the larger European

suppliers of data processing equipment.

Consumer Electronics in

Other Parts of the World

A number of developing Asian economies

have already established themselves as significant competitors in the global market for electronic products: Taiwan, South Korea, Hong

Kong, and Singapore all have rapidly growing

industries. The capabilities of each differ, as

do the roles their governments have played.

Generally, manufacturers in these countries are

still concentrating on consumer electronics

(see ch. 10, table 79), although clearly intending

to move toward more advanced products, including semiconductors and computers; in essence, they are following the Japanese model.

Only Taiwan and Korea have locally owned TV

industries of any size. Hong Kong and Singapore have been effective competitors in calculators, electronic watches, and toys and games;

Hong Kong’s $2.6 billion in electronics exports

during 1980 were split approximately 70:30 between consumer products and components.27

Japanese firms have invested extensively in

TV production facilities in other Far Eastern

nations, as have American manufacturers and

a few European companies (Thomson-Brandt

has a color TV plant in Singapore). RCA

transferred some of its color production to

Taiwan as early as 1969. By the time Rockwell’s Admiral division left the business at the

end of 1978, all of its TV production had been

moved to Taiwan; the facilities were sold to a

Hong Kong-based conglomerate.28 Although

U.S. companies have not invested in Korean

consumer electronics plants, Matsushita began

Z7R. Neff, “HOng Kong Prepares To Change, ” Electronics, July

14, 1982, p. 124.

za~e]evjsjon Receiving Sets From Japan (Washington, D. C.:

U.S. International Trade Commission Publication 1153, June

1981), p. A-21.
Ch. 4—Structure and Trade in the International Electronics Industry ● 127

to ship color TVs from Korea to the United

States in the mid-1970’s.29 By the end of the

decade, Japanese electronics firms relied on

subsidiaries or subcontractors in other Asian

nations for two-thirds of their production of

radios, 40 percent of their black-and-white TVs,

and more than a quarter of their audio tape recorders. so In turn, Japan supplied electronics

manufacturers in the rest of Asia with about

70 percent of their ICs and other high-technology components.

Table 18.—Wage Rates for “Skilled” Labor in

Asian Countries Compared to Japan

1975 1980

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . 29 38

South Korea . . . . . . . . . . . . . . . . . . . . . . . . . 22 51

Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 29

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 21

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 32

Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12

Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 17

Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 12

Sri Lanka. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3

Wage Rates and Investment

Chief among the attractions of Asian nations

as locales for foreign investment have been low

wages, Savings in labor costs have drawn both

Japanese and American firms making consumer electronics and semiconductor devices,

As the economies of these countries develop,

wage rates go up; table 18 illustrates the narrowing gap between Japan and other Asian nations over the period 1975-80, Labor costs in

all the countries listed except the Philippines

have increased with respect to Japan, but the

rise in several of the more advanced economies—Korea, Hong Kong, Singapore—has

been particularly steep. All three have been

preferred investment sites for Japanese electronics firms, several of whom have responded

to wage increases by returning some production to Japan, making extensive use of automated equipment. 31 In comparison to the

higher wage countries listed in table 18, the

electronics industries in Indonesia and Sri

Lanka remain in an early stage of development.

As the patterns outlined above might suggest,

foreign investments have made substantial contributions to the development of host country

electronics industries.32 Foreign-owned plants

train people who can then staff indigenous

SOURCE Oenshi Sangyo no Kokusaik no Hoko to sono Eikyo ni Kansuru Chosa

Hokoku @urvey Report on Trends in the Internationalization of the Elec.

tronlcs Industry and Their Influence, Part II on East and Southeast Asia)

(Tokyo Nihon Denshl Klkai Kogyokal (Electronic Industries Association of Japan), March 1981), p. 5

companies, as well as nurturing the infrastructure—suppliers, transport facilities, financial

institutions, government agencies—needed to

support a local industry. Moreover, as the

economies of these countries expand, their

own electronics markets grow. At present, consumers in Taiwan probably buy more consumer electronic products than those in any

Asian country except Japan, with South Korea

close behind. Demand should continue to grow

rapidly in both Taiwan and Korea; color TV

broadcasting–which began at the end of 1980

in South Korea—will be a major spur.

During the 1960’s, most of the developing

Asian economies pursued policies aimed at attracting outside capital. Several countries later

restricted direct investment, but in response

to slow economic growth during the latter part

of the 1970’s often moved back toward selective encouragement. Foreign-owned electronics plants in Asia have typically been built for

export rather than local sales; table 19 illustrates the heavy dependence of these countries

on exports as well as foreign capital.

“’’International Technological Competitiveness: Television Receivers and Semiconductors, op. cit., p. 2-23.

sODenshi Sangyo no Kokusaika no Hoko to sono Eikyo ni Kansuru Chosa Hokoku (Survey Report on Trends in the Internationalization of the Electronics Industry and Their Influence,

Part 11 on East and Southeast Asia) (Tokyo: Nihon Denshi Kikai

Kogyokai (Electronic Industries Association of Japan), March

1981].

31J. Marcom, Jr., “Japanese Electronic Firms Cut Reliance On

Offshore Plants, ” Asian Wall Street Journal Weekly, Aug. 17,

1981, p. 1.

‘ZFor a case study that describes how technology transfers associated with offshore assembly in Korea helped build the foundation for a domestic industry, see J. N. Behrman and H. W.

Wallender (eds.), Transfers of Manufacturing Techno)ogj Within Multinational Enterprises (Cambridge, Mass.: Ballinger, 1976],

ch. 10 on “Motorola -Korea.’
128 ● International Competitiveness in Electronics

——. . . . —————

Table 19.—Forelgn Capital, Production, and Exports in Asian Electronic Industries, 1979

Foreign investment as a

percentage of total Total electronics production Exports as a percentage of

investment in electronics (millions of dollars) total electronics production

South Korea. . . . . . . . . . . . . . . . . . . 250/o $3,300 70%

Taiwan . . . . . . . . . . . . . . . . . . . . . . . 45 3,200 80

Hong Kong. . . . . . . . . . . . . . . . . . . . - 1 0 2,000 90

Singapore . . . . . . . . . . . . . . . . . . . . . 80+ 1,850 90

Malaysia . . . . . . . . . . . . . . . . . . . . . . 90+ 990 75

Indonesia . . . . . . . . . . . . . . . . . . . . . high 540 Not available

Philippines . . . . . . . . . . . . . . . . . . . . very high 320 90

Thailand . . . . . . . . . . . . . . . . . . . . . . very high 110 10

SOURCE Derrshl Sangyo no Kokusaika no Hoko to sono Elkyo ni Kansuru CfIosa Hokoku (Survey Report on Trends in the Internatlonallzation of the Electrordcs lndust~

and Their Influence, Part II on East and Southeast Asia) (lokyo Nlhon Denshi Kikal Kogyokai (Electronic Industries Association of Japan), March 1981), p. 7.

By 1978, before the OMA, Korea’s shipments

of color TVs to the United States exceeded

400,000 sets (table 12)—a graphic illustration

of expanding scale and rising competitiveness

in the country’s consumer electronics industry,

which, in contrast to that in Taiwan, owed little to U.S. capital (although Japanese investment had been substantial). Following in the

footsteps of Japanese and Taiwanese color TV

manufacturers, the Korean Gold Star firm has

now established U.S. production facilities.

Gold Star—a member of the Lucky Group, a

large conglomerate—began operations in Alabama during 1982 (table 10), Taiwan’s exports

of color sets to the United States had, before

the OMAs, been even greater than those of

Korea. Many of these shipments came from

plants operated by RCA and Zenith, who own

a considerable fraction of Taiwan’s production

capacity and who were also restricted by the

1979-82 OMA. Tatung, the country’s largest

electronics manufacturer, opened the first

Taiwanese-owned assembly plant in the United

States in 1980, with Sampo beginning production in Atlanta the following year.33 Such investments are a clear indication that consumer

electronics firms in the rapidly industrializing

nations will continue their efforts to penetrate

U.S. markets.

JJT. Furukawa, “flee Taiwan Elect. Growth, ” Electronic News,

Dec. 7, 1981, p. W. About half Taiwan’s total exports of electronics have been coming to the United States. On Gold Star,

see E. Lachica, “Korea’s Gold Star Seeks To Make a Name for

Itself in the U.S. Television Market, ” AsiarI Wall Street ]ournal

Weekly, July 5, 1982, p. 8.

China has been a major exception to otherwise common trends in the developing Asian

economies (also see ch. 10, which compares industrial policies in these countries). The People’s Republic has negotiated a number of joint

ventures with foreign concerns, most of whom

have viewed it as potential market more than

potential competitor. Sony, for instance, has

announced an agreement with China’s National Electric Technology Import Corp. to provide

technology and manufacturing equipment for

producing VCRs in Beijing.34 The People’s Republic has already become a significant market

for consumer electronics products originating

elsewhere in Asia; Japanese firms have dominated shipments of black-and-white TVs, with

South Korea and Taiwan leading in exports of

tape recorders and radios, respectively. 35

American and European firms are also competing for electronics sales in China, though

seldom in consumer products.

The Example of South Korea36

As the paragraphs above indicate, and as

table 19 also shows, South Korea—along with

Taiwan—is a leader among developing Asian

electronics industries. Government has given

MN. Hashimoto, “Sony, China To Try A New Approach to Joint

Ventures,” Asian Wall Street Journal Weekly, Jan. 19, 1981, p. 6.

a5’’Chugoku ni Dairyo Yushutsu, ” (Large-Volume Exports to

China) Nihon Keizai Shimbun, Jan. 12, 1981. 3eThe information that follows is drawn largely from Denshi

Sangyo no Kokusaika no Hoko to sono Eikyo ni Kansuru Chosa

Hokoku (Survey Report on Trends in the Internationalization

of the Electronics Industry and Their Influence, Part II on East

and Southeast Asia), op. cit.
Ch. 4—Structure and Trade in the International Electronics Industry 129 ———— — —

local manufacturers considerable assistance

since Korea made its first transistor radios in

1950, with the commitment to expansion in

electronics strengthening in recent years. During the 1970’s, Korea’s production of consumer

electronics grew at nearly 50 percent per

year—table 20. The fraction of total manufacturing output accounted for by electronics

swelled, with exports of consumer electronics

increasing at nearly 65 percent annually, During the 1980’s, production and exports of data

processing and telecommunications equipment

are expected to grow faster than consumer

goods output, components other than microelectronics to decrease (see table 78, ch. 10).

Table 20.—South Korea’s Electronics Production

1971 1976 1980 (1971-80)

Consume; -. ., . . . . . $ 33 $ 551 $1,148 48.30/,

Industrial a ., . . 19 126 364 38.8

Components . . . . . . 86 745 1,341 35.7

$138 $1,422 $2,853 40.0

Electronics as a

percentage of all

manufacturing . 1.40/0 5.60/o 8.5%

alncludes computers and telecommunications equipment

SOURCE Oenshi Sa_rgyo no Kokusaika no tioko to sono Eikyo ni Kansuru Chosa

Hokoku (Survey Reporl on Trends in the Internationalization of the Elec.

tronlcs Industry and Their Influence, Part II on East and Southeast Asia)

(Tokyo Nihon Oenshl Klkai Kogyokal (Electronic industries Association of Japan), March 1981), p 103.

-— ——

As table 20 indicates, components—many of

them produced by the small firms that predominate in Korean industry—are a staple of the

nation’s output; of roughly 750 Korean electronics firms in 1978, well over half were

capitalized at less than $500,000, and about 500

were parts suppliers. 37 As a result, the country is largely self-sufficient in the components

needed for production of both color and monochrome TVs, as well as many other consumer

products. The chief weakness of the components sector—a weakness shared with other

developing economies—has been ICs. Nevertheless, Korean firms have managed to outstrip

their rivals elsewhere in Asia, always excepting Japan, in technology and production capacity for microelectronic devices. 38 While most

of the semiconductors now made in Korea are

discrete devices and small-scale integrated circuits, the Hyundai Group—a large conglomerate—has announced plans for substantial investments in advanced devices, aiming at production of 64K RAMs and other advanced

products within a few years.

o71bid., p. 107.

36A. Spaeth, “Korea’s Electronics Industry Making Rapid Gains

in Shift to High-Technology Products, ” Asian Wa)) Street ]ollrna) Weekly, Dec. 20, 1982, p. 1; R. Neff, “ Bold Koreans Push

Into Leading-Edge ICS, ” Electronics, June 16, 1983, p. 98.

Semiconductors

Technical advances in electronics, as in

many other industries, flow in good measure

from synergistic relationships among endproduct manufacturers and suppliers—here,

suppliers of the primary building blocks for

electronic systems, semiconductors. IC designs

represent direct responses by companies in the

merchant industry to perceived needs at the

user level. In their turn, semiconductor firms

depend on suppliers who design and build the

specialized equipment needed for producing

ICs—equipment ranging from electron-beam

mask-makers and optical wafer-steppers to annealing furnaces (ch. 3). A separate section below is devoted to the equipment industry because of its role in providing the tools that

semiconductor manufacturers need to maintain their own technological competitiveness.

American dominance of world semiconductor markets continued through the 1970’s without significant challenge, least of all in ICs. Virtually all the major innovations in microelectronics have come from the United States; most

foreign producers depended to considerable

extent on licensing agreements with American

firms. U.S. companies have also supplied world

markets directly, through exports or local pro-
130 . International Competitiveness in Electronics

duction by subsidiaries, Including captive production and overseas operations, U.S.-owned

firms accounted for nearly two-thirds of total

world semiconductor output in 1981.39 Only

near the end of the last decade did the situation begin to change, as Japanese enterprises

made rapid strides in IC design and production.

If the 1970’s represented the zenith, American dominance seems bound to wane during

the present decade. There are many signs. First

and perhaps foremost is the determination by

other governments to contest the U.S. lead

in technology (ch. 10). While the results of

government-sponsored R&D efforts have been

mixed—and no doubt will remain so—such

programs, many of which are of substantial if

not overwhelming magnitude, demonstrate the

importance other nations attach to an independent capability in microelectronics. The

many efforts by foreign enterprises to tap the

U.S. technology reservoir through investments

in American firms are another sign. Still more

tangible evidence that the current decade will

not duplicate the 1970’s comes, not surprisingly, from Japan. Partly as a consequence of government-subsidized research efforts, as many

as six Japanese companies have demonstrated

their ability to compete successfully in

the design and production of sophisticated

ICs—most notably, memory chips such as dynamic RAMs. Although the range of products

in which the Japanese are strong is fairly narrow, they are quickly broadening their product

lines. For U.S. manufacturers, the competitive

situation in the 1980’s differs substantially from

that to which they had grown accustomed.

The Semiconductor Industry

in the United States

Growth continues to be a major descriptor

of the U.S. semiconductor industry. Output in

the United States, including exports and production consumed internally, has gone from

about $600 million in 1960 to $9.5 billion

SeStatus 198z; A Report on the Integrated Circuit Industry

(Scottsdale, Ariz.: Integrated Circuit Engineering Corp., 1982),

p. 5.

in 1982; the average annual increase, nearly 14

percent, has been well above the 9 percent (in

current dollars) average for the gross national

product. 40 Output in 1983 is projected to reach

$11.3 billion.

Demand in the rest of the world has also expanded at high rates. Table 21 compares sales

in the major markets—the United States, Western Europe, and Japan—for 1974 and 1982.

Sales more than tripled in the United States

and Japan, with increases for ICs compared to

discrete semiconductors especially striking,

Over the same period, European semiconductor sales increased by only 75 percent. The

Japanese market is now half the size of that in

the United States.

Structure

Something over a hundred American firms

make semiconductors, with about 60 percent

of the industry’s output coming from the four

largest manufacturers: IBM and Western Elec-

~Domestic shipments were $571 million in 1960—A Report

on the U.S. Semiconductor Industry (Washington, D. C,: Department of Commerce, September 1979), p. 39. The 1982 and 1983

figures are from 1983 U.S. Industrial Uutlook (Washington, D. C.:

Department of Commerce, January 1983), p. 29-7. Other definitions of the industry’s products and boundaries will, as for consumer electronics, result in different figures. The gross national

product (GNP) growth rate is based on table B-1, p. 233 of the

Economic Report of the President (Washington, D. C.: Government Printing Office, February 1982). GNP in real terms has,

of course, grown much more slowly,

Table 21 .—Semiconductor Sales in the

United States, Western Europe, and Japan

Sales (billions of dollars)

1974 1982

United States

Discrete semiconductors . . . $0.88 $1.3

Integrated circuits . . . . . . . . . 1.2 6.3

$2.1 $7.6

Western Europe

Discrete semiconductors . . . $0.77 $0.77

Integrated circuits . . . . . . . . . 0.52 1.5

$1.3 $2.3

Japan

Discrete semiconductors . . . $0.55 $1.2

Integrated circuits. . . . . . . . . 0.59 2.4

$1.1 $3.6

SOURCES: 1974– E/actron/cs, Jan. 8, 1976, pp. 92, 93, 105

1982- Electronics, Jan 13, 1983, pp. 126, 142, 150; Mar, 10, 1983, p 8
Ch. 4—Structure and Trade in the International Electronics Industry ● 131

tric, which produce only for internal consumption, plus Texas Instruments (TI) and Motorola,

which sell most of their production on the open

market. Some 80 percent of U.S. output comes

from the 20 largest manufacturers, a percentage that would be higher if ICs alone were

considered.

41

Major U.S. merchant companies—those that

sell on the open market—are listed by sales level in table 22. Note that 3 of the 10 have been

purchased—in 2 cases by foreign interests—

since 1977; thus, strictly speaking, the table no

415’ummary of Trade and Tariff Information: Semiconductors

(U.S. International Trade Commission Publication 841, Control

No, 6-5-22, July 1982), p. 8.

longer represents U.S. companies only, T h e

ups and downs of sales figures for various companies over the period 1978-82 show that positions are likely to continue to change; indeed,

Motorola nearly caught TI in 1981/1982, managing small increases despite the recession

while the latter company’s sales dropped nearly 20 percent.

Market Trends

Table 23 shows sales and projections by device type in the domestic market (exports are

not included), while figure 23 illustrates end

uses for ICs. Sales growth between 1982 and

1986 is projected at 20 percent per year. While

such estimates often miss the mark—1982 sales

Table 22.—Merchant Semiconductor Sales of Ten Largest U.S. Suppliers

Worldwide semiconductor

sales (millions of dollars) Approximate 1982

1974 1978 1980 1982 market share

Texas Instruments . . . . . . . . . . . . . . . . . . . . $634

Motorola . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481

National Semiconductor . . . . . . . . . . . . . . . 210

Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Fairchild Camera and Instrument

acquired by Schlumberger in 1979). . . . 323

Signetics (acquired by Philips in 1977) . . 121

Advanced Micro Devices . . . . . . . . . . . . . . 26

General Instrument . . . . . . . . . . . . . . . . . . . 63

RCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA

Mostek (acquired by United

Technologies in 1980) . . . . . . . . . . . . . . . 60

NA = Not available

$921

680

376

300

358

214

132

129

NA

134

$1,580 $1,300

1,120 1,219

800 673

575 578

566 412

384 340

282 329

244 313

NA 291

360 220

8.8 ”/0

8.3

4.6

3.9

2.8

2.3

2.2

2.2

2.0

1.5

SOURCE Dataquest

Table 23.—U.S. Semiconductor Sales by Type

Sales volume (millions of dollars)

1975 1980 1982 1986a

Discrete semiconductors . . . . . . . . . . . . . . . . . . . . . . $ 665

Integrated circuits:

Standard logic families . . . . . . . . . . . . . . . . . . . . . . 364

Microprocessors/microcomputers . . . . . . . . . . . . . 68

Memory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

Linear circuits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192

Consumer products ICs. . . . . . . . . . . . . . . . . . . . . . —b

Custom ICs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —b

Other ICs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

938

Total semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . $1,603

$1,255

1,313

641

1,862

676

393

—b

304

5,190

$6,445

$1,322

1,183

1,053

2,113

868

497

426

137

$ 1,720

1,920

2,820

5,450

1,700

820

1,410

310

6.277 14.430

$7,599 $16,150

j’;:f’;:dunder other Ics “ ,!

SOURCES f975–E/ecfronics, Jan. 8, 1976, pp 92, 93.

f980-E/ectronics, Jan 13, 1962, pp 124, 125

1982, 1#6-E/ectronics, Jan 13, 1963, pp 128, 129, Mar 10, 1983, p 8
132 . International Competitiveness in Electronics

(

Figure 23.— End Uses of Integrated Circuits Sold Worldwide in the Merchant Market, 1980

SOURCE Status ’80 A Report on the Integrated Clrcwt Indusfry (Scottsdale, Ariz : Integrated Circuit Engineering Corp , 1980), p. 34

proved disappointing when the economy failed

to recover as expected—the longer term demand trend is bound to be steeply upward.

Growth will be fastest for ICs, with discrete

semiconductors—e.g., transistors—declining in

relative importance as ICs continue to replace

them. Within the IC category, microprocessors

and microcomputers are in turn taking over

some of the applications formerly performed

by standard logic circuitry (ch. 3). Note the

rapid increases in demand for microprocessors

and single-chip microcomputers and the steep

rise anticipated for custom circuits. Because

table 23 is based on value rather than units, it

may understate demand for memory circuits

in comparative terms. Memory chips were the

opening wedge for Japanese marketing efforts

in the United States; price competition—expected to continue—means that dollar sales

gain may be be depressed even as unit sales

skyrocket.

Where in 1960 about half of U.S. semiconductor production was sold to the military,

1982 military sales were at a level of $900

million to $1 billion — a bit more than 10 percent of the total; if only ICs are considered,

defense production accounts for around 7 percent of demand.42

Merchant and Captive Producers

U.S. semiconductor manufacture is marked

by two types of companies: 1) the so-called captive producers who make semiconductors to

be incorporated in their own end products,

which may range from consumer items to computers and defense systems, and 2) merchant

manufacturers who sell a major part of their

output to other firms. Some captives—IBM,

Western Electric—consume all their production internally, while other integrated producers—RCA, NCR—sell a fraction of their output

on the open market and use the rest themselves. Most companies that depend on micro42L. Wailer, “cadence Slow for Military Sales, ” Electronics,

Aug. 25, 1982, p. 75; An Assessment of the Impact of the Department of Defense Very-High-Speed Integrated Circuit Program

(Washington, D. C.: National Materials Advisory Board Report

NMAB-382, National Research Council, January 1982), p. 6. The

two largest defense suppliers, Texas Instruments and Motorola,

had 1980 military sales of about $110 million and $90 million,

respectively—6.8 percent and 7.4 percent of their total semiconductor output. These figures are for direct sales; semiconductor products embodied in standard systems such as computers

would add to the totals.
Ch. 4—Structure and Trade in the International Electronics Industry ● 133

electronic devices buy a portion of their needs

from merchant firms even if they operate captive facilities. While a number of the larger

merchant producers also make end products,

and consume some of their semiconductor output internally, the fraction tends to be small

compared with outside sales—typically in the

10-percent range (table 24; note that this table

lists production rather than sales, thus the

figures differ somewhat from those in table 22).

The only recent and authoritative data on

production by U.S. captives covers ICs only.

Collected by the U.S. International Trade Commission (ITC), the data shows the percentage

of domestic IC output accounted for by captives to have ranged between 40 and 50 percent during the period 1974-78.43 Table 25 cond3Competjtjve Factors influencing World Trade h Integrated

Circuits (Washington, D.C.: U.S. International Trade Commission Publication 1013, November 1979), pp. 82, 84. The captive

percentages were:

1974 1975 1976 1977 1978

qq.OO/o ZIT.9°/o 49.80/o 44.10/o 40. t)O/o

Table 24.—internal Consumption of Several

U.S. Semiconductor Producers, 1978

Semiconductor production

(millions of dollars)

Total Internal consumption

Texas Instruments . . . . . . . . $1,192 $112 (9.4%)

IBM . . . . . . . . . . . . . . . . . . . . . 750a 750 (100%)

Motorola . . . . . . . . . . . . . . . . 582 31 (5.3°/0)

Fairchild Camera and

Instrument . . . . . . . . . . . . 389 37 (9.5°/0)

National Semiconductor. . . 364 37 (105)

Intel . . . . . . . . . . . . . . . . . . . . 298 30a (10%)

Western Electric . . . . . . . . . 200a

200 (loo%)

aEstlmated

SOURCE Dataquest.

tains another set of estimates, these based on

worldwide production of firms with headquarters in the United States (and elsewhere);

the captive percentages here are lower than

those found by the ITC’s surveys in part

because U.S. merchant firms have extensive

overseas operations while captive production

remains more heavily concentrated in the

United States.

Table 25 also illustrates the extent to which

American companies have captured world

markets for ICs (in this table, production by

foreign subsidiaries of U.S. firms is attributed

to the United States). Although the U.S. position has been challenged by Japanese manufacturers in some segments of the market, American companies still produce more than twothirds of the world’s ICs.

All estimates indicate that captive production accounts for a substantial fraction of U.S.

semiconductor output; not only is captive production large, according to table 25 it is increasing. For a variety of reasons, this trend

is expected to continue; one projection shows

captive IC production rising from about onethird of the worldwide output of U.S.-based

firms in 1982 to 40 percent by 1985 and 50 percent at the close of the decade.44 While such

estimates are always problematical, they are

based on forces that have been at work in the

industry for a number of years—in many cases

the same forces that have led enterprises like

GE and United Technologies to purchase merchant semiconductor firms. Manufacturers of

WStatus 1982: A Report on the Integrated Circuit Industrj’, op.

cit., p. 48.

Table 25.—World Integrated Circuit Output by Headquarters Location of Producing Firms

1978 1982a

Production Share of Product ion Share of

(millions of dollars) world output (millions of dollars) world output

United States. . . . . . . . . . . . . . . . . . . . . . . $4,582

Merchant . . . . . . . . . . . . . . . . . . . . . . . . 3,238

Captive . . . . . . . . . . . . . . . . . . . . . . . . . . 1,344

Captive percentage. . . . . . . . . . . . . . . . 29.30/o

Western Europe . . . . . . . . . . . . . . . . . . . . 453

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,195

Rest of the worldb . . . . . . . . . . . . . . . . . . 482

68.3% $9,700 69.5%

6,450

3,250

33.50/0

6.7 620 4.4

17.8 3,440 24.7

7.2 190 1.4

$6.712 $13.950

aEstimated

blncludes the Soviet Union and Eastern Europe for 1978 but not 1982

SOURCES f978—Sfatus ’130 A RePoff orI (he /ntegrated Clrcu/t /ndustry (Scottsdale, Arlz. ” Integrated Circuit Englneerlng Corp , 1980), p 4

f982-StahJs 1982” A Report on (he /rrtegrated Clrcult Industry (Scottsdale, Ariz Integrated Circuit Englneerlng Corp , 1982), p 5
134 . International Competitiveness in Electronics

products incorporating semiconductors—

computers, automobiles, industrial machinery—see benefits in an internal capability for

design and production. Large consumers of

ICs, such as computer manufacturers (table 26),

look for cost savings. But even if the firm supplies only a small fraction of its own needs—

as in fact most captives do—experience with

state-of-the-art devices is an advantage in the

development of end products. Many companies want to be able to produce their own

custom ICs; among the secondary benefits is

protection of proprietary circuit designs—

easier if production is in-house. In their pursuit of such goals, a number of captive facilities

have earned places among the technological

leaders of the U.S. industry.

The figures in table 26—restricted to firms

that build exclusively for internal consumption

except for NCR, which ventured into the merchant market in a small way in 1981—should

be regarded as no more than rough indications;

other estimates differ. The general trends are

not in question, however; most captive operations—the exception is IBM—remain modest

in size, manufacturing specialized devices.

Computer firms predominate in table 26. A

good deal of their production consists of small

lots—i.e., 1,000 to 10,000—of custom chips for

which outside sources are scarce or unavailable. 45 Honeywell’s Solid State Electronics

d%ee L. Marion, “Mainframe Builders Making More ICS, ”

Electronics, May 22, 1980, p. 106; W, I. Iversen, “Captive SemiDivision, for instance—which produces largely for the firm’s line of industrial control

systems, rather than its general-purpose computers—expects to be making 1,500 different

chip designs by 1985. NCR and Burroughs use

much of their output in peripherals such as terminals, where the cost advantages are greater

than in processors. IBM, unlike other computer

firms, makes most of its own memory circuits;

the company is the largest producer of semiconductors in the world. At the same time,

IBM has probably become the biggest single

customer for merchant devices, purchasing

substantial quantities of memory chips from

Japanese as well as American vendors. One

motive for the company’s recent acquisition of

a substantial interest in Intel was to help protect a major supplier from possible takeovers.

International Operations of U.S. Firms

Most American semiconductor producers

are multinationals. Foreign investments began

in the late 1950’s; a little over a decade later,

the overseas production facilities of U.S. semiconductor manufacturers numbered more than

a hundred.46 Overseas plants typically serve

one of two purposes. First, many U.S. firms

conductor Facilities Are Gearing Up To Compete Against Established Merchant Suppliers, ” Electronics, May 19, 1982, p. 133.

All of the mainframe manufacturers profiled in the first of these

articles already had, or were planning to install, the capacity

for producing at least 20 percent of their own semiconductor

needs.

*A Report on the U.S. Semiconductor Industry, op. cit., p. 38.

Table 26.—Estimated Production Levels for Captive Manufacturers of Integrated Circuits

Captive production as

1982 IC production percentage of all Circuit types emphasized

(millions of dollars) ICs consumed in captive operations

IBM (worldwide) . . . . . . . . . . . . . . . . . . $2,080 80 ”/0 Bipolar and MOS logic and memory

Western Electric . . . . . . . . . . . . . . . . . . 385 NA Microprocessors, memory

General Motors (Delco) . . . . . . . . . . . . 185 NA Bipolar

Hewlett-Packard . . . . . . . . . . . . . . . . . . 160 NA Wide range of MOS and bipolar

Honeywell a 

. . . . . . . . . . . . . . . . . . . . . . 90 10-20 Mostly bipolar logic

NCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 40 MOS microprocessors, memory

Digital Equipment Corp. (DEC). . . . . . 60 NA Bipolar

Burroughs . . . . . . . . . . . . . . . . . . . . . . . 40 NA MOS logic and memory

Data General . . . . . . . . . . . . . . . . . . . . . 30 High MOS and bipolar; many standard parts

Tektronix . . . . . . . . . . . . . . . . . . . . . . . . 25 NA Bipolar linear

NA - Not available

alioneywell also owns the merchant firm Synertek, the production of which has been excluded,

SOURCES Output flgurus, product6-StahJs1982: A Reporf on the /rrfegrated C/rcu/f /ndustry (Scottsdale, Arlz. Integrated Circuit Englneerlng Corp , 1982), pp 52-56

P@rcont8g@ conmmpthm, pro41ucts-L MarIon, “Mainframe Builders Making More ICS, ” Hectronlcs, May 22, 1980, p 106.
Ch. 4—Structure and Trade in the International Electronics Industry ● 135

own offshore facilities to which labor-intensive

production operations—particularly wire bonding and assembly—have been transferred. Second, many companies manufacture semiconductors in industrialized countries to better

serve the market or in response to foreign government pressures for local production. Subsidiaries of the second type are often called

point-of-sale plants. The larger U.S. merchant

firms have made foreign investments of both

sorts. Most offshore plants are in newly industrializing countries: Malaysia, Singapore, Taiwan, Mexico, the Philippines, Like color TVs,

semiconductors are major U.S. import items

under items 806.30 and 807.00 of the Tariff

Schedules. The great majority of point-of-sale

plants, in contrast, are in Europe—where U.S.

merchant companies hold about half the market, These plants are concentrated in the

United Kingdom and West Germany. Point-ofsale manufacturing also takes place in Australia, Japan, and Brazil. TI, for instance, builds

such products as 64K RAMs in Japan, shipping

some back to the United States; the company

owns as many as 40 overseas plants in 19

countries,

Captives also produce overseas. While IBM

has not invested in offshore plants that send

semiconductors back to the United States, the

company makes ICs in West Germany and

France to supply its European subsidiaries.

NCR produces semiconductors in Mexico,

Hong Kong, the United Kingdom, and West

Germany; Rockwell—which splits its production between merchant sales and captive

consumption —has plants in Mexico, Taiwan,

the Philippines, and Malaysia.47 Wide dispersion in both production and sales has been a

hallmark of the semiconductor industry for

many years.

Exports and Imports

As figure 24 shows, U.S. imports and exports

of semiconductors have risen steeply over the

years. Much of this trade consists of intracorporate transfers—American companies shipping wafers offshore to be returned later in

semifinished or finished form. If ICs only are

4Tsee ~aP~n FaCt l?ook ’79 (Tokyo: Dempa Publications, Inc.,

1979), p. 96, for one of the more complete surveys of semiconductor plants owned by U.S. as well as Japanese firms.

Figure 24.—U.S. Imports and Exports of Semiconductor Products

1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCES 1967-76—A Hepml On the U S Serrr/corrductor /ndustry (Washington D C Department of Commerce September

1979), p 59

19774 -Surnrnary of Trade ar?~ Tar~tt ln~orrrratJon Sem~con~uctors (U S International Trade Commlsslon

Publlcatlon 841, Control No 6.5-22, July 1982), p 26

1982– 1983 U S /ndustr~a/ Outlook (Washington, D C Department of Commerce January 1983), p 29-6
136 . International Competitiveness in Electronics

——— —— -—

considered, U.S. imports have exceeded exports since 1978, and by slowly increasing margins. 48 For all semiconductor products, as

figure 24 indicates, the trade balance has now

begun to follow that for ICs onto the negative

side of the ledger; still, shipments by Americanowned firms continue to predominate among

both imports and exports. According to table

27, about 80 percent of all U.S. imports of semiconductor products in recent years have been

re-imports after offshore assembly by U.S. producers—which enter under items 806.30 and

807.00 of the Tariff Schedules (virtually all 807).

At the same time, imports from Japan have

grown swiftly as a share of total imports. The

increase in percentage of domestic value added

between 1977 and 1981 stems mostly from the

increasing capital intensity—hence increasing

share of costs—for the front-end wafer fabrication carried out in the United States.

Table 28 classifies imports for the years 1977

and 1981 by source, showing more clearly the

increase in shipments from Japan as compared

with other Asian nations. A small fraction of

the imports from Japan originate with American-owned companies such as TI, but most

come from Japanese manufacturers. Virtually

all imports from the other countries listed are

806/807 shipments of U.S.-based multinationals. This table emphasizes the continuing importance of offshore assembly.

~Summary of Trade and Tariff Information: Semiconductors,

op. cit., p. 27.

Table 28.—Origin by Country of U.S. Imports

of Semiconductor Productsa

Import shipments by value and

percentage of total imports

(millions of dollars)

Country of origin 1977 1981

Japan . . . . . . . . . . . . . . . . . . $ 87 (6%) $ 398 (11 0

/0)

Malaysia . . . . . . . . . . . . . . . . 286 (21 %) 880 (250/o)

Singapore ... , . . . . . . . . . . . 257 (19°/0) 593 (17%)

Philippines . . . . . . . . . . . . . . 72 (5°/0) 471 (13%)

South Korea. . . . . . . . . . . . . 224 (17°/0) 238 (7°/0)

Mexico . . . . . . . . . . . . . . . . . 78 (6°/0) 149 (4%)

Taiwan . . . . . . . . . . . . . . . . . 93 (7%) 131 (4%)

All other . . . . . . . . . . . . . . . . 260 (19°/0) 723 (20°/0)

$1,357 $3,584

alncludes rjlscrete Semiconrjuclors and integrated circuits, partially completed

as well as finished products,

SOURCE” Summary of Trade arrd Tariff /n forrnatlorr: Semiconductors (U.S. Inter.

natlonat Trade Commission Publication 841, Control No. 6-5-22, July

1982), p. 28.

A similar picture emerges on the export side:

nearly three-quarters of U.S. semiconductor exports consist of semifinished products—mostly

wafers—shipped to offshore plants.49 Among

industrialized countries, major destinations for

U.S. shipments—semifinished as well as completed devices—include Canada and West Germany, the latter serving as a convenient entry

point into the European Community; U.S. ship491n 1g81, 73 percent of U.S. exports of semiconductor products went to offshore assembly sites in developing countries—

Summary of Trade and Tariff Information: Semiconductors, op.

cit., pp. 16, 29, The destinations and relative magnitudes of these

exports correlate closely with the import figures in table 28. Data

on exports to the European Community, mentioned later in the

paragraph, come from Bureau of Industrial Economics printouts, Department of Commerce.

Table 27.—Sources of U.S. Imports of Semiconductor Productsa

Distribution of imports by source

Distribution of value added

Total value of imports 806/807 for 806/807 importsc

Imports from Imports from all

Year (millions of dollars) imports b

Foreign Domestic Japan other countries

1970 . . . . . . . . . . . . . . . $ 157 88.30/o 43.60/o 56.40/o NA

1975 . . . . . . . . . . . . . . .

—

803 76.9 52.7 47.3 N A

d

1977 . . . . . . . . . . . . . . .

—

1,360 81.5 44.9 55.1 6.40/o 12.1 %

1981 . . . . . . . . . . . . . . . 3,584 78.3 32.7 67.3 11.1 10.6

= Not available.

~l~~ludes dls~rete semiconductors and integrated circuits, partially completed as well as finished products

bBased on total value of all Imports entedng under items 806.30 and 807.00 of the Tadff Schedules of the United States

cFore~gn value add~ percentages are based on the dutiable value of the 806/807 imPorts, domestic vaiue added the duty-free ‘alue

‘In 1975, 4.4 percent of integrated circuits (only) originated in Japan.

SOURCES” 1970, 1975–A Report on the U.S. Semicorrductor Industry (Washington, DC.: Department of Commerce, September 1979), P 62

1977, l#f—Surnrnwy of Trade and Tariff /rrforrnatlon: Semiconductors (U S. International Trade Commlsslon Publication 841, Control No 6.5-22, July 1982),

p 15.
Ch. 4—Structure and Trade in the International Electronics Industry 137

ments of semiconductor products to West Germany in 1980 come to about $264 million, 42

percent of total U.S. semiconductor exports to

the EC. Point-of-sale production in Europe by

American-owned firms is probably somewhat

greater than exports from the United States,

although precise figures are not available.

Pricing and Profits

American semiconductor firms have invested in offshore production facilities in part

because of price battles waged among themselves. Learning curve pricing has been common, with manufacturers anticipating future

cost savings when setting prices for new products. Such practices quickly pass production

efficiencies along to purchasers; as pointed out

in the previous chapter, costs per bit for

random access memories—a convenient measure—have fallen steadily over the years.

If price competition in semiconductors has

been good for purchasers, it has sometimes cut

into the industry’s profitability. Merchant sales

tend to be quite cyclical; when customers adjust their inventories in response to the business cycle, fluctuations at the supplier level are

magnified. In some years, semiconductor industry profits have been higher than for U.S.

manufacturing as whole, in other years lower;

over the longer term, the semiconductor industry has done about as well as other manufacturing sectors. This variability also shows

up when profitability is compared to costs for

acquiring investment capital. In 1979, profitability was well above costs of capital, in 1975

—a recession year—substantially below.50 Larger companies such as TI and Motorola have

often managed better than average profits,

reflecting at least in part their diversification;

when the semiconductor market slumped in

1981, TIs’ Geophysical Services subsidiary provided excellent returns, helping the company’s

net profits.

‘o’’U.S. and Japanese Semiconductor Industries: A Financial

Comparison, ” Chase Financial Policy for the Semiconductor Industry Association, June 9, 1980, p. 5.8.

Employment

Given the extensive offshore assembly activities of U.S. merchant firms—which concentrate on the labor-intensive steps in the production process—it is no surprise that domestic

employment in semiconductor manufacturing

has not expanded as rapidly as unit sales. From

1972 to 1982, the average annual rate of growth

in employment was 7.2 percent (ch. 9, especially figs, 56(B) and 60), Over this same period,

the rate of growth of output was twice as high

(15 percent). Domestic semiconductor manufacturing has shown a steady increase in the

proportion of white-collar workers, many of

them technical professionals, with commensurate increases in overhead costs as a proportion of direct labor costs.

Semiconductor Manufacturing in Japan

Structure

The independent merchant suppliers that

have been such a vital force in the U.S. semiconductor industry have few analogs in other

parts of the world; while Japan’s Government

has made sporadic attempts to stimulate entrepreneurial risk-taking, in the world semiconductor industry only the British-owned Inmos

represents a serious attempt at emulation of the

American model. Thus it is no surprise to find

the major Japanese producers—table 29—to be

relatively large, diversified firms that make

microelectronics devices for both internal consumption and outside sales—more like RCA

than Intel.

The top five semiconductor manufacturers

in Japan account for almost three-quarters of

the country’s production, the next five virtually

all the rest. The industry is somewhat more

concentrated than that in the United States,

with a near absence of small, specialized suppliers. As table 29 indicates, many though not

all of the principal Japanese competitors in

microelectronics are the same companies that

U.S. manufacturers face in consumer markets

or in computers—Hitachi, Fujitsu, Toshiba.

Nippon Electric Co. (NEC), the largest pro-
138 ● /international Competitiveness in Electronics

— .

Table 29.—Total Sales and Semiconductor Share for Major Japanese Producers

Sales (millions of dollars) Semiconductor Percentage of

Total Semiconductor a

as percentage semiconductors

1981 1978 1981 1982 of total (1981) used internally (1982)b

Nippon Electric Co. (N EC) . . . . . . . . . . . . $4,850 $520 $960 $990 19.80/o 240/o

Hitachi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,500 465 825 800 5.3 19

Toshiba . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,540 400 770 740 8.1 8

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,210 125 415 480 12.9 24C

Matsushita . . . . . . . . . . . . . . . . . . . . . . . . . 15,700 225 475 410 3.0 13C

Mitsubishi . . . . . . . . . . . . . . . . . . . . . . . . . . 6,060 145 320 320 5.3 11

Sanyo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,470 120 215 185 4.8 32

Sharp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,810 NA 125 140 4.3 27

Oki . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986 NA 95 125 9.8 44

N A = Not available.

aMerchant sales only.

bEgtimated from valueof merchant sales and valueof fiscal year (beginning in April) semiconductor production.

cl~l

SOURCES: ModwIt som/conductcw saks-Dataquest.

Tola/somtifictap*cthn-”One Trillion Yen Semiconductor lndust~ Forecast for FY1981,’’Japan EcorrornicJourna~ June 16,1981, p.9; “Semiconductor Manufacturers’ Strategy In FY-82 Discussed, ” Japan Report, Joint Publications Research Service JPRS U11012, Dec. 16, 1902, p 93 Yen conversions at 220 per dollar for 19S1, 249 for 1982.

Total sdos–’’The 500 Largest Industrial Corporations Outside the U.S., ” Forfune, Aug. 23, 1982, p. 207

ducer of semiconductors in Japan, stands out

because of the high fraction of its business accounted for by microelectronics, yet this fraction is only one-fifth; most Japanese producers

get substantially smaller proportions of their

revenues from semiconductors.

None of the nine firms listed in table 29 consumes as much as half its output internally.

Sony, the biggest Japanese manufacturer producing solely for internal consumption, has

recently been operating at a level of about $100

million annually—placing them roughly tenth

in total semiconductor output. Thus, the distinction between merchant and captive producers is less relevant for Japan; major Japanese computer and/or systems firms both make

and sell semiconductors. (Nippon Telegraph

and Telephone—which, like AT&T, has a large

and widely respected R&D effort in microelectronics—does no manufacturing itself.)

Figure 25 compares semiconductor production in Japan to that in the United States. While

it was only in 1981 that Japan’s output reached

a level half that here, over the 1980-81 period

Fujitsu’s production increased by one-third,

Matsushita’s by one-half, Oki’s even more.51 As

figure 25 indicates, total production in Japan

“’’One Trillion Yen Semiconductor Industry Forecast for FY

1981, ” )apan Economic ]ourna), June 16, 1981, p. 9. Here and

at several other places in the chapter, financial or production

data for Japanese firms is given on a fiscal year basis, beginning in April of the year noted.

was up by one-third during a period when U.S.

output declined slightly, although remaining

flat over the 1981-82 period (comparisons of

production level reflect differing demand levels

related to economic conditions in the two

countries, along with exchange rate fluctuations). While Texas Instruments and Motorola

remain the two largest merchant manufacturers in the world, NEC was the third largest

by 1980, Hitachi sixth. Given the growth rates

of the recent past, other Japanese firms seem

likely to follow NEC into the top ranks of the

world’s producers, No wonder American semiconductor firms are worried.

To support the production increases of recent years, Japanese manufacturers have made

heavy capital investments. Japan’s microelectronics industry reportedly invested nearly

$900 million on plant and equipment in 1981,

after spending $750 million the previous year.52

Meanwhile, U.S. producers—remembering the

consequences of their spending cuts in 1974

and 1975—have maintained their own capital

expenditures at somewhat over $1 billion annually.53 Because the Japanese industry remains

SZIbid.

MIg8Z U.s. ]ndustria] Outloo~ op. cit., p. 238. Japan’s exports

of semiconductors to the United States benefited from continued

investments in new production capacity during the 1974-75 sales

slump. When the market recovered, Japanese suppliers of 16K

RAMs were able to take advantage of capacity shortages in the

United States to enter the American market in a major way.
—

Ch. 4—Structure and Trade in the International Electronics Industry ● 139

Figure 25.—Semiconductor Production in Japan and the United States

al

—2

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

United

States /

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Year

SOURCES L/n/fed Sf.stes– 1967.76–A Report on the U S Semfconducfor /ncfustry (Washington, D C Department of Commerce, September 1979), p 39

7977-80— Summary of Trade and Tar(ff /n formation Semiconductors (Washington, D C U S International Trade Commlsslon Publlcatlon 641 Control No

6-5-22, JUIY 1982), p 26

1981, IM2— 7983 U S /ndustr(a/ Out/ook (Washington, D C Department of Commerce, January 1983), p 29-7

Japan— 1967.80-Japan Facf Book ’80 (Tokyo Dempa Publications, Inc , 1980), p 188; Japan E/ecfrorrics A/rnanac 7992 (Tokyo Dempa Publlcat!ons, Inc

1982), pp 149, 178

1981, 1982- /n-Sfat E/eclronics Report, Feb. 21, 1983, p 5.

Yen conversions from Economic Reporf of the President (Washington, D C U S. Government Printing Office, February 1983), p 275

a good bit smaller than that in the United

States, capital spending as a percentage of sales

has been considerably higher (see fig. 51, ch. 7),

Early Development

For many years, Japanese expansion in microelectronics was fueled by demand from consumer products manufacturers. In the late

1950’s, as much as two-thirds of Japan’s total

output of transistors went into radios. 54 Even

for the period 1974-78, nearly 40 percent of all

ICs produced in Japan were purchased by the

consumer sector.55

‘J, E. Tilton, International Diffusion of Technology: ‘Me Case

of Semiconductors (Washington, D, C.: The Brookings Institution, 1971), p. 157.

SsCompetitive Factors influencing World Trade in Integrated

Circuits, op. cit., p. 117. The percentage would no doubt be

higher if all semiconductors were included. Furthermore, an

additional 30 percent of Japan’s IC output was sold through distributors, much of this presumably ending up in consumer goods,

Given this dependence on consumer products, it is no surprise that, as in the United

States, the early manufacturers of semiconductors in Japan included many firms that also

made vacuum tubes. But while few of the

American vacuum tube producers were able

to carve out a major place in the semiconductor market, the large Japanese firms all negotiated this transition successfully, They were

joined by only a few newer companies, although one of these—Sony—was the first Japanese firm to mass-produce semiconductors,

The structure of the Japanese industry thus

evolved quite differently from that here, as

table 30 makes evident.

Most of the technology embodied in Japan’s

output of semiconductors, as for consumer

electronics, was at first based on developments

originating in the United States, As of 1974,

Bell Laboratories had licensed a greater number of semiconductor patents in Japan than in
140 International Competitiveness in Electronics

Table 30.-Major Producers of Semiconductor In

the United States and Japan at the End of the 1950’s

Share of domestic

semiconductor market

United States (1960)

Vacuum tube manufacturers . . . . . . . . . . . .

GE . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . .

RCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Raytheon. . . . . . . . . . . . . . . . . . . . . . . . . . .

Philco . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Westinghouse . . . . . . . . . . . ... . ...

Others ......., . . . . . . . . . . . . . . . . . . .

Semiconductor Entrantsa 

. . . . . . . . . . . . . . .

Texas Instruments . . . . . . . . . . . . . . . . . . .

Transition . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hughes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Motorola . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fairchild Camera and instrument . . . . . .

Others. .,...., . . . . . . . . . . . . . . . . . . . . .

Western Electric (captive) . . . . . . . . . . . . . . . .

Japan (1959)

Vacuum tube manufacturers ,.., . . . . . . . . .

Toshiba . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matsushita . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nippon Electric Co. (NEC) . . . . . . . . . . . . .

Mitsubishi . . . . . . . . . . . . . . . . . . . . . . . . .

Others . . . . . . . . . . . . . . . . . . . . . . . . . .

New entrantsa

. . . . . . . . . . . . . . . . . . . . . . . . . .

Sony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sanyo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Others . . . . . . . . . . . . . . . . . . . . . . . . . . .

imports, . . . . . . . . . . . . . . . . . . . . . . . . .

3 5 %

8

7

4

4

4

4

60%

20

9

5

5

5

16

5%

100%

79%

26

16

15

15

2

5

19%

11

2

6

2%

100%

aDefjned as a]j firms that had not manufactured vacuum tubes. Fujitsu was

formed in 1968 from amerger of apair of firms, one falling in each category;

the sharesof each have been included under “Others.”

SOURCE:J. E. Tilton, /rrternatlcma/ Diffusion of Technology: The Case of

Semiconductors (Washington, D.Cfl The Brookings institution, 1971~

pp 00, 144.

all of Europe.56 Much the same is true for patents owned by other American companies;

nearly half of Fairchild’s semiconductor patent

licenses have gone to Japanese firms. Over the

latter part of the 1960’s, royalty payments

by Japanese manufacturers to U.S. holders of

semiconductor patents averaged $10 million

annually.

The Government Role

If the industrial policy of Japan’s Government was a secondary influence on consumer

electronics, this has certainly not been the case

for semiconductors. Here, MITI and the rest

of the Japanese bureaucracy took a direct

~W. F. Finan, ’’The Exchange ofSemiconductor Technology

Between Japan and the United StatesJ’ First U.S.-)apan Techn~

]ogica] Exchange Symposium, Washington, D.C. Oct. 21,1981.

Also see, in general, Tilton, op. cit.

hand—particularly when it came time to move

into ICs. Although the repertory of measures

was much the same as for the consumer sector—restrictions on imports and foreign investment, promotion of exports, R&D assistance—

the relatively comprehensive MITI “vision”

developed for the 1970’s placed IC technology

at the center of an ambitious plan aimed at

strengthening the entire electronics industry

and building competitiveness in computers and

communications (see chs. 5 and 10).

MITI’s efforts to keep out foreign semiconductor firms were largely successful; although

a number of American companies were allowed to join in minority partnerships or create

sales arms, only TI managed to establish a

wholly owned manufacturing subsidiary, Liberalization did not come until the 1970’s;

Motorola has built its presence through a joint

manufacturing venture, while several other

U.S. semiconductor firms have recently moved

to start production in Japan—more than two

decades after such investments in Europe,

In concert with restrictions on investment,

a variety of protectionist measures limited export shipments by American firms. The shares

of the Japanese semiconductor market held by

U.S. manufacturers thus remain far below

those in other industrialized countries, In 1982,

U.S. exports of ICs to Japan totaled no more

than $135 million (fig. 26), only 4 percent of

Japan’s own output. In 1981, TI–-the chief

American supplier within Japan—had sales

through local production and export shipments

which came to about $120 million; if included

in table 29, TI-Japan would barely place in the

top 10 among those selling in the Japanese market. 57

bTThe ,statistics collected by the United States and Japan for

semiconductor trade between the two countries differ in some

years by more than 50 percent; Japan typically reports shipments

from the United States to be higher than U.S. sources show,

shipments to the United States lower. Some of the reasons are

discussed in A Report on the U.S. Semiconductor Industry, op.

cit., p. 96.

TI’s sales in Japan are the largest of any American supplier,

though reportedly limited by the original agreement with MITI

to a market share no greater than 10 percent. Approximate 1981

sales in Japan by U.S. firms were: TI, $120 million; Motorola,

$35 million; Fairchild, $31 million; Intel, $3o million–S. Lohr,

“A Piece of Japan’s Chip Market,” New York Times, Feb. 1, 1982,

p. D1 (the estimates are those of the Bank of America’s Asia

Division),
Ch. 4—Structure and Trade in the International Electronics Industry ● 141

--

Figure 26.— U.S.-Japan Trade in Integrated Circuits

50

0

1975 1976 1977 1978 1979 1980 1981 1982

Year

SOURCE 1983 U .S ln~us(rlal Ouf/OOk (Washington D C Department of Corn

merce, January 1983) p 29-5 1982 ftgures estimated

International Trade

As Japanese production grew, exports and

imports rose roughly in parallel—table 31—until the latter part of the 1970’s, when the balance swung decisively toward exports. Most

of Japan’s imports are ICs. In recent years, the

majority have originated in the United States

and Europe; shipments from IBM’s European

plants to IBM-Japan account for a sizable percentage. 58 As figure 26 shows, U.S. exports of

ICs to Japan have not changed much since

1979. Japanese manufacturers export roughly

comparable volumes of ICs and discrete devices; these have gone largely to the United

States and the developing Asian economies,

with shipments to Western Europe rising

quickly over the past few years.59

SeJapan Fact Book ’80, op. cit., p. 193. Where as late as 1970,

90 percent of Japan’s IC imports came from the United States,

more recently the figure has been about 60 percent—]apan Fact

Book ’79 (Tokyo: Dempa Publications, Inc., 1979), p. 99. 59During 1980, Japan’s exports of integrated circuits by valUe

were distributed as follows:

United States . . . . . . . . . . . . . . . . . . . . . . 39.5°/0

Hong Kong, Taiwan, Korea, Singapore, and

the Philippines ., ., ... ... ... ... . . 33,5°/0

Western Europe (mostly West Germany) . . . . . 19,10/.

Rest of the world ... ... ... ... . . . . . . . i’.9°/o

See Japan Electronics Almanac 1982, op. cit., pp. 181, 184.

Table 31 .—Japan’s Semiconductor Trade

Shipments

(millions of dollars)

Year Imports Exports —

1960 . . . . . . . . . . . . . . . . . . . . . . $ 1.6 $ 8.0

1965 . . . . . . . . . . . . . . . . . . . . . 7.9 21,0

1970 . . . . . . . . . . . . . . . . . . . . . 92.1 27.9

1975 . . . . . . . . . . . . . . . . . . . . . 172 128

1977 . . . . . . . . . . . . . . . . . . . . . 293 310

1978 . . . . . . . . . . . . . . . . . . . . . . 382 486

1979 . . . . . . . . . . . . . . . . . . . . . . 559 757

1980 . . . . . . . . . . . . . . . . . . . . . . 611 1,090

1981 a . . . . . . . . . . . . . . . . . . . . 670 1,100

aArlnUallZ@ from first 6 months

SOURCES’ 1980, 1965-J E Tilton, /nternat/onal D~ffusion of Technology” The

Case o~.%rrrlcon~uctors (Washington, D C The Brook!ngs Institu

tion, 1971), p 45

1970, 1975—R H SIlln, The Japanese Sern(conductor /ndustry (Hong

Kong: Bank of American Asia Ltd , May 1960), p 115

1977—Japan Fact Book ‘M (Tokyo Dempa Publications, Inc 1960),

pp. 212, 216.

197841—Japan E/ectronlcs A/rnanac 1982 (Tokyo Dempa Publications, Inc , 1962), p. 28.

Yen conwa/ons-Econornlc Repofl of the Pres/cfer?t (Washington,

D C Government Printing Office, February 1982, p 345.

Although Japanese semiconductor manufacturers have established production facilities in

Asia and Europe, their investments total much

less than those of American firms–nor do they

compare with Japan’s overseas investments in

consumer electronics. In value terms, less than

5 percent of semiconductor production by Japanese-owned firms took place outside Japan as

of the end of the 1970’s; this percentage will

no doubt rise as Japanese manufacturers continue to invest in point-of-sale operations in the

United States and Europe.60

The Semiconductor Industry in Europe

While Western Europe has been largely selfsufficient in consumer electronics, this was

never true in semiconductors (or computers);

consistently, at least 5 of the top 10 firms in

European semiconductor sales have been

American-owned. 61 Plants sited in Europe account for about a quarter of world semiconductor production, but well over half of European output flows from subsidiaries of American corporations. Moreover, European-owned

MR. H. Silin, The Japanese Semiconductor Industry: An Overview (Hong Kong: Bank of American Asia Ltd., January 1979),

p. 137.

alon the ear]ier years of the European industry, see Tllton,

op. cit., especially ch. 5.
142 International Competitiveness in Electronics

firms are especially weak in ICs. In 1981, they

accounted for about 71⁄2 percent of world output of all types of semiconductors but only 41⁄2

percent of IC production; 8 years earlier, in

1973, European companies supplied 18 percent

of the world’s semiconductors, about the same

as the Japanese at that time.62 As this demonstrates (see also table 25), Europe’s semiconductor manufacturers have declined in importance compared to firms in the United States

and Japan, despite efforts by European governments to shore up domestic industries. Indeed,

on a global basis, most of the gains by Japan

can be viewed as coming at the expense of European producers.

Table 32 shows that the primary European

entrants are diversified companies; like those

in Japan, they get relatively small fractions of

revenue from microelectronics. (The sales

declines between 1980 and 1982 reflect

depressed business conditions.) Most of the

firms listed in the table consume some of their

production internally, selling the rest on the

6ZThe 1981 figures are from Status 1982: A Report On the ink+

grated Circuit Industry, op. cit., p. 5; those for 1973 from G. Dosi,

Technical Change and Survival: Europe Semiconductor Industry (Sussex, United Kingdom: Sussex European Research Centre,

1981), p. 62.

open market; only SGS-Ates and the three new

ventures at the bottom of the list are primarily

suppliers of microelectronics. As might be expected, each company’s semiconductor line

has been shaped to considerable extent by its

end products. Philips is strong in linear circuits

for consumer electronics, Ferranti in devices

for military systems and communications,

Siemens in digital ICs for computers and industrial products.

The dilemma of the European manufacturers

is exemplified by companies like Siemens and

Philips. Both have excellent fundamental technology in microelectronics, but—as table 33 illustrates—have not managed to convert their

technical skills into positions of market leadership outside Europe. Sales in other parts of

the world by European firms generally come

in specialized devices rather than mass-market

products; before Inmos began production in

1982, Siemens was the only European-owned

company making 64K RAMs.

Table 33 also demonstrates the importance

of the European market for several of the larger

American producers. While the data are for

1978, the picture has not changed that much

over the years: American merchant manufacturers do greater volumes of business in Europe

Table 32.—Total Sales and Semiconductor Share for European Manufacturers

Sales (millions of dollars)

Total Semiconductor Semiconductor

Company Headquarters 1980 1980 1982 fraction, 1980

Philips. . . . . . . . . . . . . . Netherlands $18,403 $558 $494 3.0 ”/0

Siemens . . . . . . . . . . . . West Germany 17,950 420 328 2.30/o

Thomson-CSF . . . . . . . France 3,901 190 184 4.80/o

SGS-Ates . . . . . . . . . . . Italy 119 100 158 Highb

AEG-Telefunken. . . . . . West Germany 6,756 196 150 2.90/o

Plessey . . . . . . . . . . . . . United Kingdom 1,638 49 NA 3.0 ”/0

Ferranti . . . . . . . . . . . . . United Kingdom 498 48 82 9.60/o

Inmos . . . . . . . . . . . . . . United Kingdom — — 26 High

Matra-Harris . . . . . . . . . France — — 14

Eurotechnique . . . . . . . France — — 12

Other. . . . . . . . . . . . . . . 79

$1,690

NA = Not available

aMerchant sales only.

blg~ semiconductorsales estimated, SGS-Ates does almost ail Its business in Component%

SOURCES: 1980 semlmncfucforsa/cs-E. Williams, “Electronic Components,” Fhncia/ Thrres, Apr 5, 1962, sec. Ill, p. I Original

source, Dataque.st. The SGS-Ates estimate Is from ‘(Management, American-Style, at Italy’s Microchip Manufacturer,” World Business Weekly, Aug. 31, 1961, p. 22.

1982s@mkonductors s/os-Dataquest; SGS-Ates–’’SGAteses Expects Move Into Black, ” Electronics, Apr 21, 1983,

p 76

Tots/ sa/os—4’The 500 Largest Corporations Outside the US.,” Fortune, Aug. 10, 1981, p. 207; “The 100 Largest

Foreign Companies, ” Forbes, July 6, 1981, p, 96; R. Whiteside (cd.), Major Cornparrles of Europe 1982 (London’

Graham & Totman Ltd , 1982), “International Corporate Scoreboard, ” Bus/rress Week, July 19, 1982, p 85.
Ch. 4—Structure and Trade in the International Electronics Industry . 143

———

Table 33.—Merchant Semiconductor Sales by Region

for Selected Manufacturers, 1978

Approximate

world market share

Proportion of company sales

by geographic region

United States Europe Japan Rest of world

Texas Instruments . .

Motorola . . . . . . . . . . .

Nippon Electric Co.

(NEC). . . . . . . . . . . . .

Philips a 

. . . . . . . . . . . . .

National . . . . . . . . . . .

Fairchild . . . . . . . . . . . .

Hitachi . . . . . . . . . . . .

Toshiba. . . . . . . . . . . .

Intel ., . . . . . . . . . .

Siemens . . . . . . . . . . . .

11 ”/0

8

7

7

5

5

5

5

4

3

55 ”/0

62

24

24

65

63

6

6

59

12

31 “/0 10%0

25 5

4 77

63 4

19 5

18 3

2 80

4 70

27 3

78 0

4 %

8

11

9

11

15

12

20

11

— 1 0

alncludes Signetlcs

SOURCE G DOSI, Technica/ Change and Surwval Europe’s Sern~conductor /ndustry (Sussex, United Kingdom Sussex Euro.

pean Research Centre, 1981), p 65 Original source, Nomura Research Instttute.

than the Europeans do elsewhere; U.S. firms

also have much higher sales in Europe than in

Japan, a reflection of the effectiveness of Japanese barriers to trade and investment.

As one remedy to the gradual decline painted

above, several European manufacturers have

actively pursued American technology. One of

the companies listed in table 33—Fairchild—

was purchased by the French concern Schlumberger in 1979. Philips had acquired Signetics

several years earlier. Siemens owns 20 percent

of Advanced Micro Devices. Two of the small

firms included in table 32–Matra-Harris and

Eurotechnique, both French—originated as

joint ventures with American partners holding

minority interests. For the French, a major goal

was technology acquisition; from the standpoint of the U.S. participants, joint ventures

may give better entry into European markets—

particularly that of France itself, where the

telecommunications sector has been especially well protected.

European firms are also negotiating joint

ventures with Japanese concerns. Despite persistent efforts to strengthen Europe’s technological capability in microelectronics on an ECwide basis (ch. 10), European companies seem

to find it easier to cooperate with American or

Japanese firms than with each other. One reason may be that the Americans and Japanese

are viewed as having more to offer.

Semiconductor Manufacture Elsewhere

While semiconductors are made in many

parts of the world by U, S- and Japanese-owned

firms, only a few developing economies have

much indigenous production—and then usually in discrete devices rather than ICs. Firms

outside the advanced industrial countries (excluding the Soviet Union and Eastern Europe)

accounted for only 0.3 percent of world production in 1981, with most of this in the developing Asian nations, Of these, Korea probably

has the strongest technical capability in ICs,

but Taiwan, Malaysia, Hong Kong, and Singapore are all attempting to improve their positions, Chip production under local ownership

began in Taiwan in 1982, with the first products intended for consumer applications.63 A

pair of locally owned companies in Hong Kong

have begun producing ICs; while some of the

output will go into watches and other consumer products, one of these manufacturers is

already making LSI memory chips.64 The developing Asian nations clearly hope to follow

Japan in moving from consumer products into

ICs and systems.

‘R. Neff, “Buzzword in Taiwan is ‘Information, ‘‘ Electronics,

Apr. 21, 1982, p. 96. The 0.3 percent figure given above is from

Dataquest.

64A. Spaeth, “TWO Firms Begin Making Hong Kong’s First

Chips, ” Asian Wall Street ]ournal Weekly, April 5, 1982, p. 20.
144 . Internationa/ Competitiveness in Electronics

Semiconductor Manufacturing

Equipment

Advances in IC design move in parallel with

advances in processing equipment; indeed, IC

designs depend heavily on the capability of the

available manufacturing equipment. A number

of large-volume semiconductor manufacturers,

both here and in Japan, develop some of their

own production equipment—including such

companies as TI, Western Electric, IBM, and

Matsushita. While the Japanese evidently expect to build more of their own equipment in

the future, semiconductor manufacturers in all

parts of the world, Japan included, have relied

heavily on independent equipment suppliers—

most of them relatively small American companies. These firms design and fabricate wire

bonders, annealing furnaces, ion bombardment

apparatus, lithographic equipment, plasma etchers, automated test equipment, and other

specialized capital goods. The U.S. semiconductor industry, particularly the smaller independent firms, has drawn strength from the

concentration of equipment firms here—about

275 companies, most with annual sales in the

range of $5 million and below.65

65An Assessment of the Impact of the Department of Defense

Very-High-Speed Integrated Circuit Program, op. cit., p. 133.

Table 34 lists the 10 leading suppliers of

semiconductor manufacturing equipment on

the basis of world sales. The industry includes

only a few large enterprises, with sales levels

dropping rapidly past the top five; nonetheless,

the total approaches $2 billion yearly, to which

expendable such as chemicals and silicon add

perhaps $3 billion more. The larger companies

in table 34 tend to concentrate on lithographic equipment and automated circuit testers, relatively expensive items. Something over half

the total sales of the industry consists of frontend wafer fabrication equipment, with about

half of this for lithography.66 A number of the

equipment firms in table 34—e.g., Varian,

Kulicke & Sofa—have entrepreneurial roots

similar to the merchant semiconductor manufacturers they do business with. Others, such

as Fairchild Test Systems or Canon, are divisions of much larger corporations.

While the lithographic equipment made by

Censor—a firm based in Liechtenstein—is well

known, and companies like Philips and Siemens can and do build a good deal of their own

production machinery, on the whole Europe’s

ML. Wailer, ‘‘Advanced Gear Leads Production Sales, Electronics, Mar. 10, 1982, p. 46. Back-end testing and assembly

equipment accounts for most of the remainder. Other definitions

of the equipment industry yield sales estimates spanning a considerable range.

Table 34.—Semiconductor Equipment Manufacturers Ranked by Worldwide Sales

Salesa

(millions of dollars)

Headquarters 1979 1981 Major products

Perkin-Elmer . . . . . . . . . . . . . . . . . . United States $106.0 $186.0 Lithographic equipment

GCA . . . . . . . . . . . . . . . . . . . . . . . . . United States 55.7 142.0 Lithographic equipment

Applied Materials. . . . . . . . . . . . . . United States 74.6 104.0 Epitaxial reactors, sputterers, plasma etchers

Fairchild Test Systems . . . . . . . . . United Statesb 111.0 83.1 IC testers

Teradyne . . . . . . . . . . . . . . . . . . . . . United States 53.5 79.2 IC testers

Varian . . . . . . . . . . . . . . . . . . . . . . . United States 60.9 75.0 Ion implanters, sputterers

Eaton . . . . . . . . . . . . . . . . . . . . . . . . United States 64.1 64.1 Lithographic and test equipment

Takeda Riken . . . . . . . . . . . . . . . . . Japan 26.3 55.3 IC testers

Canon . . . . . . . . . . . . . . . . . . . . . . . Japan 16,7 47.6 Lithographic equipment

Kulicke & Sofa . . . . . . . . . . . . . . . . United States 36.3 37.5 Wire bonders

Others . . . . . . . . . . . . . . . . . . . . . . . NA fv 1,000

$1,800-$1,900

NA - Not available.

%pen-market sales of semiconductor manufacturing equipment only. bpafi of FalrChlld camera ~d ln~trunlent, Which Is flow Ownd by the French concern Schlumberger,

SOURCE: “Gear Makers Sea Essentially Flat Year,” Electronic News, Mar. 8, 1982, Supplement p. 4. Original source, VLSI Research, Inc. Other sources give considerably

different estimates for several of these firms, a number of which are privately held and do not report sales.
Ch. 4—Structure and Trade in the International Electronics Industry ● 145

equipment industry is weak. The situation is

quite different in Japan, Aided over the latter

part of the 1970’s by the MITI-sponsored VLSI

joint R&D project, discussed in more detail

elsewhere, Japan is becoming increasingly selfsufficient in processing equipment. The VLSI

project concentrated most of its resources on

fabrication technology; because the participants were large, integrated manufacturers, the

result was to strengthen the internal capabilities of these companies rather than build an

independent equipment industry as exists in

the United States, While Japan’s semiconductor producers continue to buy about half their

equipment from American suppliers, the U.S.

share of Japan’s equipment market has been

declining. 67 To counteract this erosion, many

American suppliers have been investing within

Japan, following the lead of U.S. semiconductor firms. The equipment market in Japan

reached about $600 million in 1981; sales have

been growing considerably faster than in the

United States because of the high capital

spending rates of Japanese semiconductor

manufacturers. 68 Companies like Canon are

also beginning to make inroads into the U.S.

equipment market.

137R$ Neff, ‘‘ U,S, IC Gear Makers Bui]d in Japan, Electronics,

July 14, 1981, p. 89.

“’Semiconductor Equipment Makers Cutting Into American

Share,” )apan Economic }ournal, Dec. 1, 1981, p. 10.

The Computer Industry

For many years the world’s producers of data

processing equipment seemed to consist of

IBM plus a dozen or so much smaller competitors. This picture has changed for several reasons: continued expansion by independent

manufacturers of peripherals; rapid growth in

sales of smaller systems; the emergence of software as a separate industry. No longer is the

typical computer a general-purpose mainframe; now there is no such thing as a typical

computer. Processors are becoming more specialized, computing power dispersed to the

locations where needed. This evolution does

not imply that mainframes have diminished in

importance, simply that they no longer account

for the vast majority of the output of computer

manufacturers. The following description of

the data processing equipment industry focuses on processors themselves, with limited

attention to peripherals; no attempt is made to

cover the software industry, the dimensions of

which are largely unmapped.

The Computer Industry in the

United States

No matter how its boundaries are defined,

the value of U.S. production of computers far

-1

Photo credit COf?)DUfJfi3ph(C Corp

Printed circuit board for computerized typesetter

outstrips that of consumer electronics or semiconductors. Growing predominately from and

far surpassing the manufacture of business

machines, computer production in the United

States–including peripherals–approached $35
146 International Competitiveness in Electronics

.—

billion in 1982 (fig. 27).69 As for microelectronics, the expansion of the computer industry

has been phenomenal; the annual growth rate

over the past 10 years has averaged 18 percent.

Some parts of the market have grown for periods of several years at 30 to 50 percent annually; while mainframe sales were up by nearly

7 percent in 1982, minicomputer sales increased twice as fast; microcomputer sales

grew more than 60 percent.70 Table 35 gives

more detail on U.S. sales for 1975 and 1982;

the projections for 1986 indicate that the total

market may increase by nearly 10 times over

the 1975 figure. Small computers and separately purchased software will lead the expansion.

wAs defined by Standard Industrial Classification 3573, 1982

estimated shipments (including exports) came to $34. I billion—

1983 U.S. Industrial Outlook, op. cit., p. 27-5. Other definitions

of the industry’s boundaries—e.g., that adopted by Electronics

magazine and referred to in several places below—result in much

larger sales figures. Electronics’ total for 1982 —including imports but not exports by American manufacturers–is $52.1

billion (Jan. 13, 1983, p. 132). Neither of these two figures includes data processing services, itself a major industry; in 1981,

the worldwide revenues of U.S. computer services firms exceeded $20 billion—1983 U.S. Zndustriid Outlook, p. 27-4. When

the full range of data processing activities are aggregated, figures

in the range of $7o billion thus result.

Top4 Archbo]d, “The Datamation 100: Welcome to the Club, ”

D~tmnation, June 1983, p. 87.

Figure 27.—U.S. Production of Computer

Equipment (SIC 3573)

30 -

25 -

20 -

15 -

10 -

5

1970 1975 1980

Year

SOURCE 1972, 1975, 1977, 1960, 1963 editions, U.S. /ndustria/ Outlook, Depart.

ment of Commerce. 1981 and 1982 shipments estimated.

Table 35.—Sales of Computers and Equipment

in the United States

Sales (billions of dollars)

1975 1982 1986a

Hardware

Processors

Desktop, small business, personal . . . . $0.08 $6.05 $25.4

Minicomputers, other small systems . . 0.78 7.76 16.0

Mainframes . . . . . . . . . . . . . . . . . . . . . . . . 5.40 13.0 18.7

$6.26 $26.8 $60.1

Memory, mass storage . . . . . . . . . . . . . . . 2.95 4.14 8.9

Other peripherals . . . . . . . . . . . . . . . . . . . . 3.62 13.2 26.9

Total hardware . . . . . . . . . . . . . . . . . . . $12.8 $44.1 $95.9

Software . . . . . . . . . . . . . . . . . . . . . . . . . . NA 3.11 16.8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.8 $47.2 $113

NA = Not available.

aProjected.

SOURCES: f975–E/ectron/cs, Jan. 8, 1976, p. 94.

1982, 19&Y-E/ectronks, Jan. 13, 1963, pp. 132, 133.

Structure

In large measure because IBM is so much

bigger than its competitors—with sales nearly

eight times those of its nearest rival, the

minicomputer specialist Digital Equipment

Corp. (DEC)—the U.S. computer industry is

highly concentrated by the usual measures; the

four largest domestic firms account for threequarters of sales.71 Once past the leader, the industry is populated by a relatively large number

of firms that do not differ so greatly in size—

table 36. The table ranks U.S. computer manufacturers by worldwide sales—an appropriate

basis given the global outlook shared by firms

in this industry.

Table 36 makes the long-term preeminence

of IBM quite evident, but it is the shifts in position beneath that are truly striking. DEC, which

more than any other company started the minicomputer industry-largely by virtue of the pioneering PDP-8 of the mid-1960’s (ch. 3)—was

a tiny company 15 years ago. By 1979, its sales

TISummary of Trade and Tariff Information: Computers, Calculators, and Data Processing Machines (Washington, D. C.: U.S.

International Trade Commission Publication 841, Control No.

6-4-13, September 1981), p. 6. IBM’s place in the industry can

be judged by noting that its 1982 U.S. sales of computers and

related products—a little over half the company’s worldwide

sales—came to $18.9 billion, 40 percent of the total U.S. computer market in that year (the IBM sales figure is from “The

Datamation 100: Welcome to the Club,” op. cit., the total U.S.

market figure from table 35. Most of IBM’s sales are in computers, but it does have other business activities.
Ch. 4—Structure and Trade in the International Electronics Industry ● 147

— —

Table 36.—U.S. Computer Manufacturers Ranked by 1982 Worldwide Sales

Computer-related sales

(millions of dollars)

1975 1982

IBM . . . . . . . . . . . . . . . . . . . . . . . . . $11,116 $31,500

Digital Equipment Corp. (DEC). . . . . . 534

Burroughs . . . . . . . . . . . . . . . . . . . . . . 1,447

Control Data Corp. (CDC) . . . . . . . . . 1,218

NCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960

Sperry (Univac) . . . . . . . . . . . . . . . . . . . 1,295

Hewlett-Packard . . . . . . . . . . . . . . . . . . 250

Honeywell . . . . . . . . . . . . . . . . . . . . . . 1,324

Wang . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Xerox . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

4,019

3,848

3,301

3,173

2,800

2,165

1,685

1,322

1,300

Return on

equity (1982)a

23.40/o

14.3

5.7

11.1

12.4

9.2

16.3

13.2

20.6

18.0b

Major products

Mainframes and minicomputers;

peripherals; office automation

Minicomputers and peripherals

Mainframes and minicomputers

Mainframes and peripherals

Mainframes and peripherals

Mainframes and peripherals

Mini and microcomputers; peripherals

Mainframes and minicomputers

Minicomputers; office automation

Peripherals; office automation

aAl I lines of business

bl~l

SOURCES 1975—0 Rothenbuecher, “The Top 50 Companies in the Data Processing Industry,” Datarnattor?, June 1976, p 48

IM2—P Archlbold, “The Datamatlon 100 Welcome to the Club, ” Datarnafion, June 1983, p. 87.

ranked sixth, and in 1981 DEC surpassed the

mainframe companies between it and IBM to

become the second largest computer manufacturer in the world. Wang Laboratories—known

for its small business systems and word processors—entered the top 10 in 1981. The computer industry no longer consists of IBM plus

the five smaller mainframe-oriented companies

–CDC, NCR, Burroughs, Sperry-Univac, Honeywell. Yet it is not so many years since American firms could be contrasted to the rest of the

world as the “big eight’’—the six mentioned

plus GE and RCA. The latter two have dropped

out of the computer business; even so, while

producing computers their sales volumes were

greater than virtually any foreign manufacturer.

Aggregated data on the profitability of the

U.S. computer industry tends to be dominated

by IBM’s figures, which–as table 36 indicates—have usually been well above the average, The computer industry has been less affected by the business cycle than most; nearly

all the firms listed in table 36 did reasonably

well in 1982 despite a depressed economy. In

general, the industry has been more profitable

than U.S. manufacturing as a whole. *

● Comparing the industry composite figures for “Office Equipment, Computers” With the “All-Industry Composite” as tabulated by Business PVeek in their yearly corporate scoreboard

issues (each March) gives the following picture:

Evolution and Structural Change

Many of the early entrants in the computer

industry began as business machine manufacturers. While IBM trailed such firms as Remington Rand and Underwood into data processing, its share of the market rose steadily; dating

computer manufacturing from 1951, by the end

of the industry’s first decade more than 70 percent by value of all systems installed in the

United States had been built by IBM.72 This

percentage held roughly constant through the

1960’s, only beginning to fall as minicomputer

sales surged; while IBM has retained its posiReturn on Equity (Profits as a Percentage of

Value of Common Stock)

Computer composite A1l-industry composite

1974 . . . . 16.90/o 14.00/o

1976 . . . 17.9 14.0

1978 . . . 20.4 15.1

1980 . 19.2 15.3

1981 . . . . 15,2 14.0

1982 . . . . 15.9 11.0

Again note that the computer figures are heavily weighted by

IBM’s profits, and that the firms Business Week includes in this

category do not necessarily coincide with the “computer industry” as defined elsewhere.

72&ps in Technology.. Electronic computers (Paris: organization for Economic Cooperation and Development, 1969), p. 39.

The percentage by number of machines was somewhat less,

IBM’s position benefited greatly from success in marketing to

the Department of Defense; in the mid-1960’s, nearly half the

company’s U.S. sales were to the Federal Government, a much

larger fraction than any of its rivals managed. At the end of the

1960’s, perhaps three-quarters by value of all computers in the

world were IBM machines (pp. 8, 139).
148 . International Competitiveness in Electronics

tion in mainframes, still holding around 70 percent of the domestic market for large systems,

its share of minicomputer sales in the United

States is only about 20 percent.73

Virtually any business or other organization

is now a potential computer purchaser; with

the appearance of machines in the $1,000 and

under price range, so are households. As costs

come down, sales rise; the mid-1960’s, which

brought the minicomputer, proved a watershed

for the industry. Many of the older mainframe

companies had trouble competing successfully in markets for small systems—indeed still do.

New entrants emerged building small, inexpensive systems suitable for dedicated applications

as well as general-purpose data processing.

While most of the companies that had been

competing in the mainframe market introduced smaller machines—later if not sooner—

newcomers such as DEC and Data General, the

latter spun off from DEC in 1968, emerged as

the leaders.

Table 37 lists major producers of minicomputers. (The distinctions between mainframes

and minis are arbitrary; this listing simply follows one definition, as noted in the table.) Al7Z. Anders, “Lawsuit’s End May Spur IBM To Acquire Firms,

Expand in Satellite, Office Markets, ” Wall Street ]ournal, Jan.

11, 1982, p. 29.

Table 37.–Major U.S. Manufacturers Ranked by

1982 Worldwide Minicomputer Salesa

Minicomputer sales

(millions of dollars) Return on

1975 b

1982 equity, 1982C

IBM . . . . . . . . . . . . . . . . . . . . . . $450 $3,000 23.40/o

Digital Equipment Corp.

(DEC) . . . . . . . . . . . . . . . . . . . . 160 1,680 14.2

Burroughs . . . . . . . . . . . . . . 290 800 5.7

Data General . . . . . . . . . . . . . . . 35 604 5.8

Hewlett-Packard . . . . . . . . . . . . 70 588 16.3

Wang. . . . . . . . . . . . . . . . . . . . . 15 585 20.6

prime. . . . . . . . . . . . . . . . . . . . . . NA 351 31.1

Honeywell . . . . . . . . . . . . . . . . . 80 330 13.2

Gould . . . . . . . . . . . . . . . . . . . . . NA 325 10.60/0

Texas Instruments . . . . . . . . . . 25 320 8.9

NA = Not available.

Whls table uses Datarm?tlon deflnltlon of the minicomputer market; all such

deflnltlons are arbltra~ and others might give a different ranking.

bApproxlmate. CAll llne~ of business

SOURCES: 1975—0. Rothenbuecher, “The Top W Companies in the Data Processing Industry,” Datarrratlorr, June 1976, p 48.

1982-P. Archbold, “The Datamatlon 100: Welcome to the Club,”

f)atarnatlorr, June 1963, p 67.

though IBM sells more small systems than any

other company, its advantage does not compare with the margin it holds in mainframes,

and indeed might disappear under a more restrictive definition of “minicomputer.” Only

a few other entrants from the early days of

mainframes are major factors in this part of the

market. The table is restricted to American

firms, but would differ little if foreign manufacturers were included. U.S. companies dominate world minicomputer markets more completely than for either mainframes or desktop

machines; only the West German firm Nixdorf

is among the world’s 10 largest minicomputer

manufacturers (although its U.S. sales were but

$150 million in 1981, the company has a

substantial presence in Europe).

Just as the minicomputer opened vast new

markets through lower costs—made possible

largely by ICS–so the microcomputer has followed, again extending sales to new groups of

customers. And just as the growth of minicomputer sales saw new firms challenging the established leaders, so microcomputer systems

have been pioneered by companies like Commodore, Apple, and Tandy (makers of Radio

Shack computers); now it is DEC and HewlettPackard that find themselves in a reactive position. Table 38 shows how fast microcomputer

sales have been expanding—although they are

still small in value compared even to minicomputers—and the extent to which new entrants

have taken leading positions; even so, IBM is

already in second place.

Change is taking place at the other end of the

market as well, with plug-compatible manufacturers (PCMs) continuing to enlarge their positions. Building mainframe processors and peripherals that are compatible with IBM systems, these companies strive to offer superior

price/performance combinations; perhaps onethird of the disk drives used with IBM processors, for instance, are now supplied by other

firms.74 CDC, one of the first to make plug-compatible peripherals, sells processors that run on

IBM software as well, while Amdahl continues

74’’ IBM’s Coming Disk-Drive Surge, ” Business Week June 11,

1979, p. 116.
Ch. 4—Structure and Trade in the International Electronics Industry 149

Table 38.—Major U.S. Manufacturers Ranked by

1982 Worldwide Microcomputer Sales

Microcomputer sales

(millions of dollars)

1979 1982

Apple . . . . . . . . . . . . . . $ 75 $664

IBM . . . . . . . . . . . . . — 500

Tandy (Radio Shack) . 150 466

Commodore . . . . . . . . 55 368

Hewlett-Packard ... .. . NA 235

Texas Instruments — 233

Digital Equipment Corp.

(DEC). . . . . . . . . . . . – 200

Return on

equity, 1982a

28.0°/0

23.4

32.3

52.9

16,3

8.9

14.3

NA = Not available

aAll Ilnes of business

SOURCES 1979–’’The Datamation 100, ” Dafamat/ort, June 1980, p 87

1982-P Archbold, “The Datamation IWI Welcome to the Club, ”

Datamaflon, June 19K, p 87

to be the leading American PCM firm, with

about half of all such installations.75 The PCM

share of the U.S. market for mainframe processors has risen over the last 5 years to perhaps

20 percent. Yet another indication of IBM’s

strength is that most of the gains of the PCMs

appear to have come from sales won in competition with mainframe manufacturers other

than IBM.76

The PCM portion of the industry is characterized by particularly strong international ties.

A number of foreign firms, including several

leading Japanese manufacturers, supply IBMcompatible equipment. Amdahl is 28 percent

owned by Fujitsu, with which it shares technology. National Advanced Systems, which

stopped making its own machines early in

1983, markets large computers built by Hitachi. 77 Several European firms also market

Japanese-built PCMs.

International Trade and Investment

As in microelectronics, U.S. computer manufacturers have been heavily oriented toward

754’ Moving Away From Mainframes: The Large Computer

Makers’ Strategy for Survival, ” Business Week Feb. 15, 1982,

p. 78; “In Focus: 1982 CP[J Market Survey, ” Datamation, May

1982, p. 44. Amdahl’s 1982 mainframe sales were $312 million.

The next largest PCM supplier, National Advanced Systems—

a division of National Semiconductor—has about 18 percent of

U.S. PCM installations. The core of National’s base stems from

Itel Corp. ’s plug-compatible business, which was acquired by

National when the failing company reorganized in 1979.

76C. Bylinsky, “The Game Has Changed in Big Computers, ”

Fortune, Jan. 25, 1982, p. 82

77’’Unit of National Semiconductor Ends Computer Product ion, Waff Street ]ournai, F’eb, 1, 1983, p. 41.

the world marketplace, which they have supplied through exports and foreign investment,

Offshore assembly to reduce labor costs has

been far less central to competitive dynamics

than in the semiconductor industry, but price

competition in microcomputers and other

small systems will probably cause more U.S.

firms to transfer labor-intensive operations offshore in the future. Point-of-sale investments—

primarily in Europe—have been the rule for the

major U.S. firms, while—as figure 28 shows—

exports from the United States have exceeded

imports by wide margins. Nearly half the export shipments go to Western Europe, with Japan and Canada also getting substantial fractions. 78

Although imports of computers and equipment exceeded $2 billion in 1982, much of this

consists of re-imports by U.S. firms following

offshore assembly, Detailed figures are not

available, but the percentage of computer imports entering under item 807,00 of the Tariff

Schedules has been in the range of 40 percent

over the past few years.79 Most of these reimports come from U.S.-owned plants in Canada; parts and subassemblies also enter from

the Far East and Mexico. Of imports originating with non-U. S. firms, Japan is the leading

source. In 1980, Japanese manufacturers shipped

computers and equipment worth less than $200

million to this country. By 1982, imports from

Japan had more than tripled, with Japan’s share

of U.S. computer imports rising from about 16

percent to nearly one-third.80 Many of these

‘Bin 19s0, us. exports of computers and equipment, which

totaled $7.54 billion, were distributed as follows:

Western Europe . . . . . 44,50/0

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9

Others. . . . . . . . . . . . . . . . . . . . . . . . 37.6

See Summary of Trade and Tariff Information: Computers,

Calculators, and Data Processing Machines, op. cit., p. 23.

Tglmports under 806.30 are negligible. The U.S. International

Trade Commission aggregates 807,00 imports of computer equipment with those for calculators. Dividing 807 imports for computers plus calculators by total imports for computers gives:

1976 1977 1978 1979 1980

Ratio of 807 to tota] 410/o 360/0 3i’0/o 420/o 4i’0/o

Since 807 imports of calculators are small in va]ue, these percentages overstate the fraction of 807 computer imports only slightly.

See Summar~ of Trade and Tariff Information: Computers,

Calculators, and Data Processing Machines, op. cit., pp. 11, 20.

‘I bid., p, 20; 1983 U.S. industrial outlook op. cit., p. 27-4.
150 . International Competitiveness in Electronics

— . — ..— -. —

Figure 28.—U.S. Exports and Imports of Computers and Equipment

1960 1965 1970 1975 1980 1!

Year

SOURCES 796066-Gaps In Technology E/ectrofrlc Cornpurers (Paris Organlzatlon fOr Economic Cooperatlons’ and Development, 1989), P.50

1967-81— 1972, 1977, 1980, 1982 edltlons, U S Irrdusfnal Outlook, Department of Commerce

IM2— Department of Commerce, Bureau of Industrial Economics

32

shipments have been plug-compatible mainframes distributed by American companies,

but Japan has also begun to push into personal

and desktop systems as well as peripherals.

No recent estimates of foreign investments

by U.S. computer manufacturers are available,

but it is clear that these have been large. Many

American computer firms do a quarter to half

their business overseas, with production facilities as well as sales and distribution affiliates

located in countries around the world. Domestic jobs–see chapter 9–total more than 400,000,

while American-owned computer firms probably employ several hundred thousand people

in other countries.

Computer Industries in the

Rest of the World

Computers are sold all over the world; as

table 39 indicates, installations outside the industrialized nations lag in value—because most

are small—but number about the same as in

Europe. However, manufacturing—leaving

aside desktop machines—is largely the province of companies with headquarters in ad-
Ch. 4—Structure and Trade in the International Electronics Industry ● 151

Table 39.—Worldwide Computer Installations

Number of systems and value of computers and equipment

1960 1970 1983b

Number Value Number Value Number Value

United States . . . . . 5,500 $ 8.8 billion 65,000 $ 92.6 billion 400,000 $300 billion

Japan . . . . . . . . . . . 400 0.5 6,000 7.5 70,000 50

Western Europe. . . 1,500 2.6 21,000 40.5 225,000 220

Rest of world ... . 1,600 0.8 18,000 9.6 205,000 130

Total . . . . . . . . . . 9,000 $12.7 billion 110,000 $150.2 billion 900,000 $704 billion

8EXCludeS desktop and other very small systems

bProjected

SOURCES “Japan Takes Aim at IBM’s World, ” Wor/d 13uslness Week/y, Apr 20, 1981, p 30 Original source, D!ebold Europe

vanced industrial economies; the global industry consists basically of the several hundred

U.S. firms—more making peripherals than

processors—plus their counterparts in Japan,

Britain, France, and West Germany. While subsidiaries of Japanese and Western manufacturers can be found in developing countries like

Mexico, Brazil, and Taiwan, it will probably

be some years before the industrializing Asian

nations produce anything other than small and

simple systems. Still, countries like South

Korea and Taiwan have ambitious plans for

entering data processing markets, Sales of computers in Taiwan are growing at about 40 percent annually, and the country is already home

to many small software-oriented businesses, as

well as a number of firms making microprocessor-based systems.81 Much the same is true

in Korea, where firms that have been making

computer terminals are beginning to introduce

microcomputers .82

In Japan, computer manufacture started late

compared to Western Europe and the United

States, Whereas American and European firms

began during the 1950’s more or less on a par

in data processing technology—if not in market

potential—Japan followed about a decade behind, Table 39 illustrates the gap in terms of

installations. Now Japan has the second largest

computer industry in the world, although still

—.-——

5) 11[]~.~w{)rfi in ‘1’aim an is ‘ 1 nformation, ’ “ op. (it,; A S~)at~th,

I ~ [ ][)stdrt “l’~j~~n E:][?(,t r{~nj(;s F’trrns Arc hfaking ‘1’heir hlark h}

l~cslgn, A.sldl] \t’al/ Str(;(:t journal ~1’eekl~, Dc(,, 13, 1 OH2, p. 7.

82 ~ ~ (1 [[:,1 ~ ~;]f:(:t rot) 1( \ I I)(jII St r~ jla ki ng R,i~]i(l Cain\ i n Shift

to [ ]Igt)-rr’f;(.hrlo]ogy” f)r(]du(, ts, ” op. cit.; A Spd(;th, “,4sian ‘ NI(:s’

Rel~ on ( ;hca~] Bra] npo~ver T() Plan output of hfor~; A(l\,i[](,t~(i

[;()()li$,‘‘ It’(Ill ,Strf’t’( )f)urr)d], ]an, 5, 1!)83, p. 25,

far behind the United States; sales in Japan are

also second only to the United States. As table

40 shows, the Japanese computer market was

two-thirds as big as the entire Western European market by 1982. Within Europe, West

Germany absorbs the most computers, with the

United Kingdom and France following,

Of the major Japanese-owned manufacturers

—the same six firms that are the chief competitors in microelectronics—only three (Fujitsu,

Nippon Electric, Hitachi) have annual sales of

data processing equipment exceeding $500 million (table 41). In 1981 worldwide sales, the

largest non-U, S. manufacturer—Fujitsu—

ranked between Sperry-Univac and HewlettPackard, seventh largest, with barely half the

Table 40.—World Computer Markets

United Statesa. . . . . . . . . . ... . . .

Japan

Microcomputers and minicomputers

Mainframes . . . . . . . . . . . . . ... . .

Memory, storage. . . . . . . . . . . . . . .

Other peripherals . . . . . . . . . . . . . . . .,

Western Europe

Microcomputers and minicomputers

Mainframes . . . . . . . ... . . . . . . . .

Memory, storage, ... . . . . . . . . ...

Other peripherals ... ... .. .

asee table 35 fo; U S sales by cafe90V

blncludes software

clnc[uded under ‘Other peripherals

Sales

(billions of dollars)

1975 1982

.$12.8 $47.2b

.$0.17 3.19

1.89 2.63

0.44 1,60

0.53 3,61

$3.03 $11.0

$0.3 7 $ 4.54

2,79 8.00

1.40 —c

1.24 3.5a

$5.80 $16.1

SOURCES f975—E/ecfron/cs Jan 8, 1976 pp 94 106

1982– E/ectron/cs Jan 13, 1983 pp 146, 154 table 35
152 ● International Competitiveness in Electronics

——..—— ——— —.——

Table 41 .—Non-U.S. Computer Manufacturers Ranked by 1981 Salesa

Computer-related sales, 1981 b

Company Headquarters (millions of dollars)

IBM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States

—

$26,340

Digital Equipment Corp. (DEC). . . . . . . United States 3,587

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 1,950

ICL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 1,513

Olivetti . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy 1,436

ClI-Honeywell Bull . . . . . . . . . . . . . . . . . France 1,353

Nippon Electric Co. (N EC) . . . . . . . . . . Japan 1,330

Siemens . . . . . . . . . . . . . . . . . . . . ., . . . . West Germany 1,330

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 1,290

Wang . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 1,009

Nixdorf . . . . . . . . . . . . . . . . . . . . . . . . . . . West Germany 856

Data General . . . . . . . . . . . . . . . . . . . . . . United States 764

Toshiba . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 430

Apple . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 401

Oki . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan 400

Mitsubishi . . . . . . . . . . . . . . . . . . . . . . . . Japan 330 — aselWt~ A~er~Can flrm9 included for Cc)mparl.wn only, see tables 38 through 38 for cOrnPlete us rankiws by Sales

bFiScal Years for Japanese firms plus ICL and Siemens

SOURCES U.S. fkrns-P Archbold, “The Datamation Top 100;’ Dafarnatlon, June 1982, p, 115

Japmcuo Wins— “Status of Top Computer, OA Semiconductor Companies Studied, ” Japan Report, Joint Publications Research Service JPRS U10319, Feb 11, 1982, p 17 Original source, Cornpufopia. (Yen conversions at

220 per dollar),

Europaan fhrrs-’’Reviewlng Europe’s Top 25, ” Datarnafion, November 1982, p. 124 Original source, Logica

computer sales of DEC. As table 41 shows, the

European firms of any size number but five:

ICL in Great Britain, Siemens and Nixdorf in

West Germany, Olivetti in Italy, and CII-Honeywell Bull in France.

Europe

Almost from the beginning, American computer firms have been more viable competitors

in European markets than local manufacturers. 83 The largest European entrants now

have data processing equipment sales not too

much greater than Wang’s; national industries

in Europe have passed through periodic cycles

of financial problems, mergers, and government subsidies. ICL lost $245 million in 1981;

the firm has had to depend on loan guarantees

from the British Government.84 In West Germany, IBM’s market share—about 60 percent—

is three times that of Siemens’ money-losing

data processing division.85 In Europe as a

~See Gaps in Technology: Electronic Computers, op. cit. Also

The American Computer Industry in Its International Competitive Environment (Washington, D. C.: Department of Commerce, November 1976).

%, Love, “New Talent Spurs Britain’s ICI.,” Wall Street Journal, Mar. 1, 1982, p. 27.

‘E, DiMaria, “European Makers Move to End Red Ink, ” Electronic News, Nov. 16, 1981, see, II, p. 23.

whole, IBM has more than half of all computer

sales by value—90 percent supplied by IBM’s

European plants—and American firms take

about two-thirds of the total market.86 The U.S.

share of computer sales in Europe has, nonetheless, been declining slowly during the past

few years.

The only internationally competitive European computer firm to recently emerge has

been Nixdorf—a West German manufacturer

of small systems intended primarily for business applications. The company has a global

outlook; it currently gets less than half its sales

in West Germany, nearly 20 percent in the

United States.87 Nixdorf is perhaps the closest

to an entrepreneurial firm in the American

style that the European electronics industry has

seen. The company has actively sought out the

best technologies available—e.g., in microelectronics—from both U.S. and Japanese suppliers, and cultivates close ties with customers in

its efforts to anticipate user needs, Both atti-

~“European Computers: Pie in the Sky?” Economist, Sept. 9,

1978, p. 30; “Reviewing Europe’s Top 25, ” Datamation,

November 1982, p. 124.

67]. Tagliabue, 4’Nixdorf’s Rise From a Cellar, ” New York

Times, Feb. 18, 1981, p. Dl, The company was started with

capitalization of $6,000 in the early 1950’s.
Ch. 4—Structure and Trade in the International Electronics Industry ● 153

— —. .——

tudes have been atypical among European

computer manufacturers.

Nixdorf is likely to benefit from the continuing expansion of markets for smaller systems—

a trend as evident in Europe as here. Still, most

of this growth will probably continue to be

taken by American-owned companies. Symptomatic of the difficulties of European suppliers is the case of Philips—a firm that would

seem to have as much ability as any in Europe

to compete in computer manufacturing. Since

the collapse of the Unidata consortium—a joint

effort of Philips, Siemens, and CII during the

1970’s—Philips has concentrated most of its efforts on small systems. But in contrast to Nixdorf, the Dutch multinational has had little success; at the end of 1981, Philips’ share of European small business installations was only 31⁄2

percent by value, as compared to Nixdorf’s

101⁄2 percent.88

The Japanese are also headed for a greater

presence in the European market, but thus far

most of their computer sales in the EC have

come through ties with local firms. Not only

do Siemens and ICL market Fujitsu’s large

mainframes, but Hitachi processors are sold

by Olivetti and BASF.89 The French remain

committed to CII-Honeywell Bull—now nationalized, although Honeywell retains a 20 percent

interest—as champion of the domestic market,

and presumably the European market as well.

However, the chances seem small that the Mitterrand Government will have more success

than its predecessors in promoting CII-Honeywell Bull.

In only two countries in the world do American firms have less than half the installed

base—a vital predictor of future trends because

customers tend to become locked into a manufacturer’s product line, largely through their

software inventories. The two are the United

Kingdom, where government procurement and

other policy tools have heavily favored British88’’ Sma11 Business Systems, ” Financial Times, June 8, 1982,

sec. III, p. V. Philips’ installed base in these systems ranks ninth

by value, Nixdorfs third. IBM and Olivetti were first and second; 5 of the top 10 firms in this survey were American-owned,

%, de Jonquieres, “ICI. I.aunches Japanese Computer, ” Financial Times, May 7, 1982, p. 7.

built computers, and Japan, where the government has used a variety of measures over many

years to protect and support the domestic

industry.

Japan

Britain’s policies may have kept ICL in business, but the firm is hardly thriving. Japan has

had more success; the government played a

central role in the development of the country’s

computer industry, with many of the subsidies

given semiconductor manufacturers based on

the desire to help build a strong computer

sector. 90

Japanese computer manufacturers have not

yet had the export success of the nation’s consumer electronics firms, but they have outstripped their rivals in Europe on most indicators of competitive ability if not always in total

sales (table 41). In contrast to Europe, the dynamic is upward; Japan’s computer firms appear to be the only real threats to American

leadership in information processing, Originally, the Japanese were heavily dependent on

U.S. technology; now they have excellent capabilities of their own, particularly in hardware.

Though still lagging in software, this is a current emphasis of R&D; as discussed in the next

chapter, Japanese manufacturers hope to break

free of their reliance on IBM software and plugcompatible systems.

Figure 29 shows how rapidly Japan’s output

of computers has increased; production volumes were quite low as late as 1970. Now exports have also begun to rise steeply, doubling

from 1980 to 1981 and increasing by another

50 percent in 1982. Still, even at the 1982

level–about $1.7 billion—Japan’s exports of

computers are less than 20 percent those of the

United States. Moreover, as figure 30 points

out, IBM-Japan is by far the leading exporter;

in 1981, this American-owned firm accounted

%3ee the appendix on ‘‘The Development of the Japanese Computer Industry” in E. J. Kaplan, Japan; The Government-Business

Relationship (Washington, D. C,: Department of Commerce,

February 1972], pp. 77-1o1, Also J. Gresser, High Technoiog}

and ]apanese Industrial Polic~: A Strategy for U. S, Policj’makers,

Subcommittee on Trade, Committee on Ways and Means, House

of Representatives, Oct. 1, 1980.
154 ● International Competitiveness in Electronics

—

Figure 29.—Japanese Production, Imports, and Exports of Computers and

Equipment, Including Production and Exports of U.S.-Owned Subsidiaries

1,800

1,600

1,400

1,200

c

: 1,000

z

m

.

.

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCES 1985-78-Japan Fact Book ’80 (Tokyo Dempa Publications, Inc , 1980), pp 173, 174

1978.80–Japan E/ecfron/cs A/rnanac 7982 (Tokyo Dempa PubllcatlonsInc 1982), pp 58, 59

1981, 1982— Bureau of Industnal Economics, Department of Commerce

for some 40 percent of Japan’s total exports of

computers and equipment.

The major Japanese computer manufacturers

come from the familiar group of diversified

electronics companies. The three largest in

terms of data processing equipment sales are

Fujitsu, NEC, and Hitachi (table 41). While

perhaps 50 firms make small business systems,

there are no minicomputer specialists as such

in Japan.91 Like Siemens but unlike most other

European and American computer firms, the

principal Japanese suppliers get relatively small

fractions of their revenues from computers and

peripherals—table 42. Fujitsu is something of

an exception, as is Oki, but both are still considerably more diversified than the typical U.S.

manufacturer of data processing equipment.

As they did in Europe, American computer

firms moved early into the Japanese market,

but in Japan their penetration was limited by

MITI’s efforts to protect and nurture a domestic industry. In 1960, imports captured 70 percent of Japanese computer sales, a situation

unacceptable to the government; IBM was able

to use its patent leverage to establish a wholly

owned manufacturing subsidiary, but other

production by American firms was restricted

to minority interests in joint ventures.92 Sperry-

‘l’’Competing At Home Prepares Japanese Vendors for Export, ” Electronics, Mar. 27, 1980, p. 120.

@“’The Development of the Japanese Computer Industry, ” op.

cit. IBM-Japan was established in 1960. On other U.S. ventures,

see ‘‘Can the U.S. Recapture Its Japanese Market?” Business
Ch. 4—Structure and Trade in the International Electronics Industry 155

——

Figure 30.— Japanese Computer and Equipment

110

100

90

80

70

40

30

20

10

0

Exports by “Firm

1976 1977 1978 1979 1980 1981

Year

SOURCE Top Ten Computer Compan(es’ Bus{ness Performance In FY 1981

Analyzed, Japan Reporf, Joint Publlcatlons Research Service JPRS

L 11414 June 29, 1983 p 109 Orlglnal source, Computop/a

Univac, which also had a relatively strong patent position, managed to maintain a place in

Japan through a jointly owned sales company,

Nippon-Univac, plus a minority interest which

Week Aug. 25, 1980, p. 73, and “U.S.-Japanese Computer Companies Joint Venture Reported, ” Japan Report, Joint Publications

Research Service JPRS 1./10701, July 30, 1982, p. 16.

it still holds in Oki-Univac, a manufacturing

enterprise. NCR owns 70 percent of a Japanese

venture that is largely a marketing arm for imported systems. Japanese operations by other

American computer firms have been small in

scale, most established quite recently. Through

such efforts, U.S. companies have managed to

retain perhaps 45 percent of computer sales in

Japan, including both local production and imports; IBM-Japan accounts for most of this.

Indeed, until 1979 IBM-Japan had a market

share greater than any other firm, outstripping

all the Japanese-owned manufacturers. Since

then, Fujitsu’s sales have exceeded IBM’s—

figure 31. IBM still has the largest installed base

in value terms—about 28 percent—with Fujitsu ahead in total number of systems, Part of

the reason for IBM-Japan’s lagging rate of sales

growth compared with Fujitsu, Hitachi, and

NEC—all of which, as figure 31 shows, have

seen their sales expand rapidly—lies with IBMJapan)s relatively weak position in smaller

systems.

Another factor working to the advantage of

locally owned companies has been the Japan

Electronic Computer Co. (JECC), a leasing organization supported by loans from the Japan

Development Bank. JECC was organized more

than 20 years ago under MITI auspices to aid

the domestic industry; it purchases systems

and leases them to users so that computer manufacturers need not tie up large sums of capital

in lease bases. American-owned suppliers have

not been allowed to participate. JECC has given

smaller Japanese manufacturers like Fujitsu

and NEC much more financial flexibility than

they would otherwise have had. The leasing

program is still seen by both government and

the manufacturers as a necessary support for

the industry; only Hitachi, with its vast resources, is no longer heavily dependent on

sales to JECC.93 As this implies, the computer

operations of Japanese firms have not been

very profitable, Although line-of-business

figures are not generally available, continued

support via JECC—plus the reported inability

of firms that received loans and other subsidies

Q3M. Inaba, “Say JECC Aid Is Still Vital to Japanese CP(I

Firms, ” Electronic News, June 22, 1981, p. 22.
156 ● International Competitiveness in Electronics

in the early 1970’s to pay them back—indicate be losing money in their data processing divithat a number of Japanese companies may still sions. 94

W“Domestic Computer Makers Unable To Return Subsidies,” puter manufacturing, but that NEC and Mitsubishi maybe breakJapan Report, Joint Publications Research Service LI1oO4O, Oct. ing even—’’Competing at Home Prepares Japanese Vendors for

8, 1981, p. 10. An industry analyst at Nomura Securities has spec- Export,” op. cit.

ulated that only Fujitsu and Hitachi are earning profits in comTable 42.—Total and Computer-Related Sales for Japanese Manufacturers

Sales (millions of dollars

1970 1977 1981

Total Computer a Total Computer Total Computer

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $423 $230 (55°/0) $1,450 $1,030 (70.80/o) $3,209 $1,950 (60.8”/.)

Nippon Electric Co. (N EC) . . . . . . . . . . . . 691 210 (30°/0) 2,010 510 (25.60/o) 4,854 1,330 (27.40/o)

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,191 330 (15°/0) 5,190 600 (1 1.5°/0) 15,519 1,290 (8.30/o)

Toshiba . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,666 130 (8°/0) 3,950 220 (5.60/o) 9,536 430 (4.5%)

Oki . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — NA 480 170 (34.7%) 986 400 (40.60/o)

Mitsubishi . . . . . . . . . . . . . . . . . . . . . . . . . . 1,102 55 (5%) 2,960 140 (4.80/o) 6,058 330 (5.4%)

NA = Not available

aEstimated.

SOURCES. 1970– E J Kaplan, Japarr The Govemrrr8rrt.Bus/nessRelafiorrship (Washington, D.C Department of Commerce, February 1972), p 101

1977—’’Status of Top Computer, OA Semiconductor Companies Studied, ” Japan Report, Joint Publications Research Service JPRS IJ10319, Feb 11, 1982,

pp 17, 24; original source, Cornputopla, yen conversions at 288 per dollar

IfXl I-Tables 29 and 41

Summary and Conclusions

Industrial structures and patterns of international trade are continuing to shift, though at

different rates, in the three sectors of the electronics industry under discussion. In consumer

products, U.S. manufacturing has been reconstituted with considerable foreign ownership.

The transformation came somewhat later in

color TV than in black-and-white TV or consumer audio products, where imports have

been dominant for a decade or more, with domestic production at relatively low levels. As

a result of unrelenting import competition for

color television sales during the 1970’s, weaker

American manufacturers left the industry—

mostly replaced with assembly plants owned

by Asian firms. North American Philips, the

quasi-independent subsidiary of the Dutch multinational, has also increased its holdings. The

size of the color TV market and the protective

measures adopted by the Federal Government

have helped keep some manufacturing here, although—depending on the firm—as much as

half the value may be added overseas, Zenith

and RCA have retained their traditional market

shares, as has GE, but these companies all perform substantial portions of their manufacturing offshore.

On a world basis, the Japanese have far outstripped other countries in consumer electronics. They have a major share of all markets outside the industrial economies, and have been

making steady inroads into Western Europe,

where most of the local firms have been small

and markets fragmented. Philips, the primary

exception to the general weakness of European

consumer electronics manufacturers, has

mounted a forceful effort to maintain its position. The only company outside Asia to make

consumer VCRs, Philips’ determination to persist with this line of products, as well as its expansion in the United States, signifies its commitment to a continuing presence in consumer

electronics.

Suppliers with headquarters in the developing Asian economies of Taiwan, South Korea,
Ch. 4—Structure and Trade in the International Electronics Industry 157 — -—

Figure 31 .—Japanese Computer Sales, Including Exports, By Firm

550

500 —

450 —

400 —

350 —

300 —

250 —

200

150

[

100

50

2.500

2,000

1,500

1,000

500

)

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Year

197280 F ulfrsu and lhe COIWPL fer Industry In Japan ( Tokyo Ful[tsu Lld June 1982) p 11 Orlg!oal source Computop!a

Japanese owned furms, 1981, 1982 Compuler Com Oan Ies MId Term Bus ness Reports Announc?d Japan Repor! Jc nt Pub! I< df Ior I \ RP<eaI ~ h S$,, ,, e

J PRS L 11 I CO Jan 28 1983 P 73 ( 1982 est lmated)

IBM Japan and Nippon Un/vac, 1981 U WPI I Fval!jatlng Ihe Japanese Challenge Oafamatlon January 1983 P 133

Kong, and Singapore are following in the of lower labor costs, several have already

footsteps of the Japanese multinationals. Already producing large volumes of components

—as well as radios and other audio equipment,

watches, and calculators—firms in these countries are strengthening their technological capabilities as a prelude to expanding into new

product lines. With infrastructures owing

much to the investments of American and Japanese manufacturers moving offshore in search

proved able competitors in color TV. -

The situation is quite different in microelectronics. Here the European industry has never

been able to develop a strong independent

capability. American investments overseas accelerated through the 1960’s; U.S. firms built

both offshore plants in developing countries

and point-of-sale subsidiaries to serve the Euro-
158 International Competitiveness in Electronics

.—

pean market, While U.S.-owned manufacturers

continue to supply nearly two-thirds of the

world’s semiconductors, a pair of major changes

are underway: first, vertical integration is increasing; second, the Japanese are rapidly increasing their competitiveness in world markets.

Captive semiconductor production by integrated manufacturers like Western Electric or

IBM is not a new phenomenon, but the number

of captive facilities in the United States is on

the rise. While merchant semiconductor firms

like Motorola or National Semiconductor have

been expanding rapidly, captive production

has been increasing even faster. The motives

for vertical integration are several. Large consumers of semiconductors can help control

their costs by manufacturing internally. Others

seek a custom design and production capability, assured supplies of low-volume specialty

circuits, or simply to keep up with the state of

the art, In a few cases, diversification may have

been the primary motive for acquisitions of

merchant semiconductor firms by larger corporations. While the number of high-volume independent merchant suppliers has diminished as

companies like Mostek, Fairchild, and Intersil have been purchased, a new wave of startups—beginning in 1980—may help replenish

their ranks, given growth rates comparable to

those in earlier periods.

In essence, then, the U.S. semiconductor industry consists of two kinds of manufacturers:

merchant firms that sell in the open market,

and captives. That some of the merchant manufacturers have now been acquired by other

companies has not yet changed these patterns

significantly; the formerly independent merchant firms still produce largely for open market sales. Captives, in contrast, rarely sell outside the parent organization. Industrial structures in Japan and Europe lack this relatively

clear distinction. Most foreign production

takes place in divisions of large, diversified corporations; semiconductors seldom account for

even one-third of revenues, often much less.

Typically, such companies use a substantial

fraction of their microelectronics output in

their own end products.

In Japan, the major producers of semiconductors–including Toshiba, Fujitsu, NEC, and

Mitsubishi—also make consumer goods or

computers or both. These firms specialize to

some extent—Fujitsu in computers, NEC in

communications equipment and microelectronics, Toshiba in consumer products—but all

have multiple lines of business, some extending

well beyond the bounds of the electronics industry, Japanese manufacturers are now expanding aggressively into Europe, setting up

point-of-sale plants as American firms have

been doing for years. While none of the developing countries are as yet factors in IC production, several are making determined efforts to

expand from discrete semiconductors into

more advanced devices.

The computer industry, which consumes

more than 40 percent of world output of ICs,

has changed radically over the past two decades. There is hardly an identifiable computer

industry any longer. As more and more computing power can be packed into a microprocessor or single-chip microcomputer, semiconductor firms like Intel are pointing their R&D

efforts toward “systems on a chip. ” Others—

e.g., National Semiconductor—have entered

the market for large computer systems; National’s computer division sells IBM-compatible

mainframes made by Hitachi.

More broadly, distributed intelligence and

the ever-expanding demand for smaller systems are transforming the industry. Lower

costs open new markets—typically supplementing existing applications rather than supplanting them. Symptomatic of the changes in the

global computer industry is the emergence of

DEC—a pioneer in minicomputers and still a

specialist in small systems—as the second

largest computer firm in the world. In 1981,

DEC moved past two mainframe-oriented companies, NCR and CDC, into second place in

worldwide sales behind IBM. While IBM is still

an order of magnitude ahead of its competitors,

too much should not be made of this position;

after all, U.S. Steel once held two-thirds of its

market.
Nevertheless, the wor

Ch. 4—Structure and Trade in the International Electronics Industry 159

d computer industry

can still be pictured as IBM on the one hand

and everyone else on the other, The difference

is that the others are much more numerous and

diverse than 15 or 20 years ago, Not only are

minicomputer firms like DEC more prominent,

but microcomputer manufacturers such as Apple and Tandy now have some of the highest

growth rates in the industry. In Europe too—

where, as in semiconductors, subsidiaries of

American firms have dominated production—

the most competitive locally owned manufacturer is Nixdorf, which makes small systems.

The other European computer firms—Siemens,

ICL, CII-Honeywell Bull—have been growing

more dependent on foreign technology, with

only the last-named trying to break out of this

mold.

Japan’s computer industry has been marked

by a comparatively strong American presence.

While U.S. computer makers have not been

able to penetrate Japanese markets as extensively as European, they have had much more

success in Japan than American consumer

— —— . .

electronics firms; the share of computer sales

accounted for by U.S.-owned suppliers—about

45 percent, mostly due to IBM-Japan—is also

far greater than the U.S. share of the Japanese

semiconductor market. Still, IBM has lately lost

first position in Japanese sales to Fujitsu, As

this indicates, a major difference between

Japan computer industry and Europe is that

Japanese firms are getting stronger, whil e

European suppliers are not. Japan’s computer

manufacturers have excellent hardware technology, and arc increasing their production

and exports at high rates, In this they have been

greatly helped by the size and new-found technical ability of the Japanese semiconductor industry. Japan’s computer industry is the only

potentially serious challenger to the United

States now visible. While the Japanese tend to

be weak in software and in minicomputers, the

country’s major producers—aided by government-supported R&D efforts such as the fifthgeneration computer project—appear on their

way to becoming formidable competitors in the

global computer market,
CHAPTER 5

Competitiveness in the

International Electronics Industry
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 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Consumer Electronics ,.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.

44,

45.

46.

U.S. Gross Domestic Product (GDP), Exports, and Imports . . . . . . . . . . . . . . . . . 175

Imports of Color Televisions as a Percentage of Total US. Sales . . . . . . . . . . . . 183

Proportion of Sales Accounted for by Semiconductor Products. . . . . . . . . . . . . . 198

Research and Development Expenditures of Several U.S.

Computer Manufacturers, 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

List of Figures

Figure No. Page

32. Distribution of Economic Activity in Several Countries . . . . . . . . . . . . . . . . . . . . 173

33. World Exports of Manufactured Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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

and political leaders, other nations are overtaking the United States in trade competitiveness. Growing import penetration in such industries as automobiles, steel, and electronics—

including high-technology products like computer memory chips-has led to discouraging

commentaries and a variety of diagnoses. But

from their statements, international competitiveness clearly means different things to different people. Some see the United States losing

competitiveness as a nation relative to economic rivals like Japan or West Germany; to such

observers, the declining U.S. share of global

trade in manufactured products—from 25 percent in 1960 to 18 percent in 1980—is prima

facie evidence that the Nation is losing competitive vigor. On the other hand, OTA in its

past work has evaluated competitiveness on a

sector-by-sector basis—believing this to be

more meaningful than attempts to generalize

about the economy as a whole,

That multiple views on international competitiveness coexist would be of little moment if

similar policy remedies followed. But they do

not. Viewing competitiveness from an aggregate perspective directs attention toward policies affecting the economy as a whole, and

perhaps toward measures intended to promote

exports. Policies aimed at improving overall

productivity, encouraging capital investment,

reducing inflation rates, or stimulating economic growth may have little or no impact on

patterns of trade. In contrast, viewing competitiveness in the context of individual sectors

—such as steel—is more likely to suggest remedies tailored to the problems of these sectors.

Alternatively, the sectoral perspective might

suggest that Government support be directed

to industries whose international trade position

promises to improve. One danger was illustrated by the course of discussions over U.S.

industrial policy during 1980, which were dominated by the issue of “winners” as opposed

to “losers,” or “sunrise industries” and “sunset

industries ”-a debate that hindsight shows to

be beside the point.

This chapter begins by sorting through perspectives on competitiveness, primarily in the

context of electronics. Discussion then turns

to the practical problem of evaluating competitiveness and attempting to isolate factors

that have affected the ability of American electronics firms to compete internationally. Attempts to measure [competitiveness in an industry with rapidly evolving technology are at best

indicative. From the viewpoint of Government

policy, choices then hinge on dynamics—directions and rates of change, their causes. Projections always carry uncertainty. It may not be

easy to discriminate short-term competitive

shifts from the longer term secular trends of

most concern to policy makers. Some portions

of an industry may be in competitive decline

while others prosper; a few years later positions may reverse, Within a single firm, various

divisions will differ in their ability to compete,

Within a division, some product lines may fare

better than others. Because technical change,

itself not very predictable, is central to competition in electronics, “measuring” competitiveness in any simple sense is impossible. In

order to link the technological elements with

other business, economic, and policy variables,

the chapter concludes with an examination of

business strategies,

Comparing strategies pursued in various

parts of the world—how firms in several countries have taken advantage of the technologies

163
164 International Competitiveness in Electronics

available to them—yields insights into competitive shifts. Corporate planners have options in

deciding how to utilize existing technologies.

At the same time, corporate strategies affect

the course of technological development itself,

as firms decide how to allocate resources for

research and product development. In electronics, strategic patterns vary across national

industries and among countries. In contrast to

manufacturers of semiconductor devices and

computers, U.S. consumer electronics firms

have seldom approached their markets on a

world scale; while taking advantage of offshore

production sites and exporting technology

when they could, they have otherwise been

content with the large and formerly lucrative

domestic market, On the other hand, Japanese

entrants in consumer electronics-and to some

extent the Dutch multinational Philips—produce and sell all over the world. In microelectronics and computers, the situation is reversed; here it is American firms that led—

investing overseas and exporting long before

Japanese firms were factors in this part of the

industry,

Japanese firms now seem likely to take the

lead in future generations of consumer electronic products. In part, this competitive

success—including the massive inroads into

the U.S. market for color televisions summarized in the previous chapter—was fueled by

low manufacturing costs and supportive government policies. But compared to the aid

Japan’s Government has channeled to microelectronics and the information industries,

assistance for consumer electronics has been

relatively small: low costs and prices (including

proven instances of dumping), good products,

and aggressive marketing led the way. Technology is a more potent competitive weapon in

semiconductors or computers than in consumer electronics—one of the reasons American

firms, with their proven ability to turn technology into successful commercial products—

have been able to preserve many of their traditional markets. Low costs are still important,

but a unique integrated circuit or a better performing computer system offer advantages of

a kind that can seldom be achieved in consumer products.

Comparative Advantage and Competitiveness

The Economics of Competitiveness

Is Comparative Advantage Still

a Meaningful Concept?

To some, the traditional explanation of international trade flows in terms of comparative

advantage is a relic—made obsolete by national

industrial policies. Still, without denying the

reality of government interventions and their

effects—whether these be nontariff barriers restricting inflows of goods and funds for investment, or incentives to attract foreign capital—comparative advantage provides a useful

backdrop for more detailed analyses of trade

and competition.1

I For one view of the limitations of the comparative advantage

perspective in a context of rapid technological and industrial

change, see M. F. Cantley and J. A. Buzacott, “Industry Scale,

Free Trade, and Protection,” Scale in I+oduction Systems, 1lASA

Proceedings Series, vol. 15, J. A. Buzacott, M. F. Cantley, V. N.

Glagolev, and R. C. Tomlinson (eds.) (Oxford: Pergamon Press,

1982), p. 193.

Definitions of competitiveness in terms of

comparative advantage—with roots going back

to the origins of social science--state in essence

that nations tend to export goods (or services)

that best utilize their available resources, and

to import other items; i.e., they export goods

in which they have comparative advantage.

This is not so obvious as it first appears. For

instance, it follows that any nation engaging

in international trade must have comparative

advantage in some products. Except for financial flows of one type or another, imports must

be paid for by the proceeds from exports.

Therefore, from the viewpoint of comparative

advantage, it is meaningless to speak in terms

of a nation being uncompetitive. If a country

trades at all, it must be competitive in something.

The word “comparative” plays dual roles in

the definition. First, how do industries relate

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

comparison should yield a list of industries

ordered from most to least efficient. (The precise meaning attached to efficiency is not critical, but it refers essentially to costs.) All else

equal, nations would be expected to export

goods that appeared near the top of their efficiency listing, import those closer to the bottom. Such an outcome does not depend on how

these efficiencies compare to the efficiencies

of the same industries in other countries. It depends only on the relative standing of domestic

industries. The fact is that industries at the top

of one country’s list can have ‘‘efficiency” levels below those of the same industries abroad

and still export. The first characteristic of an

export industry, therefore, is that it be efficient

in its use of resources relative to other domestic

industries.

The second comparison adds the international dimension. Here, the efficiency structure

of one nation’s industries is compared with

those of its potential trading partners. Where

the efficiency structures of two countries differ

—the usual case—trade can be advantageous

to both. The United States might in principle

be just as efficient in the production of video

cassette recorders (VCRs) as Japan; but if U.S.

efficiency is greater in, say, agriculture, it

would pay both countries to trade—the United

States shipping agricultural goods to Japan

while importing VCRS, Even given identical

cost structures, trade might be advantageous

where demand conditions differ between two

countries. Of course, such a discussion leaves

out a host of other forces—ranging from tariff

levels to export subsidies—that can affect trade

patterns. Still, comparative advantage provides

a starting point for examining these.

Technology plays a central role in electronics. Some countries may possess technological

expertise unmatched elsewhere, hence be able

to export products that no one else can make.

More often, technology is a route to lower cost

manufacturing or to products that perform better. A number of nations that could manufacture computers do not because countries like

the United States can make better computers

cheaper.

While U.S. exports have often been based on

technological leads, in other cases trading advantages may stem from natural resource endowments. This country’s exports of landbased products—food, fiber, timber, paper—

are the consequence of an abundance of arable

land combined with high-technology inputs.

Conversely, Japan would be hard-pressed to

develop agricultural advantages–regardless of

technological expertise—because of her scarcity of good land.

Nations may also be able to maintain marketbased advantages in particular industries, advantages that can persist over long time periods. The American lead in commercial aircraft,

or some types of capital equipment—e.g., gear

cutting machines—may not have resulted from

unique technological skills so much as that certain kinds of products first found large markets

in the diversified and affluent U.S. economy.

Likewise, the Japanese lead in VCRs is now so

great in terms of production scale and developmental experience that it would be very difficult to overcome.

None of these examples detracts from the primacy of relative costs of production and distribution in determining international trade

flows. When a nation has comparative advantage in a given product, that advantage is usually visible as lower costs and prices, Sometimes

manufacturing costs themselves may be the

chief indicator—this has generally been the

case in consumer electronic products. Sometimes price/performance ratios must be examined—the more typical situation for computer

systems. In an industry like steel, where it has

been clear for more than a decade that Japan

has a comparative advantage in production

costs with respect to the United States, the

crucial questions—particularly for public policy—then concern sources of advantage or disadvantage, from the national perspective how

to capitalize on the former while minimizing

the latter.

As the discussion above suggests, most costbased comparative advantages can be explained,

at least to first order, in terms of resource

availability and technology, Countries with ample supplies of capital relative to labor can ex-
166 ● International Competitiveness in Electronics

pect to excel in industries that rely on capitalintensive production methods—e.g., synthetic

fibers or primary metals. On the other hand,

where production methods call for large numbers of unskilled workers, nations with abundant supplies of such labor—hence low labor

costs—are likely to be the more efficient producers. Clothing and apparel, where much of

the output is still hand-stitched, are well-known

examples. In consumer electronics, low labor

costs have helped Asian nations such as Japan,

South Korea, and Taiwan achieve strong competitive positions; although automation has increased, assembly remains labor-intensive. Several American industries that have been losing competitiveness depend on substantial inputs of both labor and capital. To make either

steel or automobiles requires large capital investments (in most but not all cases), while

labor content is also high. Labor is expensive

in the United States, while the Nation’s advantages in technology and capital are not so great

as 25 years ago. These long-term shifts are

creating difficult problems for this pair of traditionally important American industries.

Consequences

For every comparative advantage, such as

the United States has had in computer systems,

there must be a comparative disadvantage, as

now found in steel. Given flexible exchange

rates, the value of a country’s exports will normally counterbalance its imports almost exactly, since in a very real sense nations must use

the proceeds from exports to purchase their imports. While this may seem straightforward, the

consequences are not so obvious, Listed below

are four general conclusions that follow from

the earlier discussion,

1. If a nation engages in international trade,

some of its industries are by definition competitive, but some are also uncompetitive. It is, to

reiterate, impossible for a trading economy to

lose competitiveness overall, since the very existence of trade implies that some sectors are

price competitive while others are not. From

a comparative advantage perspective, it makes

no sense to state that the United States is losing its ability to compete. What can happen is

that, over time, shifting patterns of comparative

advantage may leave the United States less

competitive in industries that once were leading exporters.

Some observers argue that the competitiveness of the United States has declined because

its percentage of total world exports of industrial products has fallen relative to nations like

West Germany or Japan. Such changes, however, are virtually inevitable in a world where

industries in other countries have been growing much faster than those in the United States

—overseas growth built in many cases on technologies painstakingly developed here. Similar

fates are likely to befall the countries that today

are experiencing the highest rates of economic

expansion. Such nations as Brazil, South Korea, Mexico, and Taiwan are steadily increasing their share of world trade in manufactures.

As these and other economies continue to industrialize, the current leaders are likely to find

themselves losing ground in sectors that might

now be mainstays. Certainly Japan’s relative

advantages in steel or consumer electronics are

not nearly so great as they once were.

2. If a nation overall rate of productivity

growth—however productivity be defined and

measured—is lower than in other countries,

this need not result in losses of competitiveness

for all that nation’s industries, provided exchange rates are free to adjust. Instead, real per

capita income will decline relative to other

countries, This may be a serious consequence,

but should not be confused with impacts on

competitiveness. Productivity growth does affect international trade flows, but again in a

relative way: firms and industries where productivity growth is lower than average can expect

to find themselves moving downward in a nation’s efficiency ordering.

Nothing has yet been said about U.S. levels

of productivity, cost, or efficiency compared

to other countries, The comparisons have been

internal. But it does follow that, if U.S. per

capita income is to remain high, productivity

levels must keep pace with those of our trading

partners. At the same time, the sad fact is that

an American firm or industry might be more

productive—or otherwise efficient in its use of

resources—than its overseas rivals and still not
Ch. 5—Competitiveness in the International Electronics Industry ● 167

—

be competitive. The examples drawn on earlier

can illustrate the point. In American industries

like steel, apparel, consumer electronics—even

shoes—labor productivity is as high or higher

than in most foreign countries, yet these industries are in competitive difficulty. (The primary

exceptions to this statement come when recessions in the United States are out of phase with

those in other parts of the world; productivity

levels depend on capacity utilization and can

drop rapidly during downturns.) While these

industries may be more efficient than their international rivals, other domestic sectors do

better still. U.S. manufacturers of color TVs

have not been sufficiently more productive

than the average U.S. company to maintain

their competitiveness; other American goods

are more attractive to our trading partners, import competition in TVs stiffer, The first comparison for domestic industries is then their

performance with respect to the rest of the

domestic economy, again leaving aside distorting factors such as trade barriers or subsidies.

3. This conclusion follows: When industries

experience relatively rising costs in world markets, and lose market share both at home and

abroad, the price system may be signaling that

resources should be reallocated internally—i. e.,

that domestic restructuring is necessary. T o

restore the competitiveness of declining industries would often require productivity improvements—for instance, through improved manufacturing technologies—greater than experienced elsewhere in the economy.

This may seem an especially harsh reality.

It implies that a firm can take advantage of the,

latest developments in product technologies,

manufacturing processes, or both—but still not

improve its ability to compete. Whether or not

it can strengthen its position will depend on

factors such as:

●

●

the attributes of the technologies the company invests in (or the other investments

it makes),

the subsequent impacts on productivity

compared with the rest of the domestic

economy,

●

●

responses to the investments by both

domestic and foreign competitors, and

the opportunities available to . . other trading

sectors both here and abroad—far from

last in importance.

It is an unpleasant fact that the realities of global comparative advantage may leave no simple

remedies for a firm or industry bent on regaining its competitiveness. Substantial capital investment might be necessary to maintain the

status quo but insufficient for improving competitive ability.

A brief example will illustrate: American

automobile firms have been undertaking extensive programs of product redesign, accompanied by investments in new manufacturing

facilities, intended to restore price competitiveness and profitability. The investments are

huge, and clearly necessary if the industry is

to again be competitive. Still, to succeed, these

spending programs must do more than keep

the U.S. industry on a par with productivity

levels in Japanese automobile firms–if only

because wages here are considerably higher.

These wage levels reflect, not only the high productivity levels attained by U.S. automakers

over the years, but also the lead in aggregate

labor productivity that the United States still

maintains with respect to Japan. To be competitive, the U.S. automobile industry must find

ways to exceed the productivity levels in the

factories of its overseas rivals—the same problem American steelmaker have faced since the

1960’s. Given the available production technologies, this might not in fact be possible; certainly the steel industry has not found the key.

4. A further conclusion, relating to Government initiatives aimed at improving overall

productivity: if such policies succeed—that is,

if average productivity across all industrial sectors were to increase faster here than in other

countries—then some formerly competitive

American industries might become uncompetitive, Productivity improvements do not occur

uniformly across an economy; some firms and

industries improve faster than others. In terms

of competitiveness, when some improve others

will decline—even if the declining firms or in-
168 ● International Competitiveness in Electronics

dustries experience productivity improvements

of their own, and even if they improve faster

than their rivals overseas.

This is a nontrivial conclusion. Phrases such

as “getting the economy moving again” or “reindustrializing America” often seem to suggest

that all industries can begin to compete internationally once new policies—whether changes

in Government regulations, a revised tax structure, encouragements for exporting—are put

into place. Unfortunately, this is highly improbable, if not impossible. The actual outcomes

will depend on relative impacts—for instance,

on how changes in tax law affect capital investment decisions and hence manufacturing efficiency across industries. Likewise, Government programs aimed at encouraging exports

—removing disincentives, promoting American goods overseas, even providing subsidies

such as tax benefits or low-interest loans—are

unlikely, by themselves, to have more than marginal effects on competitiveness. Export incentives are puny weapons for combating structural problems, and—as experiences in several

European countries show—even massive subsidies may be little help to an industry whose

costs are too far out of line.

Many of these points apply across firms

within an industry as well as across industries.

Manufacturing sectors are typically populated

by a spectrum of companies ranging from most

to least efficient. In a relative price sense, some

of the producers in a given country maybe fully competitive while others face difficulties. A

particular Government policy might help all

firms in a given industry; an alternative measure might help some firms but not others; still

other policies might hinder all uniformly. In

electronics, tax credits for research and development (R&D) are more likely to aid semiconductor firms intent on being at the leading edge

of the technology than those that concentrate

on low-cost production of standard devices, In

a complex economy like that of the United

States, it is not easy to determine a priori the

outcomes of any particular set of policies. Even

if the objective is to aid all firms, this may be

impossible, A neutral policy—either among

firms within an industry, or among industries

within the economy—is a theoretical outcome

that is seldom very closely approached. On the

other hand, differential effects can rarely be

quantified with much precision—and if they

could, political choices among alternatives

might be more difficult than they are now.

The essential lesson is that any policy

adopted by Government will result in winners

and losers, In an open economy, it is not possible to simultaneously help all sectors compete

with foreign enterprises, The nature of the economic process dictates that choices be made

when formulating public policies—choices that

discriminate implicitly if not explicitly among

sectors, and sometimes among firms.

Market Distortions and

Nonmarket Factors

In assuming that prices in world markets depend only on costs and on the qualitative characteristics of goods that lead customers to perceive value in them, the previous section left

aside many of the forces affecting competitive

events. In reality, market distortions of several

types can affect prices, as well as resource allocations and other economic decisions. One example occurs when governments provide

otherwise uncompetitive industries with subsidies—direct payments, preferential allocations of credit, tax benefits, protection from import competition, As such a list suggests, distortions can be introduced by policies having

targets—whether direct or indirect—quite apart

from international trade, Several European

countries openly subsidize industries in order

to maintain employment levels, Some of these

same countries point to the alleged advantages

American high-technology firms get from R&D

expenditures by the U.S. Department of Defense.

Pricing practices can also create distortions

—e.g., dumping, normally defined as selling exports at prices less than charged domestically. Dumping is considered an unfair tactic

under the rules of GATT (the General Agreement on Tariffs and Trade, ch. 11); governments typically attempt to counter such distor-
Ch. 5—Competitiveness in the International Electronics Industry 169

tions in rather direct fashion, aiming to improve the operation of the price system. At least

in principle, dumping margins can be offset by

added tariffs, subsidies by countervailing

duties. Remedies are less straightforward when

the sources of impacts on pricing decisions are

remote from the marketplace. The Tokyo

Round Multilateral Trade Negotiations, completed in 1979, addressed one of the more complicated of these: implicit subsidies to exporters. Examples include government payments for R&D directed at domestic objectives

—such as military security—which also, possibly as a side-effect, improve international

competitiveness. In the United States, technologies such as semiconductors and computers

(in their early days), jet engines, and nuclear

powerplants have benefited from such expenditures, All have been strong export sectors for

the U.S. economy. In recent years, countries

like Japan and France have targeted commercial technologies and commercial industries

quite overtly (ch. 10). While the Tokyo Round

negotiations resulted in a new subsidies code

to be implemented through GATT, this is only

a small step toward resolving such issues.

In other cases the problem may not be distorted price signals, but market outcomes

judged unacceptable. The most common instance—at least in terms of the frequency with

which the argument is invoked—has probably

been the uncompetitive industry claimed essential for national security. A number of countries have refused to allow open competition

in computers because they believe domestic

manufacturing is vital to their military

strength. In the United States, spokesmen for

the machine tool, steel, and automobile industries have advanced the national security

argument,

At other times, unfettered competition is opposed for social or political reasons, The U.S.

textile and apparel industry receives trade protection partly because it employs large numbers of low-skilled minority workers who might

have difficulty finding jobs elsewhere. When,

in early 1981, the Japanese were persuaded to

limit exports of automobiles to the United

States, the ostensible reason was to give American firms time to recover from recession and

adjust to rapidly shifting market conditions;

this step was taken even though there were few

indications that trade restrictions would be a

significant aid to recovery. In consumer electronics, orderly Marketing Agreements have

been negotiated to soften the impacts of rising

import levels. In these and other cases, political

pressures—here and abroad—often carry more

weight than economic indicators. The latter,

for example, might instead suggest a need to

shift resources to more competitive sectors. It

is precisely when political pressures are most

intense that the benefits of alternative policies

should be widely aired before decisions are

reached; the travails of the American steel industry have been aggravated by refusals, spanning many years, to directly confront the fact

of shifting comparative advantage.

The Role of Technology

Any given technological development—a

new or improved product, a more efficient

manufacturing process—is likely to make some

countries more competitive, others less competitive. For example, user-friendly software

for numerically controlled (NC) machine tools

would improve productivity most in countries

that have a large base of NC machines coupled

with a shortage of skilled parts programmers.

More generally, even if the technology is widely available and all nations are able to implement it, some economies will benefit more than

others. If a new manufacturing process reduces

labor intensity, the competitive gain will be

greatest for countries with high labor costs,

least for those with large numbers of available

workers. Even the most sophisticated new consumer electronic products may continue to be

manufactured largely in the Far East so long

as production requires sizable labor inputs. The

effects of new technologies on international

competitiveness depend, therefore, on attributes which must be related on a case-by-case

basis to the resources available in each country and their costs, the mix of products manufactured and sold, and existing patterns of

trade, Impacts of R&D projects—developments

in both products and processes—are inherently
170 ● International Competitiveness in Electronics

difficult to predict. This can be troublesome for

policymakers. When, if ever, does it make sense

for government to select promising research

areas for generalized support? To provide direct funding intended to maintain existing

technological leads or foster new competitive

enterprises? To support the development of

avowedly commercial products? Different

countries give different answers at different

times. Even when the thrust of an R&D strategy might seem sensible, the consequences can

be other than anticipated, It is entirely possible that a program sponsored by the U.S. Government could result in new products or processes better suited to the economic environments of our competitors.

“Technology gaps” have been an important

source of U.S. comparative advantage in the

past—notably in computers and semiconductors. Europeans tended to believe, as recently

as the late 1960’s, that technology gaps favoring the United States would be a permanent

—and undesirable—feature of international

trade, z These technological advantages have

never resided so much in fundamental knowledge—whether of the sciences or engineering—as in the abilities of American firms to

build on the existing knowledge base. Apply -

ing new technical knowledge can be a greater

challenge—a different kind of challenge—than

generating that knowledge in the first place;

the guideposts are seldom so clear, the skills

differ. In sectors as dissimilar as agriculture

and electronics, the United States has been at

the forefront in R&D and its applications; in

both, exports by U.S. multinationals have been

characterized by continual product/process developments. Even so, in microelectronics, these

commercial developments have often pro -

ceeded without a well-established foundation

in the physics and chemistry of electron

devices. Such patterns are not uncommon;

computer software, which has very sketchy

theoretical foundations, is another case. Under

such circumstances, the successes and failures

‘See, for example, J. J. Servan-Schreiber, The Americ~n Challenge (New York: Atheneum Press, 1968).

of individual firms at product development

have more direct consequences for competitiveness than do government R&D policies, although the latter help shape and direct technical progress.

Today, it is difficult to maintain purely technological leads. Unless knowledge of the technology is coupled with unusual resource requirements—large capital investments, sophisticated research facilities—diffusion among industrialized nations will be rapid. Moreover,

the flow of technical information is no longer

so one-sidedly from the United States overseas

as during the 1950’s and 1960’s. Firms in many

countries now have the ability to locate and

license the technologies they need, or to quickly duplicate products and processes developed

elsewhere.

In essence, this means that gaps in technology should be viewed as largely self-closing,

if only because it is easier to catch up by imitation than to create new knowledge. While

some Americans continue to lament the passing of clear-cut leadership by the United States,

there is little to be done except to work hard

on our own technical abilities; it is plain that

other countries can make a great deal of progress with imported technologies provided they

have capable people and adequate capital for

investment. virtually all the nations that compete with the United States have taken advantage of this avenue. Japan consciously followed

a strategy of purchasing technology from European and American companies. 3 Importing foreign technology has, in fact, been a central element in Japanese economic development since

the late 19th century.

Although Japan has recently been the most

conspicuous in adapting foreign technologies,

virtually all countries lean in one way o r

another on more advanced economies to foster

development. Nations such as Taiwan and Korea are doing so today. During the 19th century, and earlier in the 20th, the United States

3T. Ozawa, Japan Technological Challenge to the West,

19501974: Motivation and Accomplishment (Cambridge, Mass.:

MIT Press, 1974).
Ch. 5—Competitiveness in the International Electronics Industry 171

—

imported a good deal of technology—e.g., for

making iron and steel. In the postwar period,

German expertise in rocketry helped build the

U.S. space program. When the United States

develops a synthetic fuels industry, it will depend to considerable extent on the technology

base developed earlier by countries without our

petroleum reserves.

In essence, flows of knowledge among developed countries have returned to a situation

more like that before World War II; diffusion

of technology has also been accelerated by the

activities of multinational corporations. Particularly in electronics, foreign investments by

U.S. firms have aided infrastructure] development in many countries, industrial as well as

industrializing. Even in the absence of joint

ventures or other corporate connections, electronics firms in many parts of the world now

have the ability to monitor and learn from developments elsewhere, taking advantage of the

multiple pathways by which technology moves

inter nation ally.

From the standpoint of the individual firm,

that technology transfers take place so rapidly makes R&D more rather than less essential.

Companies that are leading try to stay ahead.

Those that are behind must do their best to

utilize the technologies available to them. The

United States still maintains technological

leads in electronics—computer software, minicomputers, microprocessor designs, office

automat ion equipment such as word processors. These leads are not as large, nor as broadly based, as a few years ago. Because commercial advantages are short-lived, continuous effort is required; in today’s economy, cutting

R&D expenditures is often tantamount to accepting a position of dependency on technology developed elsewhere, Nations without the

resources to stay at the leading edge may have

no alternative. On the other hand, economies

now at the forefront have evolved industrial

structures adapted to a leadership position. To

slip back means a painful adjustment-not only

technical stagnation, but marked shifts in trade

patterns.

Other Perspectives on Competitiveness

Productivity

Some commentators hold that an industrial

economy is losing competitiveness if its aggregate productivity-i,e., gross domestic product (GDP) per capita—is growing more slowly

than the GDPs of its rivals. The United States,

by this definition, would be declining in competitiveness relative to most other industrial

nations. Q Great Britain is the obvious example

of a nation losing competitiveness, in this view,

over several decades.

To what extent are definitions of competitiveness based on relative productivity levels

meaningful? The question hinges on the rela-

‘S[;e [ ,’, S In(fu,itrial (,’{)rrjpf:tltl~t:rlf:5.s, ,4 [,’c)mj)arisor] Of Sfeel,

Itt]ef’tror)ic s, and ,\ utornoh~)e.s (wash ington, D,(; .: ( 1,S (Jongrcss,

(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-

~)arl!fi to the LJ nlted St.ites.

tion between aggregate productivity, or GDP,

and economic competition, This relation is not

a close one; as pointed out in the previous section, even countries with very high rates of productivity growth cannot be competitive in all

industries. Japan’s agricultural sector is inefficient and unable to compete internationally–

as a result of which farmers have used their

political power to exact trade protection from

the Japanese Government. Nor do rapid increases in productivity necessarily correlate

with technical leadership. Japan, with unmatched productivity improvements over the

postwar period, has depended on the United

States and Europe for much of its technology.

Early applications of robots—an area where

Japan has lately gained a justified reputation

for leadership (ch. 6)–were based on equipment imported from the United States. In electronics, Japanese companies have only recently

begun to compete in product lines character-
172 International Competitiveness in Electronics

ized by the newest technology; for the most

part, inroads have been in such products as

radios, TVs, and standard semiconductor devices. As Japanese firms move into high-technology product lines, these patterns change;

still, they belie the significance of aggregate

trends in productivity or GDP by themselves.

Indeed, for many years other countries expressed little concern over Japan’s competitiveness despite the explosive growth of that nation’s economy—some even continued to denigrate Japanese products as the cheap and

shoddy output of low-cost labor.

Nevertheless, relative productivity gains—

considered either in the aggregate or on a

sector-by-sector basis—are central to the

dynamics of any nation’s economy. Differing

rates of productivity growth will, over time,

lead to shifts in the structure of international

trade and thus the competitive positions of

firms and industries throughout the world, In

the United States, sectors where the pace of

technological change has been modest—steel,

automobiles, shoes, consumer electronics—

have borne the brunt of restructuring; penetration of American markets varies considerably

among these industries, but in each the Federal

Government has resorted to trade restrictions

to control imports and blunt competitive pressures. At the same time, even in such industries, the stronger U.S. firms have often maintained their ability to compete with overseas

rivals; most often, the companies displaced

were in trouble before imports became a factor. In consumer electronics, Zenith and RCA

have lost little in the way of market share,

though imports and U.S. investments by foreign corporations have driven others from the

business. In steel, domestic minimills have

steadily won sales in selected product lines

from larger American steelmaker; they have

done so in the face of stiff import competition,

Thus, the primary effect of import competition

may be to accelerate processes of industrial adjustment already underway. Market penetration by imports in such industries need not

imply that an economy is in overall decline.

These same industries may eventually find

themselves revitalized; indeed, many economists contend that exposing industries to competition is crucial to their continued healths

This is an attitude long reflected in U.S. antitrust law.

One reason for slow productivity growth in

the United States is simply this Nation’s greater

industrial maturity compared with many of its

rivals—shown, for instance, by the much greater proportion of economic activity devoted to

services than manufacturing. As figure 32 indicates, by 1980 two-thirds of the American

work force was employed in the service sector. Other industrial countries continue to

employ more of their people in industry, fewer

in services; even in the United Kingdom, services account for only a little over 55 percent,

Productivity improvements in the service sector are more difficult to achieve—or at least to

measure. Despite the much lamented decline

in U.S. productivity growth, the manufacturing portion of the American economy continued to increase its productivity about as fast

during the 1970’s as over the preceding 20

years.6 Even if productivity improvements have

lagged in the service sector, the shift has

brought compensations internationally. Revenues to American firms for such services as the

engineering and construction of public works

projects—airports, hospitals, dams—have increased rapidly. As one result, other portions

of the economy have moved downward in the

rank ordering of U.S. comparative advantage,

In other words, the United States is substituting

exports of services for shipments of industrial

products, importing more of the latter. The substitution need not imply either rise or decline

in competitiveness,

Of course, greater aggregate productivity in

the United States as measured by GDP per capital—one of the fundamental indicators of living standards—is a desirable goal wholly apart

from its possible influence on competitiveness,

But public policy instruments directed at the

—

sFor a well-known statement of this view, see B, Klein, Dynamic EcorIomics (Cambridge, Mass: Harvard University Press,

1977).

‘U. S. Industrial Cornpetjtjveness: A Comparison of S’teel, Electronics, and Automobiles, op. cit., table 10, p, 61. Annual~roductivity growth in manufacturing was 2,4 percent from 1950

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

I I

Industry

I I

1960

u

1980

United

States

1960

—

1980

—

—

1960

—

1980

West

Germany

1960

Services

—

—

1980

—

—

1960

—

—

1980

Japan France United

SOURCE Wor/d Development Report 1982 (Washington D C World Bank, 1982)

Kingdo m

general dilemma—i.e., macroeconomic and be reflected in shifting exchange rates, which

market promotion policies—would be more

likely to achieve such objectives than measures

aimed at improving the positions of particular

industries. The tax reductions and savings

stimuli embodied in the Economic Recovery

Tax Act of 1981 are examples of steps that

should help improve productivity. Still, even

if they lead to greater productivity growth,

there may be little change in the competitive

positions of many American firms. All else

equal, aggregate productivity improvement will

in turn will increase the price competitiveness

of some industries while decreasing that of

others,

Market Share

Another common perspective on competitiveness starts with market shares of different

countries. In this view, a drop in the U.S. share

of world manufacturing exports could indicate

a loss in competitiveness. The popularity of
174 ● International Competitiveness in Electronics

market share as a measure of corporate performance helps account for the application to

international competitiveness. For measurement purposes, markets can be defined globally, nationally, or regionally. Figure 33 compares the U.S. share of world trade in manufactures to the shares of several other countries.

Perhaps the most striking point made by the

figure is the huge expansion in total world

trade: a sixteenfold increase between 1960 and

1980; changes in country market shares, in contrast, are matters of a few percentage points.

The United States is now less prominent

among exporting nations, but to transfer a parameter such as market share—with real though

limited meaning in a corporate setting–to the

arena of trade between nations risks misunderstanding. Losses in the U.S. share of world

markets are virtually inevitable as other nations

progress economically. Starting from a lower

postwar base, growth rates elsewhere have frequently exceeded those here. As a result, the

United States has been left with a smaller portion of total world output, and a smaller share

Figure 33.—World Exports

of trade; to some extent, market share is nothing more than a surrogate for comparing economic growth rates.

Rather than worldwide exports, would

shares of the U.S. domestic market or particular third country markets make better indicators of competitiveness? If the U.S. market

is the basis for comparison, the expansion of

trade as a percentage of GDP must be considered. Growth in trade—exports as well as

imports—has exceeded income growth in the

United States, as table 43 indicates. That

growth in imports exceeded that for national

income does not, by itself, imply a loss of competitiveness; indeed, the growth rate for exports over the period in the table is a bit higher,

If the intent were to evaluate competitiveness

by examining the exports of advanced economies to nations in the developing world—

where the United States has, on the whole,

declined—the question is then whether American corporations have slipped in their ability

to compete with foreign exporters. Is this so?

of Manufactured Goodsa

1960

Total $55 billion

1980

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),

Exports, and Imports

Value in billions of

constant 1972 dollars

1960 1980

GDP ., . . . . . . : . . . . . . . . . . $732.0 $1452.4

Total U.S. exports . . . . 38.4 161,1

Total U.S. imports . . . 30,7 109.1

SOURCE De-partment of Com-merce, Bureau of Ec;nomtc A;alysls

Not necessarily, and for several reasons—the

first being rates of economic growth in particular developing country markets. Longestablished ties still link traditional trading

partners-e. g., France and her former colonies.

Such patterns tend to be rather stable; the proportion of U.S. trade with Canada and Latin

America remains high, European firms tend

to have a greater presence in African markets,

Japan has high export shares in the Far East.

If market position in the developing world

were to be treated as an indicator of competitiveness, relative shifts in the position of a

country such as the United States might simply reflect the economic growth rates of traditional trading partners relative to other developing nations. Moreover, changes in the American share of exports might indicate nothing

more than a varying mix of goods and services

sent abroad. If the United States is moving

toward increased exports of technologically

sophisticated products and services—and if the

imports of developing countries tend to be

lower in technology–then U.S. market share

might decline for this reason alone. Should it

be taken as a sign of reduced competitive ability that Japan replaces the United States in exports of automobiles to, say, Canada at a time

when American exports of computers to both

Canada and Japan are rising? Finally, U.S.

trade performance on a relative basis could slip

because of the activities of multinational corporations. American firms have invested heavily abroad compared to their counterparts in

other countries, Foreign direct investment by

U.S. corporations averaged $15.5 billion annually over the period 1977-81; in contrast,

West German companies invested an average

of $3.9 billion, Japanese $2,8 billion, while British firms spent $5.8 billion.7 Overseas manufacturing by subsidiaries of American multinationals may substitute for goods earlier shipped

from the United States. Furthermore, subsidiaries may themselves export, adding to the

shipments of countries with which the United

States competes. Does this diminish U.S. competitiveness? It would be hard to argue for such

a conclusion in the common case of subsidiaries that owe much of their competitive advantage to technology and skills developed by

the American parent.

The point is not to slight the significance of

relative market shares, but to note that trade

statistics reflect economic currents that may

be unrelated to competitive ability. Furthermore, wholly exogenous events can have great

impact on comparative trade figures. Virtually all the countries with which the United

States competes depend far more heavily on

imported energy. Changes in oil prices have

much greater effects on the trade positions of

such countries; when energy costs jumped in

the mid-1970’s, European and Japanese imports swiftly rose in value terms, creating sudden trade deficits. Among the consequences,

exchange rates eventually adjusted to bring exports more closely in line with new levels of

imports (while many countries were able to cut

quantities of energy imports, the value of these

imports still tended to increase). One result was

a reduction in the U.S. share of world exports.

Again, there is no reason why this should imply a shift in competitiveness.

Indicators Based on Technology

According to yet another view, U.S. competitiveness has declined because other nations

have gained ground in technical ability--i.e.,

the technology gaps that once benefited the

United States have narrowed or vanished.

71nkrnational Economic in dka tors, Ilepa rt mIIII t [jf [Jon] mer{:e,

Int(~rnational ‘1’ra(ie A{irnir]istration, june 198z, p. ~~. The figurw

for the [Jnited Kingdom exclude int’estments by oil companie~,

Investment Ie\els fluctuate nlarkedly from year to year; for instan~e, [

 1,S. foreign ln~’estrnents f(~ll by. more than half from I Y8(I

to 1981,
176 . International Competitiveness in Electronics

While often true in particular cases, such conclusions can only be substantiated by careful

examination on a technology-specific basis;

generalizations about technological capability

are often suspect. Moreover the implications

for competitiveness are not always straightforward; many Japanese companies have followed

behind and benefited from the experience—including mistakes—of innovators in the United

States.

Attempts to develop indicators of technological competitiveness founded on some basis

other than case-by-case evaluations have generally focused on patents, occasionally on dates

of introduction of new products or processes.

By such measures, the relative position of the

United States has been declining in many industries.8 Yet patent statistics or product/process introductions are highly imperfect measures of technical competence, particularly if

used in isolation. There are simply too many

factors other than the characteristics of the

technology that affect them. In some portions

of electronics-semiconductors for one-firms

tend to view patenting as a routine tool of

business. Rather than a means of “protecting”

technology, or capitalizing on it in any concerted fashion, a patent may be something to

be bartered. Under such circumstances, correlations between patent statistics and technological ability have little meaning. Some observers point to the high rates of patenting by Japanese electronics firms (see ch. 10, table 77) as

a foreboding sign; however, it seems clear that

reward systems in Japanese firms encourage

patenting regardless of the value of the technology patented.9 Even in the United States,

only a small fraction of the patents granted

could be considered meaningful advances in

the state of the art.

Patents or similar indicators give an especially oversimplified picture in industries like electronics where technological change is rapid

‘Science Indicators 1980 (Washington, D. C,: National Science

Board, National Science Foundation, NSB-81-1, 1981), pp. 16-22.

‘A number of other factors act to encourage patent registrations in Japan, including very low fees. See S. Fleming, ‘LIFO

offers View of Rise in Japanese Patents, ” Financial Times, May

7, 1982.

and product cycles can move more quickly

than the patenting process. Again, there is no

substitute for case-by-case analysis. In semiconductors, American companies are generally

still the first to introduce new or improved

designs for microprocessors or more specialized memory circuits—static random access

memories (RAMs), various types of read-only

memories (ROMs)—but today their lead is brief.

Where new products from American firms win

acceptance in the marketplace, Japanese manufacturers have been quick to follow with

cheap, reliable devices of their own. They appear to have taken the lead in dynamic RAMs,

a product where the path of technical evolution is well marked, with little uncertainty over

what the market wants.10

Likewise in the computer sector, several

countries can match American capabilities

over a range of hardware. This rough technological parity does not so readily translate

into competitive ability. Selling computers demands much more than hardware; commercial

success depends heavily on software—a field

in which American companies maintain a useful lead, even more so as software costs continue to rise compared to hardware. Also important are service, a good appreciation of user

needs, and other customer support functions.

Although prospective mainframe purchasers

tend to have a relatively sophisticated understanding of the technologies offered by competing manufacturers, customers for small

business or home systems may know less about

computers than about the family car. Selling

lopi]ot production of 256K RAMs by the major Japanese manufacturers began at the end of 1982—evidently well ahead of the

plans of American merchant manufacturers, though Western

Electric announced a 256K chip in mid-1983. See “Recent Developments in Japanese 256K DRAM Production, ” japan Report,

Joint Publications Research Service JPRS L/11128, Feb. 8, 1983,

p. 39. Nonetheless, introduction dates do not tell the whole story,

Hitachi was the first to announce a 64K RAM for the merchant

market, early in 1978. (IB M’s 64K chip entered volume production the previous year.) However, Hitachi’s design required two

supply voltages, was rapidly superseded by singlesupply designs

from other manufacturers, and never mass produced. See “64K

RAM Sweepstakes: Round 4 Winner Is . . . ,“ Morgan Stanley

.?Hectronics Letter, June 29, 1979, p. 1; E. W. Pugh, D. L. Chritch10W, R. A. Henle, and L. A. Russell, “Solid State Memory Development in IBM, ” IBM Journal of Research and Development,

VO]. 25, 1981, p. 585.
Ch. 5—Competitiveness in the International Electronics Industry 177

in such markets is just as much an art as designing the system in the first place. But the

main point is that even in rapidly evolving technologies, the United States cannot expect to

maintain the kind of technological leads that

existed in the 1950’s and early 1960’s. Other

countries can now keep close—perhaps abreast

—in fields they choose to emphasize, if not

across the board.

While there is no need for pessimism, it

should be clear that the United States cannot

live off its past achievements. U.S. R&D expenditures fell as a proportion of GDP for 15

years before beginning to turn back up at the

end of the 1970’s. Meanwhile countries like

West Germany and Japan have been stepping

up their research spending, at the same time

devoting far smaller fractions to military R&D.

Still, the United States continues to spend substantially more on R&D than any other country. ” Furthermore, if the United States is able

to borrow from other countries as they have

borrowed from us, increased R&D spending in

other nations could help U.S. competitiveness.

In any event, figures on royalty and license

payments continue to show the United States

maintaining a large and growing surplus

against other industrial nations; although technology gaps may be shrinking, the United

States is still predominately a source of knowledge rather than a user of skills developed elsewhere. 12

11 ~r.s !nc]ustrja] COrnpetltjVeneSS: A Comparison of Steel, Electronics, and Automobiles, op. cit., pp. 62-64, See aIso ch, 10 of

the present report.

12 U.~7, Industrial Competitiveness: A Comparison of Steel, Electronics, and Automobiles, op. cit., pp. 64-65.

Other aspects of the U.S. environment for

technology development, several discussed

more thoroughly in subsequent chapters, do

give cause for concern. As one example, this

country has been lagging in the education of

the technically trained people upon whom

technological progress depends.13 Japan, with

half the population, now graduates more electrical engineers than the United States. And,

far more than here, the people occupying leadership positions—whether in business or government—in Japan, West Germany, or France

tend to have technical backgrounds, These

signs suggest that other nations may be better

placed to understand and exploit future technological opportunities.

Furthermore, the United States allocates as

many as 25 percent of its best technical people to defense-related R&D and production, a

higher percentage than most other countries

except for the Soviet Union and its allies. While

it is true that military research sometimes spills

over into commercial products, with benefits

for technological competitiveness—as happened with computers, aircraft, semiconductors, and nuclear power—it is also true that

these are the exceptions, Certainly the fears expressed by Europeans in the “technology gap”

debate of the 1960’s proved exaggerated: U.S.

spending for defense and space has by no

means allowed American firms to continue

dominating high-technology markets.

Iach, B; See also J. A. i41iC, M, Cal~well, and R. R. Miller, ‘“1’he

Role of Engineering Education in ]ndustrial (.:ompetiti~eness, ”

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 production 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, agriculmost industrial sectors. This is partly a mat- ture or steel. But if cost is less critical in comter 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 closely tied to a firm’s ability to utilize product as

well as process developments. In most parts

of the industry, the advantages of incorporating

new product technologies as a means to lower

costs—more generally of providing greater value per dollar—far outweigh those of simply

manufacturing conventional designs more efficiently. Even in mature segments of the industry such as color TV, advances in microelectronics may lead to new product features

or simpler and cheaper design approaches not

feasible earlier.14 Companies that fail to keep

pace find their vulnerability heightened, particularly at the low-priced end of the market

where import competition is stiffest.

Because of the changing technology, trends

in the usual indicators of competitiveness—

such as labor productivity (output per hour)—

are either unavailable or of little relevance to

electronics .15 While chapter 9 examines productivity in electronics for insights into impacts on employment, output per man-hour or

value-added per man-hour has less to tell about

competitiveness. Today’s TV set is a different

product than those of 10 years ago. Labor productivity statistics ordinarily assume that goods

remain qualitatively the same—a ton of steel,

a bushel of wheat. The more their characteristics change over time, the less meaning productivity trends convey. The problem extends

to many economic sectors, Even steel or wheat

change; the physical properties of steel improve with better control of chemical composition and processing, the nutritional value of

wheat increases as hybrid varieties are introduced, But the rates of change are slow compared to electronics.

14 For examp]e, ~i~ita] rather than analog Circuitry for Processing incoming TV signals carries the potential for greatly reducing numbers of chassis parts, thereby cutting assembly costs.

In addition, many of the adjustments needed during manufacturing could be eliminated. See T. Fischer, “Digital VLSI Breeds

Next-Generation TV Receivers, ” Electronic.~, Aug. 11, 1981, p.

97. Ch. 6 outlines reductions in parts counts in TV chassis over

the past decade. “1’hese reductions have helped keep prices stable

despite inflation.

lscomparatlve shifts in labor productivity over time are one

of the more useful measures of changes in the competitiveness

of a nat ion’s industries, See U. S’. lndustria) Competitiveness; A

Comparison of Steel, Electronics, and Automobiles. op. cit., ch.

4, especially pp. 54-58.

Technological advance also means that many

products selling in large volume today did not

exist a few years ago—thus productivity gains

cannot be calculated at all. How can productivity improvements be evaluated for integrated

circuits (ICs) with a lifetime of 4 or 5 years from

large-scale production to obsolescence? Can

measures of productivity such as value-added

or output per worker-hour for a 64K RAM manufactured in 1983 be compared to those for the

4K RAMs of 1975? What does labor productivity mean for pocket calculators—where this

year’s offering may be twice as powerful as last

year’s? Although manufacturing costs can be

a vital ingredient in determining sales volumes

for all these products, conventional approaches

to international competitiveness must be applied with care.

Regardless of the pitfalls and uncertainties,

policy guidance demands insights into whether

the United States is gaining or losing ground.

Electronics is a high-technology field par excellence, one in which this country has been

a leader for decades, If U.S. competitiveness

declines here, there is more to worry about

than the shifting patterns of comparative advantage that affect textiles or even steel. The

concerns extend beyond declining productivity

growth, beyond the possibility of relative losses

in per capita income; while these are far from

trivial matters, it is fair to say that a loss of

technical leadership in electronics would do

much greater harm. The Nation’s military security depends in many ways on electronics technology. Even more, decline would have dire

implications for the future vitality of the entire economy. If the United States were displaced as the primary technical innovator in

electronics it would be a symptom that this

country was following Great Britain on the

path to industrial decay,

But is this the case? Much that has been said

on such matters is impressionistic and emotional—all the more reason to collect and

evaluate the evidence with care. The remainder

of this chapter examines the question of U.S.

competitiveness in electronics primarily

through examination of business strategies.

While consumer electronics, semiconductors,
Ch. 5—Competitiveness in the International Electronics Industry 179

and computers are treated separately, some of

the distinctions risk becoming artificial; semiconductor manufacturers, following their earlier attempts to enter consumer markets with

products such as watches and calculators, are

busy designing “systems on a chip” to help

them move into markets for industrial endproducts. Meanwhile, computer firms integrate backward to make ICs. Desktop computers sold at retail blur the line between consumer and original equipment markets. Are

personal computers a product of the consumer

electronics sector or the computer sector? The

microcomputer market was developed first by

entrepreneurial firms, later by companies like

Tandy Corp.—largely consumer oriented. Now

that Digital Equipment and IBM have entered,

vastly different enterprises-in size, style,

market power—are competing with one another. I B M’s tactics, involving heavy reliance on

outside suppliers (including imports of industrial robots from Japan to be controlled by

the company’s personal computer) mark a turning point for a firm that in the past has designed and produced virtually all its own hardware and software-evidence of the flux within

this part of the industry.

While many industries go through periods of

rapid expansion and change, evaluations of

competitiveness are more problematic in the

midst of such a process. The marketplace will

eventually sort out the winners and losers in

desktop computers, but no one can predict

with much confidence which firms will survive

and prosper, Because in the end a nation’s international trade position is built on the successes and failures of individual business enterprises—the competitive tactics and strategies

pursued, here and abroad—the remainder of

the chapter discusses competitiveness from the

strategic perspective. While such an approach

does not result in direct indicators of competitiveness, it leads to an understanding of the

dynamics of trade and competition not possible by other means.

International Business Strategies

Corporations compete on much more than

product technologies and efficiency in manufacturing; success depends on effective approaches to markets, approaches that take account of a particular firm’s strengths and

weaknesses. As Texas Instruments’ experiences with digital watches and small computers exemplify, state-of-the-art technology is no

guarantee of ability to bring to market products that consumers will purchase.

The following pages review some of the

moves and countermoves by participants in

world markets for electronic products. That

strategic considerations are vital comes as no

surprise: explications of corporate strategy are

a staple of the business press; they provide fodder for professors of business administration,

handsome fees for management consulting

firms, And for good reason. A not inconsequential part of U.S. economic growth can be

traced to the ability of American firms to move

rapidly into emerging markets, to commercialize evolving technologies—ability embodied in

the managers, technical staffs, and other employees of these companies. The success record

of American corporations extends to technologies originating in other countries. The technical underpinnings for digital computers have

been fed by the efforts of engineers and scientists in many parts of the world. One aspect of

the American genius has been turning arcane

developments such as the computer into thriving commercial industries. The skills needed

for success in the marketplace can be quite different from those called on in basic research.

The British built the first jet transport plane,

but are no longer much of a factor in the industry; today, the Comet is remembered chiefly

for its lessons in metal fatigue.

Most privately funded R&D—in the United

States as elsewhere—is directed toward product development. Marketing strategies based

on product differential ion have a place even

at the leading edge of microelectronics or computer technologies. Bell Laboratories devotes

around 90 percent of its efforts to development,

10 percent to basic research (a considerably

higher proportion of basic research than found

in most electronics firms), That an R&D organization known best for its more fundamental
180 ● International Competitiveness in Electronics

work—including research that provided much

of the foundation for solid-state electronics—in

fact gives most of its attention to development

points to the central importance of such activities. As the focus on development suggests,

many of the “technology gaps” separating the

United States from its competitors have been

associated with product design rather than underlying differences in technical capability.

The microprocessor was an innovation in the

semiconductor design; it did not depend on

new manufacturing technology, still less on improved understanding of the physics of electron devices,

More recently, American electronics firms

have sometimes found themselves in reactive

positions rather than leading in product and

process developments, Innovation remains a

source of U.S. competitive advantage, but other

countries have become more active in introducing new products, as well as new manufacturing techniques. This has been one cause of

slipping U.S. competitiveness in industries like

steel and automobiles; while innovation in the

electronics industry has certainly not stagnated, the U.S. lead is no longer unchallenged.

Executives of American firms have repeatedly found themselves responding to competitive

thrusts from foreign firms rather than taking

the initiative. These thrusts have involved imaginative, well-researched, and well-designed

products, In electronics, new competitive pressures have come most notably from the Japanese, but in some cases also from countries that

are still industrializing.

Strategies in Consumer Electronics

More than in any other industry, Japanese

companies have come to dominate world markets for consumer electronics, Beginning with

portable radios, the Japanese moved successively into a broad range of other products:

monochrome TV, high-fidelity sound systems,

CB transceivers, pocket calculators, color TV,

VCRs. Many of these were developed first in

the United States. Video recorders are a telling example; Japanese firms make well over 90

percent of the world’s VCRs—a product with

origins in the laboratories of Ampex and RCA.

The product development, manufacturing, and

export strategies followed by Japanese firms in

consumer electronics—discussed below in the

context of the U.S. market, although applying

with only minor variations to export thrusts

into Europe as well—have often been transferred to other parts of the industry.16 Thus,

they are a logical starting point for an examination of business strategies in electronics,

Japan

Efforts by Japanese firms to sell TVs in the

United States—beginning in the mid-1960’s—

IeSee, for examp]e, R. Ball, ‘‘The Japanese Juggernaut Lands

in Europe,” Fortune, Nov. 30, 1981, p. 108.

included three parallel strands, First, the export drive began with a focus on market niches

that appeared to be served inadequately or not

at all by American manufacturers—the kind of

opportunity that firms anywhere look for when

attempting to enter new markets (app. C describes how Phase Linear, an American manufacturer of stereo components, created a new

market category with its first product). The second strand in the Japanese thrust was to draw

on product technologies and manufacturing

experience gained in their highly competitive,

if protected, home market—as well as in exporting to other Far Eastern nations; Japan’s

manufacturers had a strong foundation for selling in the United States. Third, TV shipments

were part of a continuing effort by Japanese

companies to export a succession of products

of increasing technical sophistication. The

strategy, while carried out by firms that competed among themselves, plainly was guided

and encouraged by the Japanese Government

through MITI (the Ministry of International

Trade and Industry) and other agencies.

Success was by no means guaranteed. In the

1960’s, the U.S. TV market was served by more

than a dozen domestic entrants, These in-
Ch. 5–Competitiveness in the International Electronics Industry ● 181

eluded some of the largest merchandisers and

electrical equipment manufacturers in the

country. Firms like RCA, Zenith, GE, Sylvania,

and Magnavox had patiently constructed nationwide distribution networks. Their dealers

generally handled servicing and repairs as well

as sales. Much of the production of smaller

companies consisted of private-label sets for

retailers like Sears, K Mart, and J. C. Penney.

Although the market was still expanding rapidly, its structure was relatively mature, Such a

market is not an easy one to enter, especially

from abroad.

The Japanese manufacturers recognized

their disadvantages: 1) lack of an established

distribution and service network; 2) lack of

recognized brand names, a deficiency accentuated (at that time) by the lingering reputation

of Japanese goods for shoddy quality. These

factors argued against direct competition with

entrenched industry leaders such as Zenith and

RCA.

The Japanese sought ways around these barriers through both technical developments and

marketing strategies. First of all, manufacturers

in Japan moved quickly toward solid-state chassis designs, following their earlier successes in

exporting transistorized portable radios. The

intent was to lower manufacturing costs over

the long run, and—perhaps more important—

improve reliability and reduce the need for

service (ch. 6). Japanese TV manufacturers

could not be certain of reaching either objective, American producers chose to stay with

older technologies, partly in the belief that it

was too early to expect improvements in either

costs or performance from solid-state components.

The development of solid-state TV designs

in Japan during the 1960’s illustrates the selective nature of government assistance. The Kansai Electronic Industry Development Center

served as the coordinating body for a multiyear

R&D project directed at using ICs in TV chassis, The cooperative effort, with funding from

MITI, included five Japanese consumer electronics manufacturers, seven parts suppliers,

four universities, and a pair of research institutes.17 Despite this, perhaps the most important policy support came through TV broadcasting; Japan’s Government has gone farther

than most by actively promoting such new

technologies as stereo sound for TVs, multiplexing to give multiple language capability,

and direct satellite broadcasting. Such measures have fueled demand in the domestic market, helping build a base from which Japanese

manufacturers could achieve scale economies

and export.

The second leg of the Japanese plan centered

on their selection of products. Here—as later

the case in automobiles—the choice may have

been more fortuitous than brilliant. The first

Japanese exports were small-screen sets (ch. 4,

especially table 9), where they had experience,

and where solid-state designs contributed to

light weight and portability. For a variety of

reasons, the product lines of American firms

were thin in this part of the market. The Japanese emphasis on small-screen TVs turned out

to coincide with rising demand for second sets

in American homes, demand that was more

price elastic than for the first of a family’s

purchases.

Design improvements such as solid-state

chassis helped Japanese exporters bypass traditional distribution channels. Greater reliability reduced the need for service and repair facilities, as well as for large stocks of spare parts,

opening the way for distribution through outlets where low price would have immediate impact, Japanese exporters first sold their TVs

through private-brand and discount retailers,

a tactic that had worked earlier with portable

radios. 18 AS part of their marketing plans, it appears that exporting firms frequently induced

retailers to carry their product lines by offerY 7E, Sugata and T. Nameka~va ~ “ I nte~ratcxi ( ;lrt:~lits for Tele\l -

sion Receivers, ” IEEE Spectrum, Lfay 1969, ~). 64. Three o f

Japan’s largest TV manufacturers were in(:luded hlatsushita,

Sanyo, and Mitsubishi.

lfl’[’[lshiba hegan supp]ving Sears with sma]]-screen ~OIOr

sets as early as 1964. This marked the beginning of Japan color

‘I’;’ exports to an} c.ountr~, and the beginning of [J .S. import~

of this product. See ‘4 I nternatlonal Technological Competitiveness. Tele\rision Recei\ers and Semiconductors, draft report

under ,Natlona] Science Foundation C,rant No. PRA 78-20301,

(~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,

the Japanese tried to make TVs an “off-theshelf” item. Note again that this strategy

depended on producing TV sets with considerably greater reliability than had been

common.

Instead of head-on competition with entrenched American producers, the Japanese

thus located a market niche that was relatively open, and offered low-priced but well-designed TVs of high quality through price-sensitive retail outlets. Indeed, price was a dominant aspect of the Japanese thrust; dumping

complaints brought by U.S. interests wer e

repeatedly upheld, as discussed in chapter 11.

Still, low prices by themselves were far from

sufficient for the steady expansion of exports

that followed this opening wedge. In a pattern

now familiar, Japanese exporters widened both

their product lines and distribution channels.

Eventually, they began to assemble TVs in the

United States. Japanese manufacturers now

compete virtually across the board with American consumer electronics firms, utilizing

many of the same retail outlets.

Some accounts have emphasized the dependence of Japanese pricing strategies on the

closed nature of their home market. This was

a central claim in the dumping proceeding initiated by the Electronic Industries Association

in 1968. In this view, low-priced Japanese exports were only possible in the early years because of trade protection that kept imports out

of Japan; closing their domestic market to TVs

produced by more advanced American and

European firms allowed the Japanese to charge

high prices at home, effectively subsidizing

their exports. Investigations following the 1968

dumping complaint provided support for these

allegations.

On the other hand, dumping in international

markets implies monopolistic pricing by Japanese firms that, most observers concede, compete intensely within Japan. The implication,

then, is that these companies colluded only

with respect to exports—or that manipulation

191,. Landro, “Technology, Competition Cut Price of Electronics Gear as Quality Rises, ” Wa]] Street Journal Dec. 1, 1981,

p. 37.

by higher authority, presumably MITI or some

other agency of the Japanese Government, took

place behind the scenes. Such possibilities cannot be rejected out of hand, but are not wholly

consistent with the rest of this view: that

Japanese TV manufacturers took advantage of

their protected domestic market to generate the

economies of scale needed to compete in the

United States. From the perspective of highly

competitive Japanese firms, price-led expansion at home might well have seemed a more

attractive way to maximize learning and scale

benefits.

The American Response

Exports to the United States by Japanese consumer electronics firms were by no means

new. As early as 1954, Japanese companies had

begun to manufacture transistors, with much

of the output going into portable radios. Within

5 years, fully 80 percent of the radios produced

in Japan were solid-state, many of them destined for sale in the United States.20 In exporting radios, the Japanese gained valuable experience that could be brought to bear on the

more lucrative TV market.

As a consequence of the Japanese emphasis

on small-screen TVs-and also because of the

market focus of American producers—most imports have been lower priced models, as shown

by the consistently lower percentages in the

value column of table 44. Conversely, American manufacturers have continued to concentrate on higher priced, more profitable sets—

large screen and console models. While imports have moved up-scale over the years, they

still account for a considerably smaller proportion of the market in dollar terms than in units.

Now that many Japanese companies assemble

TVs here, more of the imports come from Taiwan and South Korea. Firms in those countries

have followed Japan’s lead in emphasizing lowpriced, small-screen sets.

“J’’ The U.S. Consumer Electronics Industry and Foreign Competition, Executive Summary,” final report under EDA grant No

06-26-07002-10, Department of Commerce, Economic Development Administration, May 1980, pp. 46-47.
Ch. 5—Competitiveness in the International Electronics Industry ● 183

Table 44.—imports of Color Televisions as a

Percentage of Total U.S. Sales

Imports Imports

as a percentage as a percentage

of unit sales of value of sales

1968 . . . . . . . . . . . . 11 .0 ”/0 5.1 “/0

1970 ...., . . . . . 17.0 8.4

1972 .., . . . . . 14,9 8.3

1974 . . . . . . . . . . . . 16.0 9.6

1976 ........, . . . 35.9 18.9

1978, . . . . . . . . 26.4 15.7

1980 . . . . . . . . . . . . 11.3 7.4

1982 . . . . . . . . . . . . 19.1 12,8

SOURCES ltR%?—72-’’The U S Consumer Electronics Industry and Foreign Corn.

petition,” final report under EDA grant No OE-26-O7OO2-1O, Depart.

ment of Commerce, Economic Development Administration, May

1980, pp A75, A-76

197442—E/ecfron/c Market Data Elook 1983 (Washington, D C Elec.

tron~c Industries Association, 1983), pp 15 and 31

Table 44 also points to the reactive strategies

of the major American TV makers; when confronted with low-priced import competition,

U.S. producers essentially ceded that portion

of the market.21 Part of the reason was simply

that, even in the absence of imports, profits

would have been lower on small-screen sets.

Given expanding markets, the strategies pursued by American firms enabled them to utilize

their production facilities in optimal fashion,

at least in the shorter run. With the portable

radio experience in the background, U.S. manufacturers must have been well aware that concessions 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 counterstrategies needed to be developed—and were.

At present, the major U.S. manufacturers have

strong product offerings in all parts of the market, 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 producers, 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

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

Department of Commerce, September 1975), p. 1 I

,

dipped below 20 percent once, in 1975); brand

recognition and strong distribution networks,

combined with an emphasis on larger sets, lessened their vulnerability to imports. Both Zenith

and RCA automated some of their facilities to

hold down costs, and moved other production

overseas. Firms with smaller market shares, on

the other hand—especially those that depended

heavily on private label sales–quickly felt the

impact of Far Eastern competition. For several,

lower production scales—and higher manufacturing costs—combined with foreign competition to move their operations into the loss column. Companies like Philco, Admiral, Warwick—most recently Sylvania—left the market.

Prominent in competitive responses by the

U.S. industry were efforts to persuade the Federal Government that Japanese imports were

entering via unfair trade practices. While companies like RCA and GE that get substantial

revenues from overseas sources have taken a

Photo crecllt RCA

Color TV assembly
184 . International Competitiveness in Electronics

“free trade” stance, others, whose orientation

has been primarily domestic, have been vigorous in pursuing trade remedies over many

years. The intent has been to raise import

prices through antidumping penalties or countervailing duties. Chapter 11 outlines the sequence of events; briefly, collection of additional duties imposed on TVs from Japan was

delayed for years by a series of interdepartmental disputes within the Government. Petitions

seeking adjustment assistance under the Trade

Expansion Act of 1962 were denied in 1973,

as were parallel efforts to have countervailing

duties assessed on Japanese TVs. Attempts by

American interests—labor unions and suppliers were active along with domestic manufacturers—continued in one form or another from

the late 1960’s on through the 1970’s, indeed

are still underway. But from the viewpoint of

U.S. producers, these efforts to stimulate Government action that would raise import prices

were less than successful, Even so, the constant stream of claims that competitive tactics

by Japanese firms were both unfair and damaging had considerable political impact: a

reluctant administration was forced in 1977 to

take action. The results were the import quotas

termed Orderly Marketing Agreements

(OMAs) mentioned in the previous chapter.

The initial OMA with Japan was followed in

1979 by agreements with South Korea and Taiwan.

A second response by domestic firms was

technological. Far Eastern competition forced

U.S. TV makers to move into solid-state designs

both to lower costs and to improve reliability.

But these efforts came too late for many American manufacturers. Japanese exporters had

achieved the volume required for economies

of scale, and could continue to drive prices

downward. By 1971, Matsushita was the biggest manufacturer of TVs in the world, and 5

of the top 10 firms were Japanese (ch. 4). These

companies were expanding worldwide, while

the efforts of even the strongest U.S. firms were

largely restricted to their home market. Meanwhile, American consumers were choosing

small-screen TVs—where imports were strongest—in ever-larger numbers. Table-model and

portable sets went from 12 percent of U.S. color TV sales in 1965 to 68 percent in 1974.

22

Those American suppliers that remained economically viable did so in part by improving

labor productivity at relatively high rates; they

also transferred many of their more labor-intensive manufacturing operations overseas.

The U.S. response was, therefore, mixed. On

the one hand, American firms sought trade

protection—a reaction not untypical of businesses experiencing foreign competition in

lucrative domestic markets, particularly when

they find themselves in this situation for the

first time. On the other hand, a number of U.S.

manufacturers successfully reduced costs, enhanced quality, and managed to keep most if

not all of their traditional market share; RCA

and Zenith together still account for some 4 0

percent of U.S. color TV sales, But the majority of American companies were unable to keep

pace in the newly competitive environment.

Foreign Markets

U.S. and Japanese consumer electronic s

firms have approached markets in third countries quite differently. Companies like RCA

have sold technology overseas—most recently, RCA has licensed its new video disk technology in Europe—but have seldom embarked

on major efforts to market consumer products

elsewhere, The exception is ITT—an American-owned firm which is one of Europe’s larger

producers of color TVs but does not manufacture consumer products in the United States.

In contrast, Japanese manufacturers have exported products as well as technology; in recent years they have also invested extensively

in industrialized as well as developing countries.

In Western Europe—which offers a market

for color TVs about the size of that in the

—

zz~~ectronjc &farket Data Book 1975 (Washington, D. C.: Electronic Industries Association, 1975].
Ch. 5—Competitiveness in the International Electronics Industry ● 185

——————--———

United States—Japanese firms have made significant inroads. For many years, trade barriers

and patent protection helped European producers fend off imports (ch. 4). Now many of

the barriers are weakening. Nearly half the

high-fidelity equipment sold in Germany is

al ready imported from plants in the Far East. 23

The Japanese share of the West German color

TV market more than doubled from 1979 to

1981, reaching an estimated 15 percent. Color

TVs are made in the United Kingdom by five

of the major Japanese manufacturers; a substantial fraction of the output is shipped to

other European nations. One-third of the picture tubes used in TV sets manufactured in

Europe are imported from Japan; few if any of

the 10 remaining factories making pictur e

tubes in Western Europe are profitable. Japanese eports of VCRs to European countries

more than doubled in 1981, and doubled again

—to nearly 5 million--in 1982; threatened with

dumping complaints, Japan recently agreed to

limit VCR shipments to the European Communit y.

Japan’s entry into the European TV market

has been remarkably similar to that here. As

the PAL licensing agreements continue to expire, the Japanese will broaden their product

ranges; they are now beginning to compete in

the upper reaches of the European market. One

response by local firms has been to move toward Tv broadcasting accompanied by stereo

sound. Through a new round of restrictive

licensing practices, European companies hope

to keep the Japanese out of new high-end products .

Japan’s electronics firms have also been active in the Far East, where the U. S. presence

is limited to offshore production. Still, as Asia

has developed economically, the advantages of

Japanese manufacturers have diminished. Markets are expanding in Taiwan, South Korea,

Singapore, and Malaysia—with local industries

aiming both to export and to supply rising domestic demand. While it is no surprise to find

Japanese firms with a greater presence in Asia,

one might expect the situation to be reversed

in Latin America. But here too, many of Japan’s

TV makers have established subsidiaries, joint

ventures, and licensing agreements—in addition to their export activities. The U.S .

presence, except for assembly plants in Mexico that ship back across the border, appears

limited to scattered licensing arrangements .24

Japanese consumer electronics firms have

taken a long-term approach to the development

of world markets. They have been willing to

adapt their strategies to the constraints imposed by foreign governments, and to local

laws and regulations. Where governments have

limited imports, they have invested. Where investment is restricted, they enter into joint ventures. As one example, Toshiba commissioned

a Costa Rican company to make Toshiba-brand

TVs in 1971, several years before color broadcasting began in that country. Later, Toshiba

purchased part of the local firm, establishing

a joint venture for manufacturing a broader

line of their consumer electronic products. In

pursuing such activities, Japanese firms have

taken significant risks. They have invested in

economically depressed regions, in countries

where the initial markets for their products

have been small, and in regions of questionable

political stability. In their early years, many of

these operations probably lost money. Now ,

Japanese companies are firmly established in

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

head starts of their rivals,

Other Consumer Electronic Products

Not only home entertainment goods like

VCRs, but pocket calculators, electroni c

watches, and CB radios are now produced

mostly in the Far East. The older, established

consumer electronic firms in the Unite d

States—those that have made radios, TVs ,

audio equipment—seldom participate in these

markets. More often, the American entrants

have been small specialty manufacturers, semiconductor firms, or suppliers such as Tandy,

which sells under the Radio Shack name. U.S.

electronics companies with little prior ex -

perience in the consumer arena attempting to

diversify have, not surprisingly, sometimes

misjudged demand, introduced products that

proved to have little appeal to customers, or

failed to establish adequate distribution channels. Among the semiconductor firms, even the

most successful—e.g., Texas Instruments—

have had a difficult time learning to develop

and market consumer products. 25 profits have

not always been high enough to convince U.S.

entrants to persevere, particularly where foreign firms with low production costs were already well established.

What then of the future? Will American firms

attempt to develop new strategies for marketing future generations of consumer products?

How will their approaches contrast with those

of manufacturers in other parts of the world?

Some of the trends can be discerned, at least

as they relate to product developments. Bottom-end pocket calculators will offer more features as sophisticated models evolve into handheld computers. Watches may incorporat e

games, calculators, perhaps even radios .

Speech synthesis—and later voice recognition—will appear, enabling TVs, for example,

to switch channels in response to spoken commands, Integrated home entertainment sys -

tems combining TV reception, video tape and/

or disk players, and computing capability will

ZsSee, for example, B, Utta], “Texas Instruments Wrestles With

the Consumer Market, ” Fortune, Dec. 3, 1979, p. 50,

be developed, with component TV one of the

first steps,

To a considerable extent, the future of the

U.S. consumer electronics industry will depend on its ability to keep up in such products,

How successful will American manufacturers

be? On the one hand, new product offerings

like the RCA video disk system are favorable

signs. Although thus far something of a disappointment in the marketplace, RCA’s investment in the video disk demonstrates that U.S.

Consumer electronics firms are still willing to

take risks. Zenith’s venture into personal computers is another indication that American suppliers are not ceding their home market to foreign producers; so are the efforts of smaller

companies marketing electronic games, projection TVs, and innovative audio products. At the

same time, the failure of U.S. companies to participate in the manufacture of VCRs will make

it more difficult for them to regain product

leadership.

With U.S. sales of VCRs growing rapidly, the

approaches of Japanese and American firms

now stand in stark contrast. Broadcast videotape recorders were introduced by Ampex in

1956, with RCA following in 1959; at least eight

Japanese firms–starting with these U.S.-developed technologies—pursued consumer versions during the 1960’s, with various degrees

of resource commitment and success. 26 Non e

of the American consumer electronics firms

followed suit, although some made attempts

later on. Sony’s Betamax, which opened the

market, was in fact a fourth-generation machine—the result of many years of persistent

and often-disappointing efforts, The othe r

major VCR system—developed by Matsushita

(a third, built by Philips, has only a small share

of the market)—was also the result of years of

engineering, and a number of false starts. U.S.

firms were unable or unwilling to match these

Zesee W. j, Abernathy and R. S, Rosenbloom, “’l’he Institutional

Climate for Innovation in Industry: The Role of Management

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

a fascinating case study~ of the com mere ial izat ion of consumer

VCRs,
Ch. 5—Competitiveness in the International Electronics Industry 187

development programs, and now have chosen

to sell Japanese VCRS under their own brand

names.

The point is that, once having lost product

leadership-a s has occurred with VCRs –

American firms will find it increasingly difficult to compete in new technologies, and may

eventually find themselves importing or adapting other products as well. Because U.S. manufacturers cannot expect cost advantages, they

may be left with only their distribution systems

and brand recognition as prime competitive

weapons. To a considerable extent, Japanese

firms have already countered these advantages;

thus, the long-term prospects for American

firms in consumer electronics do not appear

bright.

Semiconductors

Technological forces have dictated the marketing strategies of semiconductor companies

in all parts of the world since the inception of

the industry. The case study on 4K RAMs in

a p penal ix C points to the i mportance of e ngineering capability for U.S. merchant firms

such as Mostek or Intel, Technology is no less

important now than a decade ago, when the

4K RAM was being developed-but as late as

the mid-1970’s the business strategies of foreign

semiconductor manufacturers were of little interest to Americans. As the 4K RAM case demonstrates, U.S. firms appeared to have little to

fear from producers in Japan--certainly not

from those in Western Europe, But from a

minor position in 4K chips, Japanese firms

went on to claim about 40 percent of the world

market for the following generation of 16K

RAMs. By 1982, the perception was widespread that U.S. firms had “lost” the market

for dynamic RAMs. Certainly this is an overdramatization, and the RAM market can by no

means stand for the industry in microcosm; but

the picture has changed. How did it change so

fast?

During the 1970’s, Japanese companies exported considerable numbers of electronic

components--including transistors—to this

country, but the major growth segment, ICs,

was dominated by American suppliers. Even

though Japan’s Government protected the local

industry, U.S. shipments took a substantial part

of the expanding Japanese IC market. Customers in Japan depended on American firms for

devices that domestic manufacturers could not

provide—high performance or large-scale

chips, custom parts, even some types of linear

circuits needed for consumer products. As the

technological level of Japan’s semiconductor

industry caught up with that of the United

States, many of these imports were replaced

by indigenous production. The phenomenon,

termed import displacement, has been characteristic of Japan’s computer industry as well.

Displaced items quickly become potential exports for Japanese firms.

During the 1970’s, awareness of the possible

consequences of foreign competition grew

within U.S. industry and Government, although the production and trade data showed

little cause for concern. The Federal Trade

Commission, reporting on interviews conducted in 1976, stated: “. . . a number of company executives expressed the opinion that

competition from foreign companies would be

much tougher to handle than competition from

other U.S. companies in the next 5 or 10 years.

In contrast, some other executives felt that U.S.

companies would not have a difficult time

maintaining their technological lead over

foreign companies. “

27 Hindsight shows those

of the first persuasion closer to the mark.

One sign that patterns of international competition would change came from subsidies

and promotional efforts adopted by foreign

governments with the aim of fostering indigenous production. Japan, France, West Germany, the United Kingdom—all in one way or

another marked the semiconductor industry as

critical to continued economic vitality, an in2T~’faff ~eilor{ OH the Semiconductor lndustrs’: A S’urIre~ of

Structure. Conduct and Perlbrmance (Washington, D. C.: Federal

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.

Since the United States was far ahead in both

technological expertise and production volume, the implicit targets were American companies, not excluding those that had invested

in local production facilities. These government-led attempts to build competitive semiconductor industries have had mixed results.

Joint projects involving public and private sectors in Japan were quite successful—in semiconductors 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 industry and marketplace on the continent as

with the policies pursued.

United States

Applications of semiconductors reflect ongoing synergistic relationships among merchant

suppliers and their customers. Purchasers outside electronics have lately presented growing

market opportunities—e.g., in automobiles.

Nonetheless, from a technological viewpoint,

firms building computer- or microprocessorbased systems remain the most influential customers (fig. 34). Manufacturers of consumer

electronics, communications systems, instruments and controls, and office equipment have

considerable impact as well. While most of the

attention below goes to merchant firms, captive operations have played a vital role in the

technological development of the U.S. industry. Furthermore, production decisions by the

larger integrated manufacturers sometimes

have major consequences for the merchant

market,

Figure 34 shows that the phenomenal expansion in semiconductor output during the 1970’s

was accompanied by a major shift from defense purchases to consumer and industrial applications; competitive success in the most

rapidly growing market segments depended on

the ability to make the transition from specialized military requirements to the demands of

private sector customers. Some companies that

fared quite well in the military market could

not compete effectively for commercial sales,

Figure 34.— Distribution of U.S. Semiconductor

Sales by End Market

Military Consumer Computer and

Industrial

20 —

o

1960 1968 1980

Year

SOURCES 1960, 1968 Innovation, Compel ltlon, and Governmental Policy In

I he Semiconductor Industry Charles River Associates, Inc

final report for Experimental Technology Incentives Program,

Department of Commerce March 1980, p 213

1980 .SIatus 80 A Re,oorf on (he /n fegrafed CIrcu/t Indusfry

(Scottsdale, ArIz Integrated C{rcult Eng[neer[ng Corp , 1980)

D 34

where the needs of customers are more diverse,

and nontechnical dimensions like price and delivery schedules more important.

Factors in Strategic Decisions

Competitive strategies adopted by merchant

semiconductor firms revolve around factors

such as size, market power and technological

capability, internal need for devices (if any),

and stage of development relative to others in

the industry. A company’s technical strengths

shape its product line, Process technology—

whether a manufacturer is strong in bipolar or

MOS (metal-oxide semiconductor), which varieties of MOS a firm knows best—is one aspect, design capability another. Some companies are known for innovative circuit designs, others for prowess at mass production—some for both. Smaller entrants tend to

specialize; only a few merchant suppliers have

broad product lines (the world’s semiconductor manufacturers supply perhaps 50 billion

devices a year—of 100,000 different types—to

several hundred thousand customers).
Ch. 5—Competitiveness in the International Electronics Industry ● 189

*

.i - .& &

Photo credIf Western E/ecfr)c Co

Technician loading plasma reactor with

semiconductor wafers

A number of U.S. merchant manufacturers

have integrated to some extent into systems.

A few, such as Texas Instruments, have always

been diversified. Others have been purchased

by larger enterprises but still sell the great bulk

of their production on the open market (ch. 4,

table 24). As merchant suppliers expand, so

does the range of their product offerings,

Smaller companies with limited resources aim

at niche markets, Newer entrants set out to develop specialized or custom devices of less interest to larger corporations; the 1981 startup

Linear Technology—a spinoff from National

Semiconductor—specializes in linear ICs, in

which the founders have expertise.

Captive semiconductor producers have different strategic aims. While most of the larger

computer firms make some of their own logic

chips, IBM has traditionally produced most of

its memory circuits as well. The company consumes so many that, for products such as

RAMs, on occasions when it chooses to purchase from outside vendors it can account for

a sizable proportion of total demand (the company is probably the largest single purchaser

in the merchant market, as well as the world’s

largest producer of semiconductors). This then

affects the business decisions of merchant suppliers: IBM’s external purchases were a powerful and rather unpredictable force on the market for 16K RAMs at the close of the 1970’s,

the company’s unexpected entry contributing

to shortages of these devices. Capacity shortfalls 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 activities; in particular, IBM and AT&T’s Bell Laboratories have been responsible for much of the

basic research underlying the semiconductor

industry in this country, indeed around the

world. Merchant firms—because of the pace

and intensity of product development, the continuing cycles of improvement in design and

production that characterize succeeding

generations of ICs—must set different priorities; they also have more limited resources

for R&D.

Technological Factors

A company introducing a new device must

assume that even if their design is at the

forefront of the state of the art it will be

superseded later if not sooner. Timing is critical; technological windows sometimes open,

providing opportunities for leapfrogging the

competition. Companies that quickly mastered

production of dynamic RAMs, or concentrated

on microprocessor design architectures in attempts to tie up large portions of that market,

were aiming at such advantages, Needless to

say, some firms have better records at exploiting these opportunities than others. A

number of companies that had been strong in

bipolar technology–including Fairchild and

Texas Instruments—did not move as rapidly

into MOS as the competition; Texas Instruments staged a quick recovery, while Fairchild

has continued to lag. Mostek, as its name connotes, was founded with the intention of specializing in MOS; the company has emphasized

memories, designing their own RAMs—the de

facto industry standard 4K RAM was a Mostek

design (see app. C)—while serving as an alternate source for microprocessors. Electronic
190 ● International Competitiveness in Electronics

Arrays, now owned by Nippon Electric, had

specialized in read-only memories (ROMs).

Other firms seeking to exploit particular technological paths have had less success: American Microsystems’ work on v-MOS ICs is one

example, RCA’s pursuit of silicon-on-sapphire

c-MOS another. Internationally, Japanese firms

moved into MOS ICs much more rapidly than

the Europeans, most of whom are still well

behind their competitors in the United States

or Japan and relying on technology imports to

try to catch up; this has been one of the objectives of Le Plan des Composants—a major industrial policy effort by the French Government (ch. 10). In the United States, some firms

—Signetics, Monolithic Memories—continue to

specialize in bipolar devices. IBM likewise remains relatively stronger in bipolar than MOS;

the speed advantages of bipolar circuits have

led many computer manufacturers to continue

emphasizing the older technology.

Quality and reliability comprise another competitive realm where strategies depend both on

circuit design and manufacturing practices (ch.

6). While Japanese firms have zealously publicized the quality and reliability of their ICs

—in much the same way that Japanese consumer electronics firms used reliability as a

wedge into the American TV market—domestic producers like Advanced Micro Devices

have also pursued an image of quality and

reliability as a marketing tool.

Products and Prices

One of the attractions of memory circuits—

in addition to the vast market—is the relatively orderly and predictable progress of the technology itself; circuit design is vital—along with

excellent process capability—but more straightforward than for logic or microprocessors.

Everyone in the industry knows that the next

generations of dynamic RAMs will be 256K

chips, followed by 1 megabit; circuits offered

by various firms are much more similar than

the designs of competing 16-bit microprocessors, One result is the fierce price competition that has often seemed the dominant characteristic of the memory market. Progress in

static RAMs, and in the various types of ROMs,

is likewise rather easy to predict. Under such

circumstances, Japanese suppliers quite naturally emphasize memory products.

In contrast, market acceptance of logic circuits or microprocessors is less predictable. Investing in a new microprocessor design—the

32-bit Intel iAPX 432 cost more than $100 million to develop—is risky, but the potential rewards are great; designs with an edge over the

competition—in performance, ease of programing, adaptability to a wide range of applications—sell for premium prices.28 Furthermore,

microprocessors—best thought of as families

of related ICs rather than unique devices—have

longer product cycles, extending the period

over which investments can be recouped.

Memory circuits are manufactured as long as

demand holds up, but sales tend to peak and

decline more rapidly than for other device

types. Five or six years elapsed between the

onset of high-volume production for 8-bit microprocessors and mass production of the succeeding generation of 16-bit parts, while lifecycles for RAM chips—though slowly lengthening—have been perhaps 3 years, sometimes

less. 29

Abbreviated product cycles dictate strategies

aimed at profitability within a narrow time

window, along with continuous efforts to develop new or differentiated offerings. The latter can be original designs but need not; second-sourcing has been widespread for many

years, in part because customers often insist

on more than one supplier before they will

design an IC into their end products. Thus, second-sourcing can accelerate market expansion

for everyone, Semiconductor firms choose to

become alternate sources for chips developed

Zaon the ~om of microprocessor design, see R. N. Noyce and

M. E, Hoff, Jr,, “A History of Microprocessor Development at

Intel, ” IEEE MICRO, February 1981, p. 8. Intel’s first microprocessor, a 4-bit device, was designed in 9 months by a single

engineer; 100 man-years went into the iAPX 432.

ZQIntel’s 8080 family—introduced in 1974 and the largest selling 8-bit microprocessor—will no doubt remain in production

for many more years, Worldwide, more than 10 companies still

produce 8080 chips. Mostek—an alternate source for another

popular 8-bit processor, the Z-80—for a number of years produced more of these devices than Zilog, the originator. See “The

Antenna, ” Electronic News, Mar. 12, 1979, p, 8; “Eight-Bit

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 product lines, perhaps by complementing circuits

they already build, as well as to reduce market

risks and save on R&D expenses. From the

viewpoint of the originator, it may be more sensible to settle for a smaller piece of a rapidly

expanding market than to try to keep others

from duplicating an IC design. Attempts to prevent duplication are virtually impossible if a

circuit finds an enthusiastic reception in the

marketplace. As one consequence, formalized

alternate sourcing agreements have largely replaced the copying that was once commonplace. Sometimes alternate source manufacturers acquire the originator’s technology —e.g.,

mask sets for lithography. Other times only

drawings or specifications are provided. The

recent agreement between National Semiconductor and Fairchild, the latter acquiring the

right to build National’s model 16000 microprocessor in exchange for developing a complementary line of peripheral chips, is an increasingly popular route.

Cost reductions via the learning curve (ch.

3, fig. 5) help shape competitive strategies, As

production volumes increase, yields rise and

manufacturing costs drop. Pricing decisions

have often been based on projections of expected cost reductions into the future, For a

firm early to market with a new design, cost

advantages over potential rivals can build rapidly, increasing with leadtime. Firms that are

late to market face a dilemma; they may have

to choose between foregoing participation or

pressing on with their own design in the hope

that it too will win acceptance, In early 1982,

with six Japanese entrants mass-producing 64K

RAMs, versus only two American manufacturers, a number of U.S. firms were confronted

with such decisions; Advanced Micro Devices,

for one, decided not to build a 64K chip,

In different circumstances, then, firms

assume different strategic postures. Companies

entering the market with a new device, particularly one incorporating proprietary technology—product or process—may have several advantages over competitors that follow. An early

entrant will normally try to remain ahead on

the learning curve, keeping production costs

below those of its rivals, margins above. Companies with proprietary designs often license

alternate sources, but at least at the outset

second-source suppliers will be at a cost disadvantage. If the initiator decides to follow a pricing strategy keyed to anticipated cost improvements, follow-on firms may find it difficult to

make a profit. Texas Instruments, for instance,

has had the reputation of practicing advance

pricing whenever possible, In a very real sense,

then, later entrants can be at the mercy of innovators should the latter choose to cut prices

and exercise the cost advantages of being farther down the learning curve. On the other

hand, an innovating firm might choose to increase margins by holding price levels high.

Under such circumstances, an alternate source

may itself be able to carve out a place through

price. One facet of Intel’s corporate strategy

has been to choose products where it could

enter the market first, reap high profits, then

move on—leaving later sales, at lower margins,

to others, Nonetheless, in many cases, especially where the innovating company is small, lining up an established supplier as a second

source may be a prerequisite to sales in any volume.

A further strategic choice, increasingly critical for American firms, is whether to design

and produce commodity-like chips or to concentrate on custom or semicustom devices, The

first option entails high-volume production of

ICs that are, or may become, shelf items—

standard circuits serving the needs of customers who design them into end products,

The alternative, customizing, can be accomplished in a variety of ways; semicustom

chips such as gate arrays or programmable

logic arrays are specialized only at the last

stage of processing. Regardless of the technological approach, firms in the custom or semicustom business create specialized ICs meeting

the needs of one or a few, rather than many,

purchasers. Because circuit design is expensive, prospective order quantities must be large

enough to cover engineering costs; alternatively, the buyer must be willing to pay a higher

price, Custom chips for automotive applications are an example of the high-volume case,
192 . International Competitiveness in Electronics

military systems of custom chip markets where

production volumes tend to be small. Occasionally, end users design their own ICs and

contract out production.

At the center of competitive strategies in

semiconductors—as for many industries—then

lies the choice of products. Firms with broad

product lines may offer devices based on a

variety of technologies while attempting to stay

at the technical frontier with only some of

these. Others—such as Mostek in the mid1970’s—operate within narrower boundaries

where they attempt to be leaders. Some entrants are content to follow the obvious trends,

offering unique designs infrequently while

relying on other strengths—perhaps low prices

or a reputation for quality—to attract customers, In its early years, Advanced Micro Devices

took such an approach (see app. C).

Beyond these common themes, mostly hinging on aspects of the technology, companies

plan their strategies according to the strengths

and weaknesses they perceive in their own positions compared to those of their rivals. No

single company has the resources to manufacture and sell all the tens of thousands of

semiconductor products now marketed in the

United States—one of the reasons for the

periodic emergence of startups, Extensive

product lines can confer advantages where

customers prefer to deal with only a few vendors; broad-line manufacturers may also be

able to achieve economies by spreading marketing costs over many items. Nonetheless,

such factors are secondary compared to choice

of product and process technology, along with

a variety of ingredients that could be labeled

“entrepreneurship.’ Successful new companies have frequently been established to exploit

a particular product, often one that larger companies have failed to pursue—perhaps because

of limited resources, or simply a judgment that

the potential market was too small,

No matter the decisions they themselves take,

managers of semiconductor firms can be certain of two features of their market: 1) competition will eventually drive prices downward (it

has been extremely difficult to capture significant monopolistic profits from new technologies), and 2) just as inevitably the pace of technical advance will render new product offerings obsolete within a few years at most. The

price history of the 64K RAM illustrates the

first point: offered in sample quantities at $100

each in 1979, and $20 to $30 during 1980,

prices dropped to the $10 to $15 range in early

1981 and $5 to $7 a year later; during 1981, 16K

RAM prices were driven down from $4 to

about $1, largely as a result of price declines

for 64K parts.30 Such pricing trends have meant

that all firms, U.S. and foreign, have had to

work continuously at cost reduction, In contrast to numerous other industries, passive or

reactive pricing policies are hardly possible;

although product differentiation is a viable

alternative under some circumstances, price

competition in semiconductors is a constant

force–enough by itself to set this industry off

from many others. The second market characteristic, rapid technological change, has forced

managers and technical personnel alike to

adapt constantly; firms that have remained

wedded to older technologies have faltered or

disappeared from the marketplace,

International Dimensions

From an international perspective, the larger

U.S. merchant firms have shared three major

strategic thrusts: 1) offshore manufacturing to

reduce labor costs, 2) foreign investment to

serve overseas markets, and 3) attempts to do

business in Japan. This last effort–on which

a number of companies are just embarking, or

reembarking after past rebuffs—may prove critical to the continuing ability of U.S. merchant

firms to compete with large, integrated Japanese manufacturers, particularly in commodity

products like memory.

Offshore manufacturing investments have

been concentrated in developing Asian nations, Generally, the more labor-intensive

assembly operations—e.g., wire bonding and

encapsulation—have been moved. In the semi30A, Alper, “Buyers Hedging on Long-Term 64K Pacts Until

U.S. Firms Ramp Up, ” Electronic News, Feb. 8, 1982, p. 1; C.

H. Farnsworth, “Japanese Chip Sales Studied, ” New l’ork Times,

Mar. 4, 1982, p. D1. Prices for 64K chips eventually fell to lows

of about $3 during the 1982 slump.
Ch. 5—Competitiveness in the International Electronics Industry ● 193

. —

conductor industry, the stimulus for these

transfers has not been import competition, as

in consumer electronics, but domestic rivalry.

Transfers offshore began in the early 1960’s,

long before Japan appeared a significant threat

in semiconductor production. By 1970, American companies operated more than 30 subsidiaries in such locales as Hong Kong, Singapore,

Malaysia, the Philippines, and Mexico. 31 Re -

locating labor-intensive production operations

has been especially attractive because transportation costs are low; chips are often shipped

by air. A cost comparison illustrating the advantages of offshore assembly is included in

appendix B (table B-2).

A second international involvement of U.S.

semiconductor companies has been point-ofsale production to serve developed country

markets, Investments in point-of-sale plants

began about the same time as offshore assembly, but from the standpoint of industry strategy the motives were quite different. These

have been twofold, First, foreign governments

have often taken steps to make local production attractive, or, conversely, to make exporting from the United States onerous. European

countries, in particular, have relied on incentives combined with tariff and nontariff barriers to attract U.S. high-technology investments. Second, point-of-sale production

can become a competitive necessity to the extent that other firms have already made such

moves.

Efforts to establish sales, production, and/or

R&D facilities in Japan—now a bigger market

than all of Europe—comprise the most recent

overseas thrust by American firms. While

Texas Instruments had been able to establish

a wholly owned subsidiary in Japan, other

American firms were kept out until recently.

Semiconductor manufacturers attempting to

invest in Japan suffered much the same fate as

other U.S. companies; the Japanese Government, through the Foreign Investment Coun31 W F’. E’ i n a n, ‘‘The International Transfer of Semiconductor

‘rhro~lgh [J, S,-Flased Firms, ” National Bureau of

Econ{)mi(: Rcsear(, h Working Paper No. 118, Dwernher 1975,

p, 57 This fi~(lr[) e~(:lu~le~ point-of-sale facilities in industrial

oat 

cil, MITI, and other agencies, controlled inward investment flows and for the most part

prevented the establishment of manufacturing

facilities under foreign ownership.32 Joint ventures in which a Japanese company held the

majority interest met a more favorable response. The purpose was obvious: to provide

shelter for Japanese companies which at the

time were well behind in semiconductor technology. MITI believed—with good reason, if

the European case is indicative—that allowing

American firms to produce in Japan would stifle the domestic industry, particularly when it

came to more advanced device types. In acting

this way, the Japanese Government was behaving much like others that have sought to protect infant industries, but Japan has often been

accused of maintaining protectionist measures

long past the point at which her industries have

been able to fend for themselves,

In any event, as a consequence of protectionism in Japan, American suppliers were

forced to adopt business tactics different from

those pursued on the continent. Most responded to MITI’s entreaties and entered into

licensing agreements with Japanese producers.

33 Such steps were entirely rational, provided the U.S. firm could be reasonably certain the technologies transferred would not

find their way into products they would face

at home or in third-country markets. With this

proviso, it would pay to sell technical knowledge, the proceeds from which could then at

least partially offset the costs of generating that

knowledge, The outcomes of licensing agreements with Japanese firms have led to many

second thoughts within the American industry.

Nonetheless, clear-cut cases in which U.S.

technology was an irreplaceable ingredient in

the growing capability of Japanese semiconductor manufacturers are rare, particularly in

later years —the exceptions being perhaps developments flowing from Bell Laboratories.

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.

73see, in ~articul a r, W. F. Flna II, “The Exchange of Semiconductor Technology Betureeo Japan and the United States, ” f’~rst

1 I! S.-]apan Technological Exchange S~’mposium, Washington,

DC,, oct, 21, 1981. Finan points out that American firms generally did not transfer proprietary information to licensees (p, 9],
194 ● International Competitiveness in Electronics

Texas Instruments became the single exception to MITI’s licensing rule—in reality only

a partial exception. Because it held a series of

fundamental patents covering ICs, Texas Instruments was in stronger position than other

American companies. As a condition for licensing its patents to Japanese firms, Texas Instruments demanded that it be allowed to establish manufacturing operations there. When

MITI refused—consistent with its decisions regarding other electronics firms—the stage was

set for prolonged negotiations. 34 Texas Instruments and MITI eventually compromised

in a 1968 agreement permitting a joint semiconductor manufacturing venture with Sony.

Four years later, Sony sold its share to the

American company.

Thus, Texas Instruments, although reportedly subject to a production ceiling, became the

only U.S. semiconductor firm to both manufacture and sell its devices in Japan, just as IBM

had—a few years earlier—become the only

American company to build computers there.

(IBM was also able to gain entry by taking advantage of its patent position.) Only recently,

as the Japanese have gained confidence in their

own technical abilities, has MITI softened its

attitude toward foreign investment; a growing

number of U.S. electronics manufacturers are

now contemplating wholly owned subsidiaries

in Japan. While the longer term consequences

of these decisions are not yet clear, investment

within Japan could—given the examples of

other industries—prove a vital support for

American firms seeking to compete with Japanese rivals in third-country markets as well as

in Japan.

Current Trends

The competitive strategies of American semiconductor firms have been aimed first and

foremost at survival in a highly competitive,

rapidly changing market. Companies big and

small have had to stay abreast of and adapt to

technological change. Flexible management

and organizational structures have been a

34J. E. Tilton, International Diffusion of Technology: The Case

of Semiconductors (Washington, D. C.: The Brookings Institution, 1971), pp. 146-147.

necessity. The usual explanations for the exits

of a number of large corporations during the

earlier years of the industry revolve around

rigid decisionmaking styles.

More recently, the character of the market

has been shifting; American companies have

been forced to alter their thinking. In some

respects the changes are a continuation of

familiar patterns: more complex ICs–large and

very large-scale integration (VLSI)—make still

more applications cost-effective, creating new

and different puzzles for chip-makers. More

fundamentally, VLSI has altered the cost structure of the industry in at least two ways. First,

production is growing more capital-intensive;

new sources of financing are needed to purchase more expensive manufacturing equipment (ch. 7). Some of the capital has come via

mergers, which have changed the industry’s

structure. The second way in which VLSI is

affecting the structure of the industry stems

from shifts in product design. What had been

a hardware-oriented business is now systemsand software-based as well. ICs are becoming

more than components, To tap the vast potential markets made possible by microprocessors

coupled with cheap memory, semiconductor

manufacturers must commit substantial resources to computer-aided design and software

development, This comes at a time of intensifying international competition—but with or

without the Japanese in the picture, the problem facing U.S. merchant firms is one of locating sources of new capital in substantial

amounts while battling to preserve even their

existing profit margins. As companies devise

their responses, several trends are emerging,

Greater vertical integration will probably

have the farthest reaching consequences. Larger merchant companies—e.g., Texas Instruments, which has entered a variety of consumer markets, including that for personal

computers—are taking advantage of broadbased positions in microelectronics to integrate

downstream into the manufacture and sale of

final products, The reasoning behind such decisions is straightforward. If much of the technology of data processing and other electronic

systems is incorporated in ICs, why not make
Ch. 5—Competitiveness in the International Electronics Industry ● 195

end products too, increasing value-added and

profitability? To this strategy—essentially an offensive one—could be added a defensive element. For semiconductor manufacturers with

the resources to contemplate entry into systems

markets, greater vertical integration reduces

vulnerability in the event that customers begin

to integrate backward into device production.

The fact is that backward integration is on the

upswing, as manufacturers of computers, office equipment, consumer durables, and a host

of other products sense the need to develop inhouse capability in microelectronics. One path

is purchase or merger with a semiconductor

company. Merger activity in the industry has

been high since the latter part of the 1970’s; by

1983 only a few of the larger, broad-line merchant suppliers remained independent.

Mergers have been of several types: some

semiconductor firms have been absorbed into

conglomerates—one example is United Technologies’ purchase of Mostek. Other acquisitions have been more directly motivated by internal needs, as in General Electric’s acquisition of Intersil. Foreign takeovers have been

prominent—Schlumberger’s purchase of Fairchild. Sometimes the apparent motive on the

part of the semiconductor company is the need

for new financing; this was no doubt a factor

with Mostek, explicitly so with IBM’s purchase

of a substantial interest in Intel. The motives

of foreign investors have varied: buying an

American firm can be a quick way to get technology as well as a convenient entrance into

the U.S. market.

In a related development, many American

semiconductor companies are seeking alternatives to “going it alone” in the development

of new technology-largely because of rising

costs. New variations on accepted technology

sharing arrangements have been devised. Some

semiconductor manufacturers have prevailed

on customers for assistance in developing specialized chips and software. Both General

Motors and Ford have supported such efforts.

Semiconductor firms have also sought new

ways to share product development costs

among themselves, sometimes through extensions of past practices in second-sourcing,

where it is becoming common for such agreements to spell out in considerable detail the

R&D and/or circuit design obligations of each

partner.

35

Arrangements in which two or more companies independently develop different members of a family of chips fall at one end of the

R&D spectrum—complementary product development. At the other end, closer to basic research, industry groups are moving toward

cooperative rather than independent but complementary projects, The Semiconductor Industry Association and the American Electronics Association have each established programs that will channel contributions from

member firms to university projects. The Semiconductor Research Cooperative is funding research directly, while the Electronics Education Foundation aims to improve training in

electrical and computer engineering, primarily through fellowships and faculty support.36

Another effort, Microelectronics & Computer

Technology Corp., will be an independent profit-seeking R&D organization capitalized by the

participating firms. 37 At least six universities

are also establishing centers for R&D in semiconductor technology and/or systems applications of microelectronics.38 Whether all these

efforts will survive and flourish remains to be

seen.

The emerging strategic picture in the United

States, therefore, is fluid and uncertain. Semiconductor manufacture, along with other portions of electronics, is undergoing far-reaching

restructuring, with outcomes that are hardly

obvious. Given settlements in the IBM and

AT&T antitrust cases, the way also seems clear

35 For exa rnples, See s. 17uss e]] and S, Z,i Pper, ‘‘] Iltt:], N! ot Or{)] a

Tighten Hold on General-Purpose MPUS: Sec Peripherals KeYI

Market for Niche Suppliers, ” Electronic Newrs, hlar. 8, 1982,

p. 1. U.S. merchant firms are also negotiating such agreements

with Japanese manufacturers—S. Russell, “Zilog, Toshiba to

Swap MIJU, CMOS Technology, ” Electronl(: .hreb~,s, Apr. 19,

1982, p. 53; “National Semiconductor Sets ~renture L$’ith Japanese Firm, ” Wall Street )ourna], Jan. 23, 1983, p, 22 (the Japanese

participant is Oki).

3CIS, Russell, ‘‘S I A Eyes $5 M Fund i ng for Research Cooperat lve, ’ ‘ Electronic Newrs, Dec. 21, 1981, p. 6.

37C, B a rney, “R&I) CO-01) Gets Set To Open [Jp Shop, ” Electronics, Lfar. 24, 1983, p 89.

wC. Norman, “Electronics P’irms Plug Into the [~nitersities,”

Science, Aug. 6, 1982, p. 511.
196 ● International Competitiveness in Electronics

for continued expansion by these two giant

semiconductor/communication/computer companies. AT&T’s manufacturing arm, Western

Electric, plans to be the first American firm to

deliver 256K RAMs—a rather spectacular entrance into the merchant market. Other firms—

Xerox is one—are also contemplating broad,

systems-oriented strategies. Meanwhile, smaller companies continue to seek specialized

product niches that will prove lucrative while

not attracting large and powerful competitors.

And in the background are the Japanese, adding another dimension that will continue to influence the strategies of American firms both

domestically and internationally.

Japan

Until half-a-dozen years ago, few in the U.S.

semiconductor industry gave much thought to

Japan as a serious competitive threat. Japanese

manufacturers—almost exclusively divisions of

large corporations—mostly produced devices

for consumer products; even today, nearly half

of Japan’s semiconductor output goes to consumer applications .

39 During the 1970’s,

Japan’s budding computer manufacturers depended on American suppliers for advanced

ICs. While Japanese companies were clearly on

the way to the skill levels needed for more advanced devices, the prevailing belief in the

United States was that they could not really

hope to catch up. The primary concern was the

closed Japanese market. American companies

had been prevented from establishing a presence remotely comparable to that which they

had achieved in Europe; customers in Japan

bought only those devices that were not produced locally.

Today the situation seems quite different.

Japanese firms have emerged as viable global

competitors in VLSI devices. Although their

prowess has centered on memory chips, they

have made up a great deal of ground in logic

circuits and other device types as well. By 1980,

the gravity of the threat had become obvious;

quite suddenly, Japanese firms captured near3e]aPan ,E)wtronjcs A~anac 1982 (Tokyo: Dempa Publications,

Inc., 1982], pp. 142, 143.

ly half the American market for 16K RAMs.

Two years later, Japan’s manufacturers seemed

well on their way to comparable levels of

penetration in the next-generation 64K RAMs;

indeed, as sales began to build, the Japanese

share soared toward 70 percent. While there

is considerable feeling that ultimately they will

not be able to hold more than about half the

U.S. market for 64K chips, any temptation to

underestimate the capabilities of Japan’s

semiconductor manufacturers has long since

passed. Seemingly countless studies recount

the strategic attack, tracing the targeting practices of government and industry.

From Linear to Digital Circuits

Firms in Japan had long since become major

producers of linear semiconductors, a mainstay in consumer electronics. By the early

1970’s, some American companies began to

abandon this part of the market, especially as

domestic sales seemed to be drying up. Leading

U.S. producers put their resources into rapidly expanding digital IC technologies. Meanwhile, for the Japanese, strength in consumer

devices was both a blessing and a curse. While

giving their engineering staffs experience in

circuit design and—more important—in highvolume production, the concentration on linear

circuits did little to raise overall levels of competence. At the time, the primary customers for

digital ICs—computer manufacturers—were a

relatively minor component of Japanese demand.

This was the situation when, in line with its

longstanding policy of fostering internationally

competitive industries, MITI acted to break the

impasse created by the focus on consumer

products, The agency helped fashion an R&D

program intended to increase Japan’s capabilities in large-scale digital ICs, particularly MOS

devices, and accelerate movement toward

VLSI. The organization of the program, which

began in late 1975, is described in chapter 10;

five companies and three separate laboratories

were involved in the 4-year effort. Funding—

totaling about $300 million—was provided partly by the participants and partly by government. The program has had far-reaching im-
Ch. 5—Competitiveness in the International Electronics Industry ● 197

pacts—as much through diffusing technology

and training people as through the technology

developed. A parallel government-sponsored

VLSI program—this one focused on telecommunications—was carried out in the laboratories of Nippon Telegraph and Telephone

(NTT), which had the most capable microelectronics R&D organization in Japan.

MITI’s objective was not only to aid Japan’s

semiconductor manufacturers: the VLSI program was part of a much more extensive effort to move the nation toward knowledgeintensive products with high export potential.

Like its counterparts within the governments

of other industrialized countries, MITI recognized that semiconductors would be fundamental building blocks for many sectors of the

Japanese economy. Supporting the computer

and information industries was the first step.

MITI was fully aware that technical competence in digital ICs would be essential, and that

without some form of stimulus private companies would find it difficult to shift rapidly from

linear to digital devices. From MITI’s perspective, support for “cooperative” R&D was a natural extension of past efforts in other industries; the VLSI program itself has been followed

by related work in computers and robotics, as

well as further microelectronics projects.

Still, by American standards, MITI’s subsidies were not large. Individual U.S. firms like

Texas Instruments had R&D budgets that came

close to matching the yearly outlays of the VLSI

project; IBM’s corporate R&D spending was an

order of magnitude larger. Of course, participating Japanese companies continued their internally funded R&D programs; MITI spending

thus gave a substantial incremental boost to

Japanese semiconductor research, reducing

risks and supporting longer term work. Even

so, total expenditures in Japan remained well

below those here. Nor did the VLSI project result in large and direct benefits to Japanese

firms, at least in terms of product offerings. A

great deal of attention in the United States has

centered on the thousand or so patents associated with the program, but it is not clear what

value these have. There are no signs of major

innovations. Primary attention went to process

rather than product technologies; one-third of

the funds were spent in the United States simply on purchases of state-of-the-art manufacturing equipment. This suggests that the major

thrust was to develop skills in low-cost production of commodity-like devices such as RAM

chips.

Two aspects of MITI’s approach deserve particular emphasis. First, subsidization of microelectronics R&D was only the opening move

in a broader strategy for building a competitive

computer and telecommunications sector .

Hindsight provides ample corroboration of

what was in fact an explicit goal: MITI’s subsequent support of computer and software development, as well as the Japanese Government’s

reluctance to allow open competition for NTT

procurements. NTT was a principal—though

independent—actor in the VLSI program; the

government evidently hoped to restrict its highvolume purchases to domestic manufacturers

(the company does not produce its own semiconductors), helping generate the economies

of scale so necessary for international competitiveness,

The second point—suggested by MITI’s level

of support, generous for a government R&D

program but certainly not enough by itself to

boost the Japanese industry past American

firms—is that the VLSI project was never conceived purely as an exercise in technology development. Consistent with the usual Japanese

approach to government-supported R&D, it

was intended to focus industry efforts, help

train engineers from private firms in state-ofthe-art technologies, diffuse these technologies

within the Japanese industry—in other words,

to overcome weaknesses in Japan’s technological infrastructure created in part by the lack

of personnel mobility (ch. 8).

This makes it doubly difficult to assess the

contribution of the VLSI project. While separating what might have happened from what

did occur is impossible, pieces of evidence do

exist: for instance, MITI excluded Oki Electric

from participation and subsidies, yet Oki managed with NTT’s help to develop a 64K RAM

that the company now exports in considerable
198 ● International Competitiveness in Electronics

—

volume. Many of the events of the past few

years—the upsurge in Japanese production and

exports of RAMs—would probably have occurred in any event, albeit at a slower pace;

memory chips were obvious targets for Japanese firms confident of their abilities to

mass-produce relatively straightforward designs to high quality standards. They were also

needed for the computers that these same firms

were determined to make in greater numbers.

In the United States, the impact of the VLSI

project has been exaggerated. It has come to

symbolize not only direct subsidization of commercially oriented R&D but also interfirm cooperation that might be illegal under American

antitrust law. In fact, as pointed out in chapter

10, cooperation among Japanese companies

has been rather limited—evidence of the

strength of the barriers within the Japanese industry that MITI was trying to overcome; this

aspect has been overplayed by American manufacturers understandably distressed at inroads by overseas competitors, While the VLSI

project makes a convenient target, by itself it

is a far-from-adequate explanation for penetrations of what had been traditional American

markets. Indeed, government policies in support of Japan’s information industries have

ranged far beyond R&D subsidies, Among the

other policy tools have been:

preferential government procurement;

favorable credit allocations, especially during the formative years;

special depreciation and other tax measures; and

grants for training and education.

Domestic firms have been effectively protected

from import competition as well as from production within Japan by foreign-owned concerns. Protection of growing industries through

government action is hardly unique, but can

only be judged to have succeeded if the protected companies eventually emerge as viable

competitors. In microelectronics, the “infant

industry” approach has been attempted elsewhere, most notably in several European nations, but only Japan has achieved success. Japanese industrial policy is discussed in detail in

chapter 10; here the point is that none of the

policy measures adopted by Japan’s Government, taken separately, appear to have been

major forces in the ultimate growth and maturation of the semiconductor industry. Taken

together, they paint a different picture—one in

which industrial policy provided vital guidance

and support for the development of an independent capability in semiconductor design

and manufacture. Cumulatively, the policies of

Japan Government have had a major impact.

Strategy and Structure

Despite MITI’s pervasive influence, the competitive strategies of individual Japanese semiconductor manufacturers are governed first by

the basic structure of the industry, which is

populated by companies for whom microelectronics comprises a relatively small part of

their business. Most of these companies—Oki

and Nippon Electric being partial exceptions—

are large, integrated firms whose sales consist

predominatel y of final products such as computers, consumer electronics, and telecommunications 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

computer manufacturer, with heavy internal

consumption—have semiconductors contributed a proportion of total sales even half as

great as for those U.S. merchant firms that are

least dependent on their semiconductor divisions—Motorola and Texas Instruments. Semiconductors account for less than one-tenth the

sales of the other Japanese manufacturers. In

this, they are closer to American companies

like Rockwell or RCA, which nonetheless differ in being primarily suppliers of specialty

rather than mass-market circuits.

The fact that the major semiconductor suppliers in Japan build end products creates

potential intracorporate synergisms absent in

companies that are primarily chipmakers.

While some U.S. managers view integration as

dysfunctional, likely to sap entrepreneurial

drive and retard innovation, it has been an advantage for Japanese companies—which have

different sets of strengths and weaknesses than

American firms. To begin with, the same halfdozen corporations that produce most of Japan’s ICs account for perhaps two-thirds of demand; given the focus on vertical integration

and internal production, it should be no surprise that U.S. suppliers have had difficulty

selling in Japan. Second, as the next chapter

points out, the quality of Japanese ICs has been

high–again, this might be foreseen, given that

firms producing for internal consumption will

find themselves bearing high downstream costs

when quality lags. A further synergism associated with size and diversification stems from

the ability to tap cash flows generated in other

lines of business; these funds can be channeled

to R&D or added production capacity, matters

amplified on in chapter 7. Further, diversified

companies can more easily tolerate short-term

losses resulting from price-led penetration of

new markets. Diversified Japanese companies

have combined such tactics with an emphasis

on quality—both image and reality—to drive

boldly into markets once the province of

American firms. Indeed, few other strategies

could have worked. Unfortunately, from the

standpoint of smaller and less diversified U.S.

merchant manufacturers, unrelenting price

competition in products representing a substantial part of their total business leaves few

options for counterattacks.

The Japanese strategy—protecting domestic

semiconductor manufacturers from overseas

rivals while providing modest R&D subsidies

and at the same time fostering domestic competition—parallels that in television. It has

yielded equally impressive results: deep penetration in targeted markets based on low

prices and quality levels above previous norms.

There has been a fortuitous element as well;

unexpected demand swamped U.S. suppliers

during 1979 and 1980. As a result of continued

capacity expansions during the preceding market slump, Japan’s producers were ready to fill

the void.

Some spokesmen for the American industry

find other familiar features: claims have been

repeatedly voiced that the Japanese practice

price discrimination, maintaining high margins in protected home markets while slashing

prices in the United States and Europe, Such

tactics would imply either explicit or implicit

monopolistic agreement among Japanese manufacturers—e, g., tacit acceptance of existing

market positions at home, with price cutting

confined to foreign markets. Even so, questions

of dumping are problematic for integrated

firms; companies making ICs for both internal

consumption and open-market sales have a

good deal of latitude in allocating costs and setting prices. Dumping, as defined under GATT

rules and the laws of most countries, would be

difficult to prove; nor would the usual rationales for prohibiting dumping necessarily be

very relevant.

MITI’s push toward ICs for computers and

communications has contributed to Japan’s

strength in world markets for memory chips.

At the same time—one legacy of the industry’s

roots in devices for consumer applications—

Japanese product lines remain more narrowly based than those of the leading American

suppliers. Microprocessors are a case in point;

the major Japanese firms all continue to produce American designs. NEC, Toshiba, Mitsubishi, and Oki sell members of the Intel 8080
200 ● International Competitiveness in Electronics

family; at least three Japanese firms are building Intel’s 16-bit 8086.40 Although several Japanese manufacturers have designed microprocessors for internal use, these have not found

other markets. And if made-in-Japan dynamic

RAMs now claim a major share of worldwide

sales, the overall Japanese presence in the

United States remains modest. In 1982, imports

from Japan accounted for about 51⁄2 percent by

value of total U.S. integrated circuit consumption; although increasing rapidly (fig. 26, ch.

4), Japanese imports remain small in absolute

terms. Still, the inroads have come in a market

segment that American manufacturers right-

‘R. H. Silin, The Japanese Semiconductor Industry: An Overview (Hong Kong: Bank of America Asia, Ltd., January 1979),

p, 148; “Background of VLSI War With United States Reviewed, ”

Japan Report, Joint Publications Research Service JPRS L/10662,

July 16, 1982, p. 43.

ly view as critical; U.S. firms heavily dependent on memory products have been severely affected, In other product categories, Japanese

competition is also stiffening; a major effect

was to further depress prices and profits during 1981 and 1982, when domestic firms were

troubled by a deep recession,

In the longer term, American semiconductor manufacturers have every reason to be

wary of continued pressure from powerful

multinationals with headquarters in Japan—

firms that have already demonstrated their ability to compete successfully in major world markets for other technically demanding products.

The U.S. merchant manufacturers have their

own advantages—they do well some things that

Japanese firms do poorly–but they cannot expect an easy time of it in the future.

Computers

If American manufacturers were for many

years unchallenged in world markets for semiconductors, the United States has been still

more preeminent in computers. Even in Japan,

American-owned firms continue to account for

over 40 percent of mainframe sales; the U.S.

share of the Japanese market for small systems

is lower, but such firms as Data General and

Hewlett-Packard have recently established production facilities there. In Europe, U.S. companies are far out front except in the United

Kingdom, where the government has actively

supported ICL through procurements and subsidies. American-owned enterprises account

for nearly three-quarters of all computer sales

in Europe.

This section again concentrates on the

United States and Japan. While Japanese computer manufacturers have not yet proven notably effective competitors outside their home

market, they are at present uniquely situated

to launch a campaign aimed at the U.S. position—in part because of their newly acquired

strength in microelectronics, in part because

of their active pursuit of joint venture ties with

suppliers in Europe and the United States. It

is too early to predict the extent to which the

Japanese strategy may succeed, but structural

changes in the world computer industry are

creating new opportunities for firms everywhere. The Japanese will probably be able to

exploit at least some of these, certainly better

than European producers.

The Environment for U.S. Suppliers

By virtually any standard, the United States

has far and away the most computer-intensive

economy in the world, a position it can expect

to maintain indefinitely. From the early days

of the industry, the number of computers installed in the United States mounted at a pace

that kept the total about an order of magnitude

greater than for all of Western Europe. 41 B y

1981 there was a computer terminal for every

48 people employed in the United States; by

41Gap5 in Technology: Electronic Computers [paris: Ch’ganiZation for Economic Cooperation and Development, 1969), p, 16.
Ch. 5—Competitiveness in the International Electronics Industry . 201

1986 there should be 1 for every 10.42 American

leadership in design, production, and sales—

as well as utilization—is reflected both in trade

data, where the computer industry continues

to be a prodigious net exporter, and in the

prominence of U.S.-owned subsidiaries in

other parts of the world.

Strategic Patterns

For many years the story of American supremacy in the global computer industry was

the story of one company—International Business Machines, Although IBM trailed Remington Rand, builders of the Univac, in marketing

early computer models, by the late 1950’s IBM

had gained the huge lead it still enjoys. For the

other old-line firms—including Burroughs,

NCR, Honeywell—competition has mostly

meant jockeying for places in the residual market left by IBM; these companies have found

it difficult to reach the Wale needed to offer

a full product line and to’ support a sales/service organization competitive with IBM’s. In

general-purpose mainframes, IBM has accounted for 60 to 70 percent of the worl d

market over the years, with lower figures in

such countries as Japan and the United Kingdom balanced by even higher percentages elsewhere. To be sure, numerous entrants—mostly

American—have attempted to carve out competitive positions against IBM, with much

more success in rapidly growing markets for

small systems than in mainframes. Companies

ranging from Digital Equipment Corp. or Control Data in the United States to Fujitsu in

Japan and Nixdorf in West Germany have established themselves solidly in some portions

of the market. But none has come close to

IBM’s overall sales, despite the rapid shifts in

overall market structure described in the previous chapter,

Most of IBM’s American competitors have

taken a straightforward approach to their situation: following IBM’s lead in the development

of faster and larger systems, trying to maintain

421, M, Branscomb, “computer Communications in the Eighties—’I’ i me To Put It All Toget her,” Computer Networks, ~ol. ~,

1981, p. 3.

product lines that match up reasonabl y well

while at the same time staking out their own

territory—e.g., Control Data in high-performance scientific machines, Burroughs in small

business systems (on the latter, see the case

study in app. C). In these efforts, American

computer firms have been aided by the technological lead of the U.S. semiconductor industry, Although IBM has relied heavily on internal semiconductor design and manufacture,

other firms—whether or not maintaining captive production facilities—have been able to

take advantage of components available on the

merchant market that were often superior by

conventional yardsticks to IBM’s devices, This

is one of the reasons IBM has itself begun to

purchase ICs on the outside. A major element

in the strategies of other mainframe suppliers

(excluding those making plug-compatible machines] has been to expand into new applications while tying their installed base to proprietary software—thus keeping old customers.

None have had more than limited success;

other mainframe-oriented firms have generally been a good deal less profitable than IBM,

and have made little headway in eroding IBM’s

market share, Several have done better abroad;

Honeywell’s joint venture in France has been

a greater force in the European market than

the parent has been in the United States.

The Impacts of Microelectronics and

Reliability Improvement

Because the market has enlarged and changed

so radically, focusing on the older mainframe

companies hardly gives a fair sampling of current strategies. As figure 35 indicates, market

growth for general-purpose mainframes—the

mainstay of the industry just a few years ago—

is now much slower than for other types of systems. As sales of minicomputers, small business installations, and desktop and personal

machines exploded, competitive dynamics

altered fundamentally. Newer entrants have

staked out major shares of markets for products

like word processors. These structural shifts

are continuing—indeed accelerating.

What are the implications for international

competitiveness? As in semiconductors, prod99-111 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 industry are shaped by technical possibilities.

Specialized machines of all sizes have long had

their place, but the turn toward small and versatile computers is a direct consequence of

twin driving forces: advances in software for

networking and distributed processing, plus

advances in microelectronics. Computer systems need no longer be structured around a

single processor. A central unit can be surrounded by a number of satellites, or the entire processing load can be shared throughout

a network. Given cheap microprocessors and

single-chip microcomputers, designers can put

“intelligence’ where they want it, Computer

firms that fall behind in such developments—

more broadly, manufacturers of systems incorporating machine intelligence, not all of whom

think of themselves as part of the computer industry—will be poorly placed to compete in future markets.

Improvements in system reliability—flowing

partially but not wholly from the growing

reliability of microelectronic devices—yield

another powerful driving force. Mean times between failure for computer systems have been

increasing steadily despite greater complexity. Today’s computers are orders of magnitude

more dependable than those of even a decade

ago; this not only cuts operating and maintenance costs but helps expand applications.

Computers can now be used in a host of applications where the dangers of a failure were

formerly too great–real-time air traffic control,

electric utility load management, critical industrial processes.

Ever-greater reliability combined with evergreater computing power per dollar has eaten

away at IBM’s traditional strengths—customer

support and service, plus the ability to lock in

customers via a product line broad enough to

satisfy virtually every need. Now, so many applications have opened up that no one company can hope to cover them all; in many of

these, IBM’s market power—so valuable in selling general-purpose mainframes—has been, if

not irrelevant, at least a far smaller advantage.

New entrants can specialize in systems for

banking or distributed word processing. Startups of earlier years—Data General, Prime, Tandem—have become substantial multinationals

in their own right. Independent software vendors are creating a whole new industry.

Better reliability—in addition to broadening

the applications of computers—has had a second, equally important, impact. As in consumer electronics, it has allowed manufacturers to skirt traditional distribution channels

and reach customers through new outlets. This

trend—which began as early as the 1960’s with

systems houses that purchased minicomputers

and peripherals in quantity, assembling them,

together with software, to supply turnkey installations—also promises to continue and perhaps accelerate. Greater reliability has reduced

the need for onsite maintenance and repair;

where field service was once a vital element

in any marketing strategy, smaller manufacturers are now less constrained by the need to finance service networks. Moreover—while hobbyists, engineers and scientists, and many businesses could be reached through specialized

distribution channels–selling personal or desktop computers to the general public requires

retail distribution. This, in turn, is realistic only

if the need for aftersales service is modest. Currently, the personal computer market is moving through a transition paralleling the earlier

shift in color TV—desktop machines are becoming off-the-shelf items rather than products

sold and serviced by specialty outlets. The personal computer is a product in which IBM had

no great advantages beyond name-recognition

and abundant internal resources for product

development. While these are far from trivial

assets, IBM will probably not be able to duplicate its position in mainframes in the far more

diverse and competitive desktop market, just

as the company has not been able to do as well

in small business systems, supercomputers, or

word processors. The general point is: to be in

the computer business no longer necessarily

means confrontation with IBM; it need not entail attempting to cut into the installed base of

any mainframe manufacturer, much less trying to match IBM’s hardware or software

across a broad spectrum of products.
*

204 ● International Competitiveness in Electronics

Even in small systems, only a few companies

have been able to span a major portion of the

market. Some—e.g., Hewlett-Packard—have

specialized in powerful machines for sophisticated customers. Others, like Wang and Datapoint, have aimed at business applications,

Digital Equipment Corp. (DEC)—which started

as an OEM supplier—now has a relatively

broad product line, including personal computers, As in the semiconductor industry, managers have had to search for market opportunities that match their organizations’ strengths.

Their choices and decisions, constrained by resource limitations and conditioned by government policies, will determine the future competitive posture of the U.S. industry. Mistakes

will be made, and weaker companies—most

likely those making peripherals, office automation equipment, and desktop computers—will

find themselves being absorbed or merged with

competitors.

Product Strategies: Hardware and Software

The mainframe-oriented companies do retain

advantages in structuring complex and farflung information systems. Designs for such

systems are often shaped by existing software

inventories, The original supplier has an easier

time achieving compatibility; indeed, computer

firms have had a good deal to gain by making

it difficult for competitors to reverse-engineer

their software and develop compatible systems.

Some have gone so far as to replace portions

of the system software with “firmware” stored

in ROM chips which can be changed from time

to time. Generally, such efforts have been intended to thwart plug-compatible manufacturers.

The importance of software extends far beyond the system level. Machines capable of

data processing for business needs are now

within the financial reach of even the smallest

firms—and, of equal significance, can be used

by people with little special training, Software

that is user-friendly, as well as reliable, is a key

element in selling to those without previous

data processing experience. As the case study

in appendix C points out, credit for the success of IBM’s System/32 small business computer goes in large part to the specialized applications programs that were available, Even

more, as hardware costs fall, specialized software becomes the pacing factor in applications

ranging from office automation—where much

of the competition for word processor sales

revolves around software—to industrial robots.

Limited growth in software productivity and

high associated costs (ch. 3) are problems that

now confront all firms in the industry, here and

overseas; among the possible solutions are multinationalized software generation. In the

future, the importance of software compared

to hardware can only increase; the exceptions

are perhaps at the very high and very low ends,

where supercomputers remain hardware-intensive and small machines selling for less than

a thousand dollars compete on the basis of

price.

From a slightly different perspective, software can become a constraint: switching to

new software, particularly system software, is

time-consuming and expensive. Customers

with extensive data processing installations

and large software inventories become locked

in because of the high costs of transferring.

This is a constraint on the system manufacturer as well, who may be burdened with obsolescent software that cuts into potential performance. The picture is somewhat different for

computers sold to purchasers who are technologically adept—e.g., OEMs who integrate computers into their own products, or those with

needs in engineering or science. Such customers commonly have the internal resources for

solving their own software problems, and find

shifting to new systems, though a difficult task,

not an insurmountable one. Still, given their

software investments, virtually all customers

have strong motives for replacing or augmenting their equipment with new models from the

same manufacturer—and manufacturer s

strong motives for ensuring software compatibility within their product lines. Therefore,

once markets begin to mature, a manufacturer’s share of the installed base becomes a good

indicator of future prospects; competitors need

hardware that is substantially better or cheaper

to stand much chance of convincing customers

to switch allegiance, Brand loyalty has been
Ch. 5—Competitiveness in the International Electronics Industry 205

high in general-purpose data processing markets, largely for such reasons.

Plug-compatibility is aimed at breaking this

cycle. Originally referring to peripherals such

as disk drives, plug-compatible manufacturers

(PC MS) later moved into mainframes that can

operate on IBM software; now some build

equipment compatible with DEC minicomputers or IBM Personal Computers. Basically,

the PCM strategy has been to make equipment

that can be used interchangeably with IBM’s,

while undercutting the latter’s price/performance ratios .43

The forces outlined above shape the strategies of companies striving to keep up in the

marketplace. New approaches to product development are appearing throughout the industry; even IBM has begun to purchase more

hardware outside, as well as software. In

another new departure for the company, IBM

has started selling disk drives on an OEM basis.

As in semiconductors, technology-sharing

agreements have become more common—

cross-licensing of patents, direct purchases of

technology, joint development—as firms conserve resources through specialization. This is

the idea behind Microelectronics & Computer

Technology Corp.—spearheaded by Control

Data and presumably aimed not only at oncoming competition with the Japanese but the continuing struggle of smaller entrants with IBM.

Movement toward technology purchases and

technology sharing appears to have even more

momentum in Europe, despite earlier failures

of joint efforts like Unidata. Siemens, ICL, and

Olivetti are among the companies now marketing Japanese-built mainframes in Europe.

International Aspects

The picture that emerges in the U.S. computer industry is one in which the long-dominant leader is being challenged on all sides,

Structural change has been driven largely by

tsrrhe fou n(jer of A m{lah], the leading supplier of PC M mainframes, has said that sur~i~’ing in competition with IBM requires

costs that are 15 percent lower or performance that is 20 percent better, See “Makeshift Marriage, ” The .&onomist, Aug. II,

1979, p, 78.

the technology—although occasionally market

demand outstrips what the industry can supply, as happened with word processors—and

it is difficult to predict where it may lead. Some

observers believe that IBM’s market power will

continue to deteriorate, even in areas where

the firm’s position has heretofore seemed unassailable. Others think the future lies with

large and powerful companies able to combine

far-flung communications and information networks into vast integrated systems. In fact, both

views are probably correct, given the fragmentation and specialization brought by cheap

hardware.

American computer manufacturers, living

nervously with rapid technical change at home,

face another series of choices in foreign markets. Governments in industrialized nations

where American subsidiaries have long been

dominant continue to follow policies transparently intended to reduce that dominance,

Such policies are nothing new: France’s Plan

Calcul was set forth more than 15 years ago,

and the Governments of Great Britain and Japan have, over the years, found many ways to

support local computer manufacturers. While

most such policies have had only limited effects in the past, certainly in Japan the technological fervor is now intense,

If competition from Japanese computer firms

is on the rise, American entrants are themselves fashioning new international strategies.

Already DEC operates six plants in Europe and

three more in the Far East. A partial list of

other American minicomputer manufacturers

with foreign production facilities would include Hewlett-Packard, Wang, Data General,

Datapoint, and Texas Instruments. U.S.-based

multinationals specializing in desktop machines include Apple, with plants in Ireland

and Singapore, and Tandy. Manufacturers producing plug-compatible mainframes have also

begun to expand abroad: Amdahl has opened

an Irish facility intended in part to supply the

Common Market, as has Trilogy Systems.

The rules of the competitive game are in particular flux in lesser developed parts of the

world. Developing countries are putting in-
206 International Competitiveness in Electronics

dustrial policies to work attracting technology

and fostering local computer manufacturing.

Mexico’s approach has been to restrict imports,

limiting sales to companies that agree to establish production facilities. With an annual market now approaching $500 million, Mexico has

been able to attract a pair of U.S. minicomputer

firms willing to live with these rules. Brazil’s

Government has reserved the domestic minicomputer market for locally controlled enterprises; transfers of technology have been encouraged, but foreign investments are limited

to minority interests. While American companies have generally chosen to stay out, several

European and Japanese firms have agreed to

participate—no doubt hoping for benefits similar to those now flowing to the Japanese consumer electronics manufacturers that accepted

such conditions in earlier years.

How will the onset of local production in

developing countries affect international competition in computers? While any answer remains conjectural, it would be foolish to dismiss the possibility that some of these nations

may evolve into viable forces in the marketplace. Although their ability to compete will

probably be restricted to simpler products over

the foreseeable future, developing economies

will begin by building equipment such as terminals, printers, and disk drives, where labor

is a major cost element. It is not a big step from

making TV receivers to producing the simpler

types of computer terminals—indeed a step

that countries like Korea and Taiwan have already taken. With the experience gained in

such products, and with protected markets

contributing to scale economies, a number of

the newly industrializing countries could move

fairly quickly into world markets.

As a final point, again consider software development. By its nature, programing has been

labor-intensive–therefore increasingly costly

in high-wage nations. Software generation depends on people with ability and experience—

including an understanding of the problems

faced by users, Such factors have prevented the

transfer of this work to developing countries,

even those like India where the raw programing skills might be available. Nonetheless, several industrializing nations are attempting to

improve the capabilities of their labor forces

so that they can produce software needed in

advanced economies. Countries like Singapore,

Hong Kong, and Taiwan are seeking to create

“software centers” where Western computer

manufacturers could establish subsidiaries that

would transfer skills and provide training for

the local work force while also producing

much-needed software. Once the people were

available, locally owned companies could take

over at least some of the work.

Japan

Objectives announced by Japan’s Government over the past few years herald a competitive onslaught directed at the U.S. computer industry. MITI is sponsoring a pair of

long-term R&D projects dealing with computer

systems, plus several related efforts.44 The fifthgeneration computer project—the origins and

organization of which are described in chapter

10—is software-intensive, directed at artificial

intelligence, information organization and

management, and natural language input and

output. In the second project, MITI is helping

fund the development of a supercomputer intended to surpass the most powerful offerings

of American companies like Control Data and

Cray. A related lo-year project will support

development of the high-speed microelectronic devices needed to implement the software

concepts of both fifth-generation machines and

supercomputers. The goal is nothing less than

to thrust Japanese companies into the forefront

of world computer technology, to leapfrog the

United States in the design and marketing of

both hardware and software. The objectives of

‘Outline of Research and Development Plans for Fifth Generation Computer Systems (Tokyo: Japan Information Processing

Development Center, Institute for New Generation Computer

Technology, May 1982); Computer White Paper: 1981 Edition

(Tokyo: Japan Information Processing Development Center,

1982], pp. 59-75; “Machinery, Information Industries ’81 Programs Outlined, ” )apan Report Joint Publications Research Service JPRS L/10086, Nov. 2, 1981, p. 21; “Archetype of Fifth Generation Computer Described, ” )apan Report, Joint Publications Research Service JPRS 1./11007, Dec. 14, 1982, p. 49; “MIT I Project To Develop Supercomputer Starts in January, ” Japan Report,

Joint Publications Research Service JPRS L/10348, Feb. 23, 1982,

p. 34.
Ch. 5—Competitiveness in the International Electronics Industry 207

these programs are by no means unique to

Japanese manufacturers; they are squarely in

the mainstream of the evolution of computing.

It is the strength of Japan’s commitment—the

backing by MITI and other government agencies, the lo-year schedules—that differentiate

them from efforts in other countries.

As the rhetoric associated with such programs makes clear, Japanese firms, with the

help of their government, hope within 10 or 15

years to lead the world in computer technology. Despite Japan’s relatively successful experience with previous government-sponsored

R&D efforts—the Pattern Information Processing System (PIPS) project, the VLSI project—

this is a tall order. At present, the market position of Japanese manufacturers is modest; as

of 1981, American-owned companies held

more than three-quarters of the world computer market in value terms, Japanese-owned

companies only about 7 percent. Still, Japan is

now the second largest supplier of generalpurpose computers to the world market, with

a very high rate of export growth (ch. 4, fig.

30). The country is also second only to the

United States in intensity of computer utilization. After the experiences of consumer electronics, automobiles, and semiconductor memory chips, few in the American industry would

take Japan’s goals lightly.

Nevertheless, because of the role that factors

such as installed base and software inventories

play in the marketing of computer systems,

Japanese manufacturers must begin with the

knowledge that—no matter how good their

technology—they cannot hope to come close

to the United States for many years. In this

sense, the computer market is not at all like that

for semiconductors, where purchasers quickly switch suppliers to take advantage of low

prices, quick delivery, or new device types.

Success in niche markets for computer systems

is quite possible, indeed a necessary first step,

but breadth in an industry expanding in as

many different directions as information processing can only be a long-term undertaking,

The U.S. position, both in technology and

market share, is simply too strong. Leaders in

Japanese Government and industry recognize

their weaknesses, and have made plans accordingly.

Technology

Carefully targeted R&D is a central strand in

the Japanese computer strategy, as in earlier

ventures into other industries, Japanese producers and their government realize, just as

they did in microelectronics, that international

competitiveness in computers cannot be attained so long as they rely on technology from

the United States, The reasons are twofold,

First, American firms are far less likely to

license technologies than in the past, The Japanese know that computer manufacturers in

the United States, unlike at least some of their

predecessors in other sectors, are acutely

aware that technical leadership is a primary

source of competitive strength, and that to

make their technology too easily available

would weaken their own position, The second

reason is even more fundamental. In the basic

building blocks of computer hardware, semiconductors, Japanese firms are near parity with

American companies; in some areas they may

be ahead. Japan can hardly depend on imported technology; rapid progress toward an

eventual goal of leadership in information

processing requires extensive indigenous capability of the sort that Japanese firms now have

in high-density memory chips,

The Japanese also recognize that their shortcomings in the marketplace are not so much

matters of hardware as of software and related

applications-based constraints, Several Japanese firms now offer computer hardware as

powerful as any. However, IBM’s huge installed base and vast catalog of applications

programs have forced Japanese competitors,

as those elsewhere striving to break into the

mainframe market, to build plug-compatible

machines that run on IBM software. To get

around this impediment is perhaps the major

reason for the fifth-generation project. While

companies like Amdahl have demonstrated

that a comfortable business can be built supplying PCM mainframes, markets tied to

another manufacturer’s software are inevitably

limited. Japan’s gamble is that it can jump
208 ● International Competitiveness in Electronics

ahead of American entrants with families of

computer systems having performance capabilities that will render present-day software

inventories obsolete. This goal has shaped the

hardware and software R&D planned for the

fifth-generation project: to take full advantage

of emerging microelectronics technologies in

more closely linking the needs and abilities of

people with the capabilities of the system. If

these objectives are met, individuals—even

those with little training—will be able to communicate with fifth-generation machines

through ordinary language in spoken or written form, as well as through graphical or pictorial images. Such systems would not only

be user-friendly, but might ultimately display

something of the independent decisionmaking

capability associated with human reasoning. *

If the technical objectives of the fifth-generation project—and similar efforts in other

countries—are achieved, even novice users

would be able to harness enormous computing

power. The commercial potential is immense.

Government Assistance

The Japanese Government has supported

R&D activities in information processing over

many years. MITI has been selective in financial aid, directing funds to potential bottlenecks, exemplified by the VLSI program’s support for digital ICs, or to R&D that could help

Japan’s industries leapfrog the competition, the

intent of the fifth-generation computer project.

Funding for the latter is projected at about $500

million over a 10-year span (1981-91); the supercomputer project is expected to get another

*An example from the field of artificial intelligence—the area

known as expert systems—will illustrate, Research in expert systems aims at computer programs that mimic attributes of people who are “experts” in some realm of knowledge—e. g., medicine, where such programs might help automate diagnosis. The

objective would generally be to augment or complement rather

than supplant human skills; an expert system would not have

the judgement of a physician, but could offer, for example, perfect recall of vast amounts of information. Expert systems typically depend on complex software and large data bases; thus,

advances in hardware as well as software maybe needed if they

are to be widely implemented.

$100 million over roughly the same period.**

A parallel microelectronics project—which

goes by names such as “R&D on New Function Elements’’—has a budget of about $150

million and is scheduled to run from 1980 to

1990, Money will go to three major development efforts:45

Three-dimensional circuit elements—

which can be visualized as more-or-less

conventional ICs stacked atop one

another, increasing the density.

High electro n mobility transistor s

(HEMTs), one variety of which consists of

very thin layers of semiconducting materials such as gallium arsenide or gallium

aluminum arsenide; HEMTs offer potentially higher switching speeds, hence faster

computers.

Radiation-hardened devices suitable for

use in extreme environments such as nuclear powerplants or outer space (resistance to heat and vibration is a related objective).

The first two especially will support both

supercomputer and fifth-generation projects.

Among related government-sponsored programs, another of major significance for the

corporate strategies of Japan’s computer manufacturers has aimed at the development of

software and peripheral devices with Japanese

language input-output capability. Scheduled

over the period 1979-83, nearly $200 million

was allocated to this effort. 46

As in microelectronics, R&D is but one of

many ways in which Japan’s Government assists the computer industry. The Japan Development Bank loans money to the Japan Electronic Computer Corp. (JECC), a jointly held

firm which purchases computers from participating manufacturers and leases them to

* * Planning for the fifth-generation program began several

years earlier, as outlined in ch. 10. A variety of funding levels

for both projects have been reported; spending plans and schedules will no doubt shift as they progress.

46’’FY82 Government Projects in Electronics Listed, ” }apan

Report, Joint Publications Research Service JPRS L/10676, July

22, 1982, p, 55.

~Computer White Paper: 1981 Edition, op. cit., pp. 4ff.
Ch. 5– Competitiveness in the International Electronics Industry 209 — .— -—

Photo credit IBM Corp

Memory cells in experimental Josephson

junction integrated circuit chip

users. Manufacturers can set up tax-free reserves to offset losses incurred when lease contracts with JECC are canceled and equipment

must be repurchased. Since 1979, tax-free reserves have been permitted for up to half the

income associated with some categories of software. Purchasers of certain types of computers

can write off 13 percent of their value, beyond

normal depreciation, in the first year. The government has also established special depreciation schedules for high-performance remote

data processing equipment.

A panopoly of support measures—of which

many more examples could be cited—has thus

been designed to help Japanese companies

achieve technological superiority and commercial success in the 1990’s. At first glance, the

sums of money involved may seem large; in

fact, when viewed in the context of the world

computer industry, they are modest; as chapter

10 stresses, it is the consistent support provided

by many individual measures acting in concert

that gives Japanese industrial policy its impact.

To place the expenditures of the Japanese

Government in perspective, table 46 lists R&D

spending by a number of [J. S.-based computer

firms. On an annualized basis, subsidies provided by Japan’s Government for R&D in information processing come to less than the expenditures of any one of these American companies. (Total subsidies for the information in-

. —.—

Table 46.— Research and Development Expenditures

by Several U.S. Computer Manufacturers, 1981

Burroughs . . ... . . ...

Control Data Corp. ., ... ... ...

Digital Equipment Corp.. ., ...

Hewlett-Packard . . . .

Honeywell . ... ... .

IBM ., ... . . . . . . . . . . ... . .

SOURCES Annual reports

R&D spending

(millions of dollars)

$220

202

251

347

369

1,600

dustries in Japan—including indirect support

through tax preferences—could only be estimated by making a large number of essentially 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,

while Hitachi and NEC spent $610 million and

$230 million, respectively .47 The government

money does have an important function: helping with the kinds of long-term R&D that individual companies might otherwise have difficulty in justifying. In addition, MITI-sponsored projects—though not cooperative in the

usual sense-attempt to stimulate creative

thinking, technology interchange, and the complex of synergies so vital to engineering research. The Japanese electronics industry probably benefits more from these factors—which

tend to be lacking within the laboratories of individual corporations-than a strict comparison of funding levels would suggest.

Of course, other governments also provide

assistance to their computer industries, not excluding the United States. European nations

routinely channel direct financial aid to local

companies, along with indirect subsidies

through procurement and tax benefits. Handsome incentives designed to attract investments and technology have been dangled

before the European subsidiaries of U.S. and

Japanese companies. In the United States,

funding by the Department of Defense through

the Very High-Speed Integrated Circuit program and this country’s own supercomputer

project—still in the planning stages—will have

47An n ual reports
210 ● International Competitiveness in Electronics

commercial spillovers. The lesson is that no industrialized nation has been content to accept

a secondary position in technologies and markets considered essential to future economic

development. The concern is that the Japanese

may be more successful in implementing their

policies than other countries.

Marketing Strategies and

Multinational Operations

Individual computer manufacturers in Japan

have begun to formulate product strategies

based on technologies expected to flow from

government-supported R&D projects, as well

as their internal activities. Marketing computers presents special difficulties because the

chief competitors are already well entrenched;

only in peripheral equipment such as terminals, printers, and disk drives have Japanese

manufacturers made a significant impact outside their home market. In Europe and the

United States, where nearly two-thirds of the

world’s computer systems have been installed,

Japanese companies are inconsequential as independent suppliers.

In an industry where sales depend on a thorough grasp of user needs at a technical level—

software as well as hardware—late entry is a

major handicap. American suppliers-including newer participants like DEC and HewlettPackard—have built networks of sales and service centers staffed by engineers and technicians who now have longstanding ties with

customers; IBM has such a network within Japan, Even those Japanese firms with strong international positions in microelectronics or

telecommunications cannot match the distribution systems of U.S. computer manufacturers.

To make much progress, Japanese entrants will

have to invest substantial sums over many

years without the expectation of immediate

returns. The history of fields like consumer

electronics indicates that at least some Japanese companies will be willing to make this

commitment.

Perhaps surprisingly, given the global perspectives of consumer-oriented firms like Matsushita, the Japanese computer industry as a

whole suffers from a pronounced lack of international business experience compared to

American firms of even quite modest size,

Until recently, most (but not all) Japanese companies have preferred to manufacture at home

for export; this could prove a major weakness

in computers. While a few Japanese electronics

companies—Toshiba is another—have expanded aggressively via overseas investment,

most of Japan’s past international successes

have come in products where integrated manufacturing and marketing in foreign countries

has not been essential. The examples include

steel, automobiles, and semiconductors; consumer electronics is only a partial exception.

In each of these cases, Japanese companies, at

least in the beginning, concentrated on export

sales. Generally able to take advantage of established distribution systems, they invested

overseas only when import restrictions compelled local manufacturing. The competitive

pressures that led U.S. semiconductor or computer firms to invest in Europe and elsewhere

have only recently begun to impinge on the

Japanese. By now, American computer firms

not only operate wholly owned sales and service networks in many parts of the world, they

have established internationally dispersed and

integrated manufacturing operations—partly in

response to governmental demands and partly due to the nature of the market. Japanese

firms, on the other hand, have been largely unwilling or unable to make the enormous investments required to participate in the world

marketplace for computers.

Managers of Japanese firms, along with bureaucrats within the government, recognize

their lack of background and experience, and

are seeking remedies. The international (as opposed to R&D) strategy appears to be an incremental one, geared to minimizing the resources at risk and taking advantage of existing

strengths. As part of this strategy, Japanese

electronics firms, with the encouragement of

MITI, are beginning to establish manufacturing plants in other industrialized countries,

Following investments by Japanese consumer

electronics suppliers in the United States and

elsewhere, tentative steps have been taken in

semiconductors, a market in which the Japanese have already become well entrenched
Ch. 5–Competitiveness in the international Electronics Industry 211

through exports. These same semiconductor

manufacturers are of course the major computer firms. Experience gained from investments in semiconductor production will help

in structuring multinational computer operations.

As a parallel step, Japanese manufacturers

have established marketing links with a number of foreign firms, Fujitsu now furnishes

Siemens [West Germany) and IGL (Britain) with

large mainframes, while Hitachi has similar arrangements with BASF (West Germany) and

Olivetti (Italy). Fujitsu has taken a minority interest in SECOINSA of Spain, while agreeing

to a technology transfer tie with a company

partially owned by the Brazilian Government.

In the United States, Fujitsu holds a minority

interest in Amdahl, the PCM pioneer to which

it exports large machines; for several years, Fujitsu distributed its smaller systems within the

United States through a joint venture with

TRW. National Advanced Systems, a subsidiary o f National Semiconductor, sells Hitachi

c o m put ers here.

Such arrangements build from the fact of

Japanese parity in hardware for large computers, parity which does not extend to software; both Fujitsu’s and Hitachi’s systems are

IBM-compatible. European firms have been

unable to attain the economies of scale that

Japanese manufacturers get in their home market, and have chosen to compete with American producers by importing from Japan, From

the collective viewpoint of Japanese firms,

these ventures—even where the equipment is

labeled with some other brand name—increase

market exposure and add to production scale.

For some time, such relationships will continue

to be essential elements in the marketing strategies of at least several of Japan’s computer

manufacturers, Even so, they link companies

none of which has more than a minor share

of the global computer market. Siemens, ICL,

and the other partners of Japanese firms together do not account for even 5 percent of

world computer sales. With the possible exception of ICL, none has a scale of operation and

distribution approaching that of the competing

local subsidiary of IBM. None is strong in

minicomputers or small systems. Moreover,

the Japanese participants remain a critical step

removed from the customers whose applications their equipment is intended to serve—

joint ventures will provide limited help at best

in remedying past weaknesses of Japanese

firms in software or customer support and

service. To become viable international competitors, Japan’s computer companies will need

to accumulate experience in dealing directly

with the requirements of customers in markets

where they hope to sell.

Computer manufacturers in Japan do not

share these problems in equal measure; the industry is far from monolithic. Fujitsu, at the

moment in a clear leadership position (ch. 4),

has, along with Hitachi, chosen to stake its international position on supplying IBM-compatible equipment--decisions that will limit

both companies’ options for many years to

come. NEC has taken a different route, developing its own system software (although derivative of U.S. technology). Nor has NEC yet

entered into marketing arrangements with foreign concerns. Instead, the company's management appears to be shaping a strategy intended

to take advantage of the overlap and merger

of computer and communications technologies, areas where the company is already prominent. Despite its relatively small size compared

to other Japanese electronics firms, much less

IBM or AT&T, Nippon Electric’s managers are

attempting to position their organization for

what they see as an eventual competitive struggle with these two American giants for dominance of the international information industry,

At several points above, the entry barriers

created by the well-established sales and service networks of American firms have been described. This aspect of the market for computers effectively turns one of the supposed advantages of the Japanese system on its head.

Barriers erected by government to keep out

foreign firms have given Japan’s manufacturers

advantages in a number of industries, partly

through scale economies. Closed markets created by import restrictions and foreign investment controls have been reinforced by com-
212 . International Competitiveness in Electronics

plex distribution structures and a deeply ingrained “Buy Japanese” attitude. In computers,

however, the longstanding customer ties maintained by U.S. firms combine with technological strengths to create formidable entry barriers

for Japanese companies—indeed, new entrants

from any part of the world. Windows do open

because of technological advance; through

these windows newcomers have moved into

markets for microcomputers, small business

systems, and other specialized products. Thus

far, most of these entrants have been American

firms—in part because the U.S. market is so

large, but also because American companies

control the distribution apparatus in most parts

of the world. The going will be difficult for

Japanese manufacturers, although they are beginning to find niche products—desktop computers may be one—suited to their strengths.

In medium and large systems, Japanese companies can choose from a number of alternative

(or complementary) courses of action. One is

to continue to build joint relationships with

foreign enterprises. As noted above, such a

strategy will require, first, deeper involvements

with end users by the Japanese participants,

and, second, movement into markets in more

parts of the world. If firms such as Burroughs,

Control Data, or Honeywell were to be enticed—each has a relatively small but wellestablished market share—the prospects for

Japanese firms would look a good deal better.

The constant pressure of trying to achieve costs

comparable to IBM’s could well force one or

more American companies to accept such ties.

As an adjunct to joint marketing ventures,

Japanese manufacturers will probably seek

other ways of incrementally expanding sales,

while awaiting the fruits of the fifth-generation

computer project. If Japan succeeds in pioneering a new generation of hardware and software, companies with multinational production and marketing experience will be able to

exploit the new technologies most effectively.

In this context, present efforts would not be

so important in themselves; rather they would

be preparatory steps for rapid growth in the

1990’s. Another path, one that some firms will

certainly pursue, is to concentrate on selling

smaller systems and personal machines. Here

the now-traditional Japanese entry strategy is

feasible because distribution networks are open

to all comers, Thus far, attempts to challenge

American companies like Apple or Tandy in

personal computers, or the many U.S. entrants

in the market for small business systems, have

not been notably successful—in the United

States or elsewhere. Still, if and when such

products become more nearly standardized

and interchangeable, Japanese companies

could expect an easier time, But even if companies based in Japan were to expand into

these markets, it is not at all obvious that this

would help them in other types of systems.

Japanese producers of computers are thus

taking what seem the only paths available in

their attempts to break into the world market:

independent technology development coupled

with joint marketing relationships. That the

marketing ties involve firms that are themselves weak and in need of partners is hardly

surprising, but makes the establishment of a

viable international presence that much more

difficult. At this point, the Japanese have had

only marginal impacts on global markets; at

home, IBM-Japan remains a formidable competitor. Whether or not technical developments

in microelectronics and software will thrust

Japan into a position nearer the forefront remains to be seen. If Japan’s computer manufacturers do begin to increase their market shares

significantly, the most likely victims will be

smaller competitors—first in Europe, then perhaps in the United States.

Summary and Conclusions

While international competitiveness—in any

industry—depends on many factors, the business strategies pursued by private corporations

are central. Costs of labor and capital, technological resources, government policies, human

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 management decisions, as features of the landscape

for business tactics and strategies.

While a useful perspective, the strategic view

of competitiveness is nonetheless an imperfect

substitute for more quantitative indicators. Unfortunately, the swiftness of technical change

in electronics precludes useful quantitative

measures. Productivity trends mean little

where the standard products of today—whether semiconductors or mainframe computers--

have capabilities that may be orders of magnitude beyond those of a decade past. Comparative manufacturing costs carry weight in some

cases, but not where one company can build

products exceeding the reach of competitors.

Little meaning attaches to patent statistics as

surrogates for technical ability when incentives

for acquiring patents vary widely among countries and nowhere correlate very closely with

qualitative aspects of technology.

If shifts in international competitiveness cannot be extracted from statistical series, careful

examination of business activities can yield insights into future prospects as well as past

trends. In semiconductors and computers, not

to mention consumer electronics, American

firms--once undisputed leaders in technology,

as in sales in their home markets and virtually

around the world-face much stronger competitive pressures. Foreign enterprises, mostly

Japanese but also entrants with headquarters

in other Far Eastern countries, are selling

larger volumes of electronics products within

the United States; American corporations are

having a more difficult time in foreign markets,

The sources of these shifts are many, By-andlarge, they are not due to mistakes or faulty

strategies by American firms or by the U.S.

Government. First and foremost, rising foreign

competition flows from continued rebuilding

of the electronics industries of Europe and

Japan in the aftermath of World War II. It is

not a new phenomenon. By the mid-1950’s,

when much of the basic reconstruction of overseas economies was complete, companies in

Japan and much of Europe found themselves

still well behind the United States in their ability to design, develop, and produce electronics

products. But they were in a good position to

catch up. The first signs of success came early,

when Japanese manufacturers like Sony created new families of transistor radios smaller

and lighter than those offered by American

firms. The transistor was invented in the

United States, the first transistor radios also

made here, but Japanese firms pushed their

product development efforts vigorously and

outstripped their U.S. rivals within a few years.

Now that Japan is in the lead with new generations of consumer products it will be difficult

for American or European manufacturers to

regain the lost ground.

In computers and semiconductors, Western

Europe came out of the war well ahead of

Japan. The Europeans had good fundamental

technology, but were stymied by small and

fragmented markets, as well as by managements that had neither the resources nor the

vision of their counterparts here. Subsidiaries

of U.S. corporations became the backbone of

the European computer industry---they still

are—and took the lead in microelectronics. In

the Japanese market, American firms could not

match their accomplishments i n Europe because of the protective policies of Japan Government. Still, if not dominant, the United

States was—and remains—a major force in Japanese computer sales, particularly for large

machines, as well as in some types of semiconductor devices. Continued efforts by American

firms--backed if necessary by the U.S. Government--to participate on equitable terms within

Japan, whether by exporting or by direct invest-

. ment, appear vital for maintaining U.S. competitiveness in electronics. The Japanese electronics market is large and still expanding

rapidly; it is now more important than Europe.

Japanese industrial policy has been a more

significant source of support in semiconductors and computers than in consumer electronics. The MITI-sponsored VLSI research

program—while not as important as some

Americans have claimed--did help Japanese

firms master process technologies for very

large-scale digital ICs. In standard device

families like memory chips--where the path of

technological evolution is clear for all to see,
214 ● International Competitiveness in Electronics — —

and technological success a function more of

painstaking development and detail design

than highly creative engineering—the Japanese

have excelled. While they cannot as yet match

the breadth of American product lines, they

will certainly continue to improve their capabilities in circuit design as well as processing.

If U.S. semiconductor manufacturers can expect intense competition, they too have their

advantages—a different set than those of Japanese firms. If American companies continue

to capitalize on these strengths—the best

trained engineers in the world, quick recognition and response to market needs, innovations

in circuit design, applications of computeraided techniques, specialized products pursued

with entrepreneurial zeal—the United States

should be able to maintain a leadership position. Still, American companies will not be able

to monopolize world sales as they did a decade

ago.

Competitive pressures, evolving technology,

and growing capital intensity—along with the

continuing expansion of captive production by

integrated firms—are changing the structure of

the U.S. semiconductor industry. New structures bring new strategies. Structure is changing in the computer industry as well, driven

by the technology of computing, itself depending heavily on microelectronics. As computing

power becomes ever cheaper, more and more

applications become cost effective. These attract new firms, designing and developing not

only peripherals and software, but specialized

processors—minicomputers, personal and

desktop units, business systems, While the

mainframe is hardly a dinosaur, a “computer”

can now be a great many things—many never

envisioned by the designers of the generalpurpose machines sold two decades ago by a

small number of companies such as Univac

and IBM. Computing power is now cheap and

widely dispersed, often invisible to users. As

distributed processing and data communications continue to spread, new firms will try to

establish themselves, entering through windows of technological or market opportunity.

Some of the older firms will find themselves

hard-pressed to keep up, even survive; their

managers will face hard choices in allocating

limited resources. Few companies—even including the largest, here or in Japan—will be

able to cover more than a small fraction of

product markets.

While no one can foretell competitive outcomes in the world computer industry, it is obvious for all to see that Japan has made a series

of explicit decisions—going back as far as the

1960’s and involving both government and industry–aimed at claiming a major share of

sales and applications. Based on past performance in other sectors of electronics, the probability of continued expansion by the major

Japanese computer manufacturers is high. Because the characteristics of the market for data

processing equipment differ from those for

semiconductors, the United States remains in

a stronger relative position. There is no reason

why the United States cannot continue to hold

an overall lead in both technology and sales.

As events in all three portions of the electronics industry demonstrate, competitive positions in global markets have shifted more-orless continually over time. Some firms in some

parts of the world rise, others decline. Of those

that decline, a few may eventually revive,

others disappear. No country can expect all its

industries to thrive in international competition; any nation that trades will be more competitive in some industries than others, the

leaders in competitiveness shifting over time.

That U.S. competitiveness has slackened in

consumer electronics does not imply that similar events will follow in other sectors. This

could happen, but there is no reason to expect

declines in microelectronics or computers paralleling those in color TV—particularly so long

as the technology continues its rapid evolution

and markets expand at high rates. These are

conditions under which American firms have

traditionally prospered. When the pace of

events slows, other sectors of the Nation’s

economy might begin to find themselves faring better than electronics in international

competition.
CHAPTER 6

Manufacturing: Quality,

Reliability, and Automation
Contents

Page

Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Quality and Reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Meanings and Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Organizing and Managing for Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

The Importance of Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

The Japanese Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224

Quality and Reliability of Integrated Circuits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

Quality and Reliability of Color TVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

Automation ● .....* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Fixed and Flexible Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

Automation in Electronics Manufacture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

Robotics ..,..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

Appendix 6A—Quality and Reliability Comparisons for Integrated Circuits . . . . 247

List of Tables

Table No. Page

47. Causes of Field Service Failures in Color TV Receivers . . . . . . . . . . . . . . . . . . . 223

48. Typical Costs of Detecting and Repairing Faulty Components in an

Electronic System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

49. Rankings by Repair Shops of TV Receivers for Quality and Reliability . . . . . . . 232

50. Reasons Given by Japanese Electronics Firms for Automating. . . . . . . . . . . . . . . 236

6A-1. Hewlett-Packard Data on 16K Random Access Memory Circuits. . . . . . . . . . . 248

6A-2. Quality Levels of Japanese and U.S. Random Access Memory Circuits . . . . . 249

6A-3.Reliability Levels of Japanese and U.S. Random Access Memory Circuits. . . 249

List of Figures

Figure No. Page

36. Data for MOS RAMs Showing Constant Failure Rates per Circuit as

Integration Levels Increase, Decreasing Failure Rates per Bit . . . . . . . . . . . . . . . 220

37. Reliability Improvement With Cumulative Production Experience

for a Microprocessor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

38. Typical Trends in Failures Attributed to Design and Production ....,, . . . . . . 223

39. Typical Failure History for Semiconductor Devices. . . . . . . . . . . . . . . . . . . . . . . . 227

40. Testing Sequence for Point-of-Sale Terminals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

41. Reliability Trend for Analog Integrated Circuits. . . . . . . . . . . . . . . . . . . . . . . . . . . 230

42. Automatic Installation of Integrated Circuits Onto Ceramic Substrate . . . . . . . . 237

43. Average Labor Hours for Assembly of 21-Inch Color TV Receivers . . . . . . . . . . 238

44. Two Approaches to the Design of Industrial Robots . . . . . . . . . . . . . . . . . . . . . . . 239

45. Manufacturing Costs for Robots, Hard Automation, and Human

46

47

48

49

Operators as a Function of Production Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

Cost Comparison for Human Operator and Robot Assuming One-for-One

Replacement and Two-Shift Operation in the Automobile Industry . . . . . . . . . . 241

Worldwide Annual Sales of Robots, Past and Projected . . . . . . . . . . . . . . . . . . . . 242

Robot Sales in Japan by Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Estimated Numbers of Robots in Use, 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
CHAPTER 6

Manufacturing: Quality,

Reliability, and Automation

Overview

Assuming comparable products–and a lack

of subsidies or other strong exogenous influences—costs are a primary determinant of international competitiveness, in electronics as

in any industry, Comparable products may not

be identical, and small differences in performance or specifications can override small differences in costs in the eyes of customers. But

even for military systems, manufacturing costs

—which depend on both the design of the product and the design of the production system—

are almost always a major consideration.

In electronics, costs are much more critical

to the successful marketing of some types of

products than others. Intense price competition in consumer electronics—televisions, video cassette recorders, stereo equipment—

makes low manufacturing costs a vital competitive weapon. Much the same is true for

standardized semiconductor products ranging

from discrete transistors to random access

memory chips; price cutting is the rule, costs

highly sensitive to the yields of the production

process (ch. 3). For other types of semiconductor devices, low manufacturing costs and low

prices are less vital; if only a single firm makes

a particular integrated circuit (IC)—perhaps

one that meets unusual or demanding performance requirements such as a high-speed, high

resolution analog-digital converter—it will

probably set prices to maximize profits, given

the lack of competition. Leading-edge computer hardware and software falls in much the

same category. Even so, electronics firms are

seldom able to establish and maintain technological advantages so large that manufacturing

costs are of little relevance.

In addition to direct and indirect manufacturing costs, prices charged to purchasers

reflect expenses associated with research, design, and development, as well as marketing

and distribution. While accounting procedures

vary, such costs are generally treated as indirect expenses–-i.e., a percentage is added to

the direct manufacturing cost of each item produced, as for other overhead. Depreciation of

plant and equipment is handled the same way.

Direct manufacturing cost then consists

primarily of parts, materials, and labor, Research, design, and development costs are

much higher for products such as computers

or large-scale ICs than for consumer items

where technical change is slow and incremental, major redesigns infrequent. In the production of semiconductor devices and computers,

research and development tends to account for

a considerably greater percentage of costs; depreciation charges are also likely to be greater

because new production equipment must be

purchased as the technology advances.

But costs are not the only way in which manufacturing operations affect competitiveness.

Beyond production costs—which depend on

wage rates, prices of materials, supplies, and

components, capital charges, and related factors—lie dimensions such as the quality and the

reliability of the goods produced. While more

sophisticated purchasers are most interested

in the quantifiable dimensions of quality and

reliability, in markets for consumer products

perceptions—whether or not well founded—influence the decisions of prospective customers.

Along with other qualitative aspects, such as

appearance, purchasers base their assessments

of value for money on perceptions of quality

and reliability.

These attributes—both the reality and the perception—depend on factors such as engineering design, how the people in the work force

are trained, organized, and managed, and on

217

99-111 ~, - 83 - 15
218 /international Competitiveness in Electronics

— . . . — —

the capabilities, indeed the quality, of the

manufacturing equipment. Automation can improve quality by reducing the probability of

human error or simply improving the consistency of the production process. In other instances, there will be no effect. In some cases,

quality may be degraded; people are better at

some jobs than machines, and vice versa—human skills far exceed those of machines for

tasks involving pattern recognition, or where

judgments must be made based on partial or

imperfect information. Regardless of specifics,

the quality of a firm products will ultimately

depend on the stress top management places

on quality as a goal of the production process.

By the end of the 1970’s, issues of product

quality were in the public eye for industries as

disparate as nuclear power, automobiles, and

semiconductors. Perceptions were widespread

that the quality of American goods had declined compared to those from foreign countries. 1 Some observers speculated that American firms and American labor had slipped,

others that consumers had become more demanding and were no longer satisfied by quality standards that had once been acceptable in

the U.S. market. Either way, a “quality gap”

with respect to imports, extending even to commodity items such as steel, has frequently been

advanced as a contributing factor in the declining international competitiveness of American

firms and industries. To take an example from

electronics, the reputation of RCA’s color TVs

had slipped badly by the end of the 1960’s.2 Not

‘OTA’S contractor on quality and reliability notes that about

80 percent of the attendees at an April 1980 American Management Association seminar on ]apanese techniques for quality

control and productivity improvement felt that the products of

their own firms were surpassed by products from Japan. Those

surveyed were at the seminar to learn from the experience of

)apanest? companies-not a random sample. See J. Mihalasky

and A. B. Mundel, “Quality and Reliability y of Semiconductors

and CTVs: United States v. Japan, ” report No. C972, prepared

for OTA by Consultant Services Institute, Inc., under contract

No. 033-1170.0, p. 6.

zR, A. Joseph, “Automation Iielps RCA and Zenith Keep Co]orTV Leadership in Face of Import s,” Waif Street Journal, May

5, 1981, p. 5(i.

only did this hurt the company’s sales, RCA

also lost some of its dealer base. Automated

production was at the heart of the company’s

effort to improve the quality and reliability of

its TV line.

Despite the importance of direct costs of production for competitive success in electronics,

OTA has not attempted to estimate or compare

manufacturing costs. Companies guard cost

data closely, More important, the dynamics of

shifting cost structures, rather than costs at a

given point in time, are central to changing

competitive fortunes. To some extent these

dynamics can be inferred without the need for

proprietary data. This chapter then focuses on

aspects of manufacturing such as quality and

reliability, plus automated production technologies.

Product quality is treated primarily from a

hardware perspective: What are the relative

levels of quality in the United States and Japan?

(The comparison is limited to these two countries.) How do product design and the application of production engineering and quality assurance techniques affect quality? How do

products fail?3 Less tangible but equally important matters of the human element in manufacturing and quality control—including questions of management and organization, as well

as the education and training of the work force

—are also discussed in chapter 8.

————

sMuch of the material on quality and reliability assembled below is drawn from “Quality and Reliability of Semiconductors

and CTVS: United States v. Japan, ” op. cit. This report is based

in part on a series of questionnaires and surveys—20(1 covering

both manufacturers and purchasers of ICS, 60 covering

independent TV service shops—plus 42 visits to facilities of U.S.

and Japanese firms that make ICS or semiconductor manufacturing equipment.

While comparisons between products of American and Japanese firms were of primary interest, some of those surveyed also

commented on the West European electronics industry. In general, the feeling was that European firms had been behind both

American and Japanese manufacturers in the quality and reliability of their ICS and TV receivers. While European producers

may recently have caught up to the United States in the quality

and reliability of certain types of semiconductor devices, overall

they probably still lag both the United States and Japan.
Ch. 6—Manufacturing: Quality, Reliability, and Automation ● 219

Quality and Reliability

Meanings and Measurement

Quality, meaning fitness for function–the extent to which a product meets the specifications of its designers and manufacturers, the

expectations of users—can be treated subjectively or objectively, Consumers typically make

subjective judgments concerning the quality of

competing products. Manufacturers attempt to

define quality in terms of parameters that can

be measured quantitatively–e.g., the ability of

a TV set to receive weak signals. In addition,

they may adopt rating scales which trained inspectors apply to characteristics that are not

inherently quantitative. Often the indices are

based on comparisons with samples or standards; an example would be the appearance of

the cabinet for a TV set—whether the trim fit

properly and colors matched, whether the

panels were free of waviness, the number of

visible flaws and blemishes.

Through measures like these, manufacturers

try to satisfy consumers’ perceptions of quality as well as ensure that their products function properly—all at a reasonable cost, For

products like ICs or computers, the quality image that a firm establishes is likely to be more

nearly consistent with quantitative measures

than for consumer goods; indeed, some electronic components are sold to specifications

Photo cred~t Be// L aboratorles

Probes for testing Integrated circuit chips

written by the purchaser. Nevertheless, the

perceptions and subjective judgments of customers sell many computers, and ICs are inspected to be sure that logotypes and part

numbers are properly printed and convey the

desired image.

Reliability is a measure of continuing fitness

for function once a product is placed in service. While quality is determined at a single

point in time—generally the end of the manufacturing process or the beginning of service

life—reliability is measured over time, as a

failure rate or similar parameter.

The most common indicators of reliability

are mean time to failure or mean time between

failures–the interval between disabling failures averaged over a large number of items,

usually in terms of actual hours of operation,

Failures that average one per million hours can

be expressed as a mean time between failures

of 106 hours or as a failure rate of 10-~ per

hour. The graphical presentation in figure 36

shows the number of ICs (from a much larger

group) expected to fail in 109 (1 billion] hours

of operation. A billion hours is 114 centuries;

such plots are constructed from short-term data

using statistical techniques. A failure rate of

one per billion hours means that the expected

or most likely lifetime for a single item chosen

at random is 109 hours.

Definitions of reliability based only on failures that prevent the product from functioning are straightforward, Measurement can

nonetheless be time-consuming, as well as presenting difficult statistical problems. Still, a

light bulb works until it burns out—testing a

large enough sample of nominally identical

bulbs will yield a statistically valid mean time

to failure. Partial failure, or gradual degradation in performance, is more difficult to quantify. A lo-year-old TV set may still function, but

not as well as when new; there are no simple

measures of “reliability” that apply to such

phenomena.
220 . International Competitiveness in Electronics

Figure 36.—Data for MOS RAMs Showing Constant

‘Failure Rates per Circuit as Integration Levels

Increase, Decreasing Failure Rates per Bit

. Failure rates per circuit

●

●

●

.

1970 1972 1975 1977

(256) (1K) (4K) (16K)

Year

(bits)

SOURCE T. Goto and N. Manabe, “How JaDanese Manufacturers Achieve

High IC Rellablllty,” E/ecfron/cs, Mar 13, 1980, p. 140

The reliability of computer software presents

another type of problem. Software does not

“fail” or “wear out” from physical causes as

does hardware—although the media that store

the software may suffer such failures. But software still needs continual maintenance; complex programs are altered and updated periodically—sometimes to correct errors that are

caught only after the software has been placed

in service, other times to improve performance,

The reliability of a piece of software then depends on the frequency of modifications required to correct programing errors that could

cause the system to malfunction.4 As a result,

“J. D. Musa, “The Measurement and Management of Software

Reliability,” Proceedings of the IEEE, vol. 68, 1980, p. 1131. More

generally, see R. Dunn and R. Unman, Quality Assurance for

Computer Software (New York: McGraw-Hill, 1982). New computer programs tend to have of the order of one mistake per hundred lines; some but not all of these will be found before the

program is placed in service—M, Lipow, “Number of Faults per

Line of Code,” ZEEE Transactions on Software Engineering, vol.

SE-8, July 1982, p. 437.

the reliability of an entire computer system

depends on both hardware reliability and software reliability—failures of the first type having physical causes (although ultimately depending on design and manufacturing practices), failures of the second type depending

wholly on the design of the software.

Exhaustive engineering efforts are directed

at ensuring the reliability of new and complex

systems of all types, particularly where failures

can be costly or dangerous—e.g., airplanes or

nuclear powerplants. To improve reliability,

designers apply techniques such as failure

mode analysis—estimating the probabilities of

different types of failures and attempting to

minimize the more serious. A common practice is to add redundancy to the system, providing functional alternatives so that the failure

of one part does not compromise the whole.

A wire rope has a great deal of redundancy because one strand, or many strands in a large

enough cable, can break without impairing the

strength significantly. A chain, in contrast, has

no redundancy. Complex computer systems

often include redundant processors and other

hardware components, as well as fault-tolerant

software that can reconfigure the system following hardware failures. In any type of system, degraded performance will normally be

preferable to sudden and total failure, For example, electronic control systems for automobile engines are designed so that component

failures–perhaps of a sensor or a memory chip

—will not cause the engine to suddenly stop

running. Instead, the engineers aim for “soft”

failure modes, or “limp-home” capability.

While quality and reliability are related, they

are by no means synonymous. Reliability depends more heavily on design engineering,

quality on control of the manufacturing process. In general, as experience in making a product accumulates, levels of quality and reliability

both increase. Note the similarity with yield increases for semiconductors, as discussed in

chapter 3. Figure 37 illustrates the reliability

improvement over time of the Motorola 6800

microprocessor, a popular 8-bit circuit that has

been in production since 1974.
Ch. 6—Manufacturing: Quality, Reliability, and Automation ● 221

Sou

Figure 37.—Reliability Improvement With

Cumulative Production Experience for a

Microprocessor (Motorola 6800)

10,000 r 1

1,000

100

10

1

1974 1975 1976 1977 1978 1979

Year

RCE D Queyssac, Projecting VSLI s Impact on Microprocessors, ’ /EEE

Spectrum May 1979 p 38

Statistical methods can be applied to quality and reliability problems during both the

design and manufacturing stages, but the specialized discipline of statistical quality control

is largely a tool of the production process. s As

an example, defects in ICs can be monitored

over time to give insight into the effects of processing variables. In contrast, reliability analysis

techniques are applied, not to process variables

but to tests conducted on finished products and

to field service experience. Steps taken to improve quality sometimes but not always improve reliability.

Organizing and Managing for Quality

Managing the interface between design engineering and manufacturing engineering presents a classic set of problems that affect production costs, as well as quality and reliability.

Designers specify the characteristics of products in great detail, while manufacturing engineers must determine how to make the product so that it will have those characteristics.

Sometimes the same people are involved in

both functions, but more commonly the responsibilities fall on different parts of an organization,

%ee, for example, J. M. Juran, F. M. Gryna, Jr., and R. S. Bingham, Jr, (eds,), Quality Control Handbook+ 3d ed. (New York:

McGraw-Hill, 1974), especially sees. 22-27,

Separation of responsibility for design, production, and quality control characterize manufacturing enterprises all over the world, but

perhaps more so in the United States than elsewhere (e. g., in Japan), One reason for the prevalence here appears to be the heritage of scientific management, an approach to job methods

and the organization of production originating

in the work of an American engineer, Frederick Taylor, during the early part of the century.6

Production engineering includes all the technical aspects of the manufacturing process:

plant layout, process design, work methods, selection of equipment, quality assurance. In

larger firms some of these functions may not

only fall in different departments, but be further subdivided. Still, regardless of organization charts that isolate the design, manufacturing, and quality functions from one another,

these activities are closely related functionally.7

Product design affects the choice of manufacturing technology. The equipment that a firm

has on hand, together with the costs of investing in new equipment, can severely constrain

the design of its products. Inspection and testing, quality and reliability, depend not only on

the choice of manufacturing technologies, but

on the overall control of the process. Application of statistical quality control techniques to

individual steps in manufacturing may be

straightforward, but overall integration and

control of a complex production process is

much more than the sum of control of the individual steps.

Although design and production are inherently interdependent, in some cases even simple communication is lost. Stories of design

and production supervisors who are not on

speaking terms—or the commonplace of the design group “tossing the drawings over the

‘See, in particular, Quality Control Handbook, op. cit., sec.

48 on “Quality Control and the National Culture, ” which points

out that the sharp divisions of responsibility typical of larger

organizations in the United States—e. g., separate departments

for quality control or inspection–create reservoirs of specialized

expertise, but at the same time may hinder the widespread application of this expertise, Scientific management is discussed

in more detail in ch. 8.

7

J. A. Alic, “Manufacturing Management: Effects on Productivity and Quality, ” Efficiency of Manufacturing Systems (New

York: Plenum Publishing Corp., 1983), p. 281.
222 ● International Competitiveness in Electronics

—

wall” to the manufacturing department—are

rife. There is at least anecdotal evidence that

foreign firms may handle, not only the problems of training design and manufacturing personnel, but of managing the interface between

design and production, better than many

American companies. One approach is to make

the same individuals or groups responsible for

both design and production, or at least extend

management responsibility for integrating design and manufacturing farther down into the

organizational structure.8 In Japan, for example, companies often rotate design engineers

through production departments early in their

careers .

9 Not only do Japanese electronics

firms tend to stress integration of product and

process design within their organizations, but

they frequently involve vendors, distributors,

and customers in the work of their manufacturing engineers.

While some American firms have grappled

with such problems more successfully than

others, companies here begin with a fundamental handicap: low prestige and low pay tend to

be associated with white-collar jobs in manufacturing relative to other categories of engineering or management; the best people are seldom attracted to such jobs. Manufacturing carries higher status in European or Japanese corporations. And, on the manufacturing side of

an American firm, quality control tends to be

at the bottom of the pecking order. Too often

it seems that manufacturing managers see quality control only as an obstacle to production.

American management has been criticized

for overemphasizing the costs of quality,

whereas some quality control professionals

argue that a comprehensive program for designing and building quality (and reliability)

into a product at all stages can save money.

Again, there seems to be a contrast with the

typical attitude in Japanese companies—disBR. E. Cole, “The Japanese Lesson in Quality, ” Technology

Review, July 1981, p. 29. See also “Sources of Japan’s International Competitiveness in the Consumer Electronics Industry:

An Examination of Selected Issues, ” report prepared for OTA

by Developing World Industry and Technology, Inc., under contract No. o33-101o.o, pp. 103-104.

‘J. M. Juran, “Japanese and Western Quality–A Contrast,”

Quality Progress, December 1978, p. 10.

cussed in more detail below—where prevention

of defects is emphasized more strongly than detection through inspection.

One reason for the low status of manufacturing in the United States is simply the low priority that industry places on it, as indicated by

low pay scales in manufacturing relative to

other parts of the firm; engineers employed in

manufacturing and quality control get salaries

near the bottom of the range for their age and

experience groups at all points during their

careers; engineers doing administrative work

earn 50 percent more than those involved in

production. 10

Another indication of lack of attention to

manufacturing is that only 4 percent of graduates of engineering technology programs in

the United States specialize in the “manufacturing, quality control, industrial” category .11

Engineering technology is a relatively new field

intended to provide practically oriented training meeting the needs of industry (see ch. 8 for

further discussion of technology education),

thus it is particularly surprising that such a

small fraction of graduates are oriented toward

careers in manufacturing. In engineering programs, so few U.S. graduates receive degrees

in manufacturing that they are not separately

tabulated. Although students who have studied

mechanical or industrial engineering often find

manufacturing jobs, many programs in these

fields have dropped the once common required

courses in such topics as manufacturing processes and plant layout,

The Importance of Design

Figure 38 contrasts schematically the effects

of design and manufacturing on reliability. Reliability tends to improve with production experience, but failures stemming from design

weaknesses sometimes show up only after long

periods in service, hence may even increase

over time. Such behavior is typical of many

1°R, Connolly, “Career Outlook,” Electronics, June 16, 1981,

p. 266.

‘1P. J. Sheridan, “Engineering and Technology Degrees, 1982,”

Engineering Education, April 1983, p. 715. The percentage is

the total for associate and bachelor levels.
Ch. 6—Manufacturing: Quality, Reliability, and Automation 223 —.———

Figure 38.— Typical Trends in Failures Attributed

to Design and Production

to manufacturing

Time from product introduction

SOURCE C?ua//ty and Fle//ab///fy of Semiconductors and CTVS L/n/ted Sfates v

Japan report No C972, prepared for OTA by Consultant Services In.

stltute Inc under contract No 033.11700 p 18

types of manufactured products, not just electronics.

Table 47 indicates the extent to which the reliability of color TVs depends on design as

compared to production. According to the

table, a greater percentage of service failures

have their sources in the design and development process than in assembly. One of the reasons that Japanese TVs achieved better reliability than American-made sets during the

1970’s appears to have been more conservative

design practice. For example, Japanese sets

were designed to draw less power. Picture

tubes operated at lower voltages, with some

sacrifice to picture quality but lower internal

temperatures and less stress on components.

In some contrast, the vice president for engineering of an American TV manufacturer, now

taken over by a Japanese firm, has been quoted

Table 47.—Causes of Field Service Failures in

Color TV Receivers

Percentage of

Attribution field failures

Design (and development) ... ., . 20-400/ o

Quality of components . . . . . . . . . . . . . . . . . 40-65 0/0

Final assembly ., . . . . . . . . . . . 15-20 0/0

SOURCE: J M Juran Jap;nese and Western Qualfiy-A Contrast, ’’”-Qua/ /(y

Progress December 1978, p 10

as saying, “At Warwick, much of the design

work happened after the product was introduced. We relied on field failure information

to tell us where we had a problem.”12

According to the estimates in table 47, about

half the failures in TVs are due to defective

components. Some of these maybe purchased,

others manufactured internally—some components fail because they themselves suffer from

design problems. Many of the components in

a television receiver are transistors or ICs. As

illustrated by figure 36, failure rates per chip

tend to remain about the same as circuit density increases. If so, going to higher levels of

integration and increasing the number of circuit functions per chip will have two important consequences. First, it will cut assembly

costs because the total number of components

will decrease. Second, there will be fewer components to fail, hence reliability should improve. The cost and quality/reliability advantages of chassis designs based on fewer but

more complex ICs have led to rapid reductions

in the numbers of components in TV receivers,

In 1977, Zenith’s 25-inch color TV contained

685 components. Less than 2 years later, the

number had been reduced to 441. 13

As part of their strategic thrust into the U.S.

market, Japanese consumer electronics firms

set out to create an image of high-quality, reliable products (ch. 5). They needed trouble-free

products in reality as well as appearance in

order to exploit the distribution channels available to them. Reductions in parts counts were

one of the techniques adopted. Likewise, by the

end of the 1970’s Japanese semiconductor

products had attained enviable reputations for

1

2

’’ American Manufacturers St ri~(’ for QLIal It}-] a[)anesc

Style, ” Business Week Mar. 12, 1979, p. 32 II.

lqlbid, Over rough]y the same time period, the ] a [)a Il(!\(?-()\\r I~ed

Quasar firm reduced its parts count from 516 to ~()[;, while

Toshiba claims a 60-percent decrease in parts {:ol]nt I)etween

1971 and 1979. Other Japanese firms ha~e reporte{i similar reductions, typically coming earlier than for Amcri(:dn ‘I’\’ manufacturers. For example, the number of parts in a part i[ u la r I)a 11-

a sonic color TV mode] went from 1023 in 1972 to 488 in 197G–-

see “Quality and Reliability of SeIni[or](i[](t{ )rs and CT\’s: I-lnitwl

States v. Japan, ” op. cit., p. 47. Japanese T\’ manufacturers often

pursued simpler chassis designs in parallel with the development of automate(l production facilities, as discussed later in

the chapter,
224 ● International Competitiveness in Electronics

quality and reliability. But manufacturers in

Japan have not relied on design improvements

alone; employees of the large, integrated Japanese electronics companies tend to have considerably more training in quality control and

production technologies than their counterparts in the United States.

The Japanese Approach

Managements of Japanese electronics firms

profess to believe that improvements in quality and reliability will automatically cut costs

and increase productivity, as well as aiding

their marketing strategies, The rhetoric emanating from top managers in Japan emphasizes

quality to a greater extent than statements by

American executives. More concretely, Japanese manufacturing companies rely much

more heavily on line managers for quality assurance, rather than the staff specialists common in American firms.

Despite this and other organizational differences, most of the methods that Japanese manufacturers use in pursuit of quality and reliability have been borrowed from the United States,

just as for product technologies. Japanese industrialists have been noted for their study missions to visit foreign companies and research

laboratories. Engineers and managers from Japan have become skilled at picking out useful

ideas from such visits—whether related to

product technologies or to aspects of manufacturing such as quality control—and improving

on them. The theory and practice of quality assurance may have diverged more in the United

States than in Japan,

Origins of Quality Consciousness

Stress on quality and reliability within Japanese manufacturing firms goes back at least to

the period of postwar reconstruction. 14 Man -

agers realized that Japan’s exports were widely viewed as cheap and shoddy. Much of the

early effort toward improving Japanese products was orchestrated by the Union of Japanese

14’’ Quality and Reliability of Semiconductors and CTVs: United

States v. Japan,” op. cit., pp. 38-40. The historical material that

follows is drawn largely from this report.

Scientists and Engineers (JUSE), which helped

to locate foreign expertise in quality and reliability, and diffused this knowledge through

publications, training courses, and conferences. As many as 10 million workers may now

have passed through JUSE training courses. 15

During the 1950’s, well-known Americans

such as W. E. Deming and J. M. Juran traveled

and lectured extensively in Japan; Juran, in particular, is credited with much of the visibility

that quality control now enjoys at upper management levels in Japanese companies, In

many respects, the quality control movement

in Japan began at the top and spread downward—in considerable contrast to the situation

in the United States, where the principal advocates of quality assurance have often been

lower level technical specialists. The wellknown Deming Prizes–established in 1951,

and given to both companies and individuals

for achievements in quality control—illustrate

the prestige of such activities; they are among

the most coveted industrial awards in Japan.16

Japanese executives like Hajime Karatsu,

Managing Director of Matsushita Communication Industries, have been quality control advocates for years; the Reliability Center for

Electronic Components of Japan was formed

in the early 1970’s at the urging of industry

leaders, including Karatsu. Financed privately by more than 200 electronics firms, the center conducts tests on components and systems,

establishes procedures for determining reliability, drafts specifications, and diffuses information on quality improvement within the industry. 17

The Japanese emphasis on line responsibility has led to extensive training programs for

assembly workers and foremen. Efforts to

reach the latter have included radio and TV

I

s

’’ American Manufacturers Strive for Quality—Japanese

Style,” op. cit.

lnQua]j@ control Handbook op. cit., sec. 48, p. 48-9. on the

prominence of the Deming Prizes, see U. C. Lehner, “Japanese

Firms’ Stress on Quality Control Is Reflected in Dogged Vying

for Award, ” Wall Street Journal, Sept. 24, 1980, p. 52. There is

even a widely publicized “Quality Month” in Japan.

1

7

’’ Guide to REI, ” Reliability Center for Electronic Components.
Ch. 6—Manufacturing: Quality, Reliability, and Automation 225

broadcasts; about 100,000 of the accompanying textbooks were sold in the first year (1956)

of the radio series alone, A monthly magazine

Gemba-to-QC (QC for the Foreman), was established about the same time and evidently

served as a breeding ground for quality circles—a technique that has recently received a

great deal of attention in the United States (see

ch. 8). The first quality circle was registered

with JUSE in 1962; within 15 years, memberships in registered quality circles had grown

beyond 800,000. JUSE reports that about

100,000 circles are now in operation, with

about 80 percent of the nation’s blue-collar

work force involved.18 

Standards

In the United States, product standards tend

to be voluntary, but Japan’s Industrial Standardization Law, passed in 1949, places the responsibility with government. The law deals

explicitly with quality and provides that all

Japanese exports must carry the approval of the

Japanese Institute of Standards (JIS). 19 Consumers in Japan are also said to look for the

JIS mark. In 1957, the Japanese Government

took a further step aimed at upgrading the

quality image of the country’s products, passing the Export Inspection Law. This regulation

created an additional set of standards aimed

mostly at smaller companies, and also provided

for the establishment of testing laboratories.

Organizing for Quality

Despite the visibility of quality circles, they

are only one tool among the many that Japanese electronics firms have adopted, Because

training in quality is widespread, and responsibility for quality assurance diffused within

the organization, quality control departments

in Japanese firms tend to be small compared

‘a’$Quality=nd Reliability of Semiconductors and CTVS: United

States v. Japan, ” op. cit., p. 60. Circles also enroll clerical and

management personnel, It has been claimed that the average

quality circle in Japan saves an employer about $100,000 per

year.

IQ Ibid,, p. 66. A number of other Asian nations have followed

the Japanese example in trying to improve the quality image of

their exports. In Taiwan, a small tax is levied to cover the cost

of inspection; the tax drops as quality levels go up. See “American Manufacturers Strive for Quality—Japanese Style, ” op. cit.

to the United States. Companies in Japan have

often dispensed with some fraction of in-process inspectors, making each worker responsible for accepting or rejecting the parts passing

through his or her station. This is but one example of the diffusion of responsibility through

the organization. It is effective in part because—at least in the larger companies—employees are carefully selected even for unskilled, entry-level jobs. Transfers of blue-collar

employees within the firm are common—a

practice facilitated by unions organized on a

companywide rather than craft basis, and newly hired workers, or those transferred to an unfamiliar job, typically pass through training

programs that are lengthy compared to those

in the United States. At Matsushita, for instance, new assembly line workers are given

a month of training—with a week devoted to

quality control—before they begin to work on

the line.20 In the United States, new assembly

line workers would typically get a few minutes

informal instruction by a foreman, who would

then monitor their performance as they learned

by doing. Both approaches have their advantages.

An apparent paradox has developed in the

wake of the 30-year history of quality control

activities in Japan outlined above. Many of the

original techniques imported from the United

States were concerned with statistical quality

control—a subject in which Deming and Juran

were authorities, Yet there is little evidence that

the application of statistical techniques to quality or reliability has advanced any further in

Japan than elsewhere. In fact, applications of

statistics are seldom mentioned in descriptions

of the quality control procedures of Japanese

electronics firms, Rather, the Japanese appear

to have focused their efforts on making individual employees aware of—and committed to—

the achievement of quality. Statistical quality

control is no more than a small part of the

‘“’’ Quality and Reliability of Semiconductors and CTVs: Unite[i

States v. Japan, ” op. cit., p. 52. While three-quarters of the workers in Japanese electronics firms were classed as unskilled at

the end of the 1970’s, the proportion of skilled as compared to

unskilled employees is expected to rise rapidly as automation

proceeds. Presumably this is an important motivation for the

training programs found in many companies.
226 ● International Competitiveness in Electronics

quality programs of typical Japanese electronics manufacturers, which the companies themselves often refer to as “companywide quality

control. ” Intangibles and consciousness-raising

are at least as important.

Quality and Reliability of

Integrated Circuits

Manufacturing and Testing

Chapter 3 outlined the steps in making ICs.

Most of the larger American merchant firms

perform some but not all of these in domestic

plants, with labor-intensive operations carried

out offshore, A typical pattern might be as

follows:

Ž Operations performed in the United

States:

1.

2.

3.

Silicon crystals, generally purchased

from outside vendors, are sliced into

wafers and prepared for lithographic

processing,

Wafer fabrication processes such as lithographic patterning, oxidation, etching,

diffusion of dopants, metallization, and

annealing are carried out; some of these

may be highly automated.

Each of the hundreds of ICs (chips) on

a wafer is tested; those that fail are

marked, typically with an ink drop.

Ž Operations often performed in offshore facilities:

4.

5.

6.

7.

Individual circuits are separated from

the wafer, and the defective chips detected in step 3 discarded.

Each good chip is mounted on a substrate (chip carrier).

Lead wires are bonded to pads on the

chip (the lead wires connect to external

pins, which plug into sockets installed

on circuit boards).

The chip is encapsulated in a metal,

plastic, or ceramic package that provides mechanical and environmental

protection (metal and ceramic packages

are normally hermetically sealed). 21

ZIF~r a more ~omp]ete description of packaging and assembly,

see A. B. Glaser and C. E. Subak-Sharpe, Integrated Circuit Engineering: Design, Fabrication, and Applications (Reading,

Mass.: Addison-Wesley, 1977), ch. 10.

Test equipment

8. The packaged

tional tests.

Photo credit GenRad, /nc

for integrated circuits

ICs are subjected to funcOften the circuits are shipped back to the

United States for the final testing in step 8, particularly if destined for American rather than

third-country markets. (Economic aspects of

offshore assembly are outlined in app. B.)

Outcomes at all these stages in processing—

purity of the silicon crystal, wafer flatness, lithographic precision, integrity of wire bonds,

hermetic sealing—can affect quality and reliability. Some are more important than others;

patterning flaws and poor wire bonds are

among the most common causes of failures. 22

During the manufacturing process, inspection

zz~-or a discussion of fai]ure modes in semiconductor devices,

see E A. Doyle, Jr,, “How Parts Fail, ” IEEE Spectrum, October

1981, p. 36. An important technique, particularly for ensuring

reliability, is the analysis of failures. ICs that fail during testing

or in service can be examined by a variety of methods—e. g., direct observation in a scanning electron microscope—and the

causes of failure diagnosed. Corrective action, which might range

from a modified circuit design to simple adjustments in process

parameters such as temperature, can then be taken. A comprehensive treatment of reliability, emphasizing the importance of

the design of the circuit, is C. G, Peattie, et al., “Elements of

Semiconductor-Device Reliability,” Proceedings of the IEEE, vol.

62, 1974, p. 149.
Ch. 6—Manufacturing: Quality, Reliability, and Automation 227 —-

and testing are possible at some points but not

others; in the absence of good methods for direct testing following a particular processing

step, the engineers must rely on control of

process parameters based on downstream test

results.

Customer Requirements

Differing customer demands lead to a range

of standards for the quality and reliability of

semiconductor devices. Purchase agreements

often specify the testing procedures to be followed. Military circuits must meet especially

demanding specifications for resistance to

shock, vibration, and severe environments (including radiation); reliability is emphasized for

satellite applications. Limited-volume markets

for parts intended for military or space applications are often served by small firms specializing in ultrahigh-reliability components. While

semiconductors for commercial markets have

seldom faced specifications as demanding as

for military and space applications, the actual

functional requirements-particularly for longevity--may be at least as severe. For instance,

some computers operate virtually continuously

for years, albeit in a service environment that

is well controlled and benign; semiconductor

devices for automobiles must function reliably--also over many years—in an environment

characterized by vibration and extreme temperatures, as well as exposure to gasoline, oil

and grease, rain, road salt, and do-it-yourself

repair efforts.

Reliability estimation—e.g., by accelerated

life testing—is costly, thus life testing of devices

intended for consumer products is minimal,

Considerably more reliability testing is carried

out on parts destined for computers or communications systems. Because the service record of their products is critical for future sales,

and because the costs of locating and replacing faulty parts are high, particularly after the

system has gone into service, manufacturers

of complex electronic systems demand reliable

components. This is one of the reasons firms

like IBM or Western Electric chose to build

many of their own ICs. Regardless of application, however, the chip manufacturer seeks a

production process sufficiently well controlled

that testing becomes simply a verification of

that control.

Because of these varying customer demands,

the electronic components industry has, since

well before the semiconductor era, supplied

products to a range of quality and reliability

specifications; as many as half a dozen levels

developed from the initial distinction between

military and commercial parts. The lowest

level has been for inexpensive consumer products such as toys and games, the highest for

applications such as communications satellites,

Failure rates for the most reliable devices can

be more than a factor of a hundred below those

for the least reliable,

Failures in Semiconductors

The time history of failures for a large population of semiconductor devices-as for manufactured products of many kinds—will normally follow a pattern like that in figure 39.

Early in life, the failure rate tends to be high,

with most of the failures caused by random

manufacturing defects. The distinctions between quality and reliability y become rather arbitrary during these early stages, A strict quality standard, for example, might weed out parts

that would otherwise fail during the infant

Figure 39.—Typical Failure History

for Semiconductor Devices

r

Infant

mortality

Wear

L

out

Constant failures

failure rate

--- - ---- -

Time

SOURCE Off Ice of Technoloqv Assessment
228 ● International Competitiveness in Electronics

mortality period. “Burn-in” tests help detect

infant mortality failures; during burn-in, ICs

are cycled to high temperatures and exercised

by computerized testing equipment. 23

After the high failure rates early in life, failure frequency usually declines to a nominally

constant value—the middle portion of the curve

in figure 39. For semiconductor devices, this

period typically spans hundreds of thousands,

even millions of hours, during which the probability of failure is extremely low, Eventually,

the curve may turn up again as devices “wear

out” or otherwise deteriorate with age.

While semiconductor products do not wear

mechanically, they are susceptible to degradation from environmental exposure, thermal cycling, and a variety of physical processes. Common causes of long-term failures in ICs include: loss of hermetic seal, with consequent

damage from moisture or other environmental agents; thermal fatigue of the bond between

the chip and its substrate or of the lead wire

bonds; gradual thinning and cracking of metallized layers due to electromigration associated with high current densities (even though

the currents in ICs are low, the small conducting paths result in high values of current density). Failure probabilities associated with particular mechanisms can be reduced by conservative design at both device and system levels,

a common tactic in applications such as satellites or submarine cables,

Testing

Testing costs for ICs increase with levels of

integration. Although 100 percent testing is

common during the early steps in fabrication,

manufacturers normally screen their final output by random sampling; that is, only a small

fraction of the outgoing product is subjected

to a full battery of tests. Many customers do

their own screening of incoming parts. On the

other hand, a toy manufacturer may not test

incoming chips at all, cutting costs by relying

on returns and complaints from the field to locate problems. Such an approach is favored

ZgE]even percent of nearly 20,000 ICs tested for the 1977 Pioneer mission to Venus were rejected, many of these tests involving burn-in periods of 100 to 200 hours. The very high reject

rate reflects the severity of the application. See “Quality and Reliability of Semiconductors and CTVs: United States v, Japan, ”

op. cit., p. 14.

where other parts are less likely to fail than the

ICs.

Semiconductor products are normally

screened and purchased to an acceptable quality level (AQL), a procedure much less expensive than 100 percent testing. From the standpoint of the purchaser, the AQL is the permissible fraction of delivered parts that can be defective—i.e., that escape detection during inspection and screening. A 1 percent AQL

means that no more than one defective circuit

out of every 100 is allowed, on the average, in

an acceptable lot; statistical sampling methods

are tailored to this requirement.

Figure 40 outlines the testing program

adopted by a manufacturer of point-of-sale terminals for purchased ICs. Tests are conducted

at many points prior to shipment because

downstream failures cost much more to find

and fix, Costs are even higher for field failures—both the direct expenses of warranty

repairs and the possible costs in terms of damage to the firm’s reputation. Table 48 illustrates

the growth in costs of locating and repairing

faulty components at successively later stages.

The indirect and intangible costs can be much

greater than the direct expenses.

Testing and Screening in Japan

When first qualifying a new vendor, Japanese

purchasers normally test all incoming parts,

With satisfactory experience, statistical sampling replaces 100 percent testing. If the defect

fraction remains below 0.01 percent (100 d e -

fects per million parts) and downstream failures are rare, the purchaser may stop screening. Even when purchaser and supplier are

unrelated firms, customers prefer to depend on

their suppliers to guarantee quality levels. Japanese manufacturers do tend to rely rather extensively on in-process testing, aging, and burnin—in part to minimize infant mortality failures.

Such practices differ from the arms-length

relationships common in the United States.

Perhaps because the major Japanese manufacturers of semiconductors are also the major

users, they often appear to take the attitude that

the objective of quality control is to deliver
Ch. 6—Manufacturing: Quality, Reliability, and Automation ● 229

—— .- -—

Figure 40.—Testing Sequence for

Point-of-Sale Terminals

-—— -.

Table 48.—Typical Costs of Detecting and Repairing

Faulty Components in an Electronic System

Point of detection Direct cost Intangible cost

Device level . . . . . . . . . . Cost of device, if Minimized if more

not refunded by devices than needed

manufacturer. are purchased

initially.

Circuit board level ... .$5 Manufacturing process

dislocated,

System level . . . . . .. $50 Shipment may be

delayed, disrupted.

In the field. ., . . . . . . . . $500 Customer upset,

SOURCE “Calls Volume Key to Testing Decision,” Electronic News, Feb. 18,

1980, supplement p. 20.

Selective

100% Inspect Ion

Quality and Reliability Comparisons

Although respective quality levels of ICs

made in the United States and Japan have been

debated for several years, there is little concrete

data bearing directly on this matter. For a valid

comparison, circuits from U.S. and Japanese

firms should be tested under the following conditions:

i

In-circuit test 10000

100°/0 - ATE or

special test -

depending on

cost trade-off

The devices should be the same type and

of similar designee. g., 4K dynamic RAMs,

8080 microprocessors.

Test procedures should be identical, the

tests conducted at about the same time. (It

is not possible to compare quality or reliability at the present moment. Quality

comparisons always refer to some point

in the past. And, while the most recent results are always desirable, quality and reliability are dynamic characteristics; they

fluctuate with the vagaries of the manufacturing process,)

The ICs should be produced to the same

1.

2.

3.

100° 0

100%

I

100%

100%

purchase specifications in terms of AQL

or other quality requirements, ideally for

delivery to the same customer.

While it is no surprise that little of this kind

of data has been made public, the unfortunate

consequence was a series of public relation

ploys obscuring the technical questions: Were

there real differences in quality? If so, what

were the reasons?

By any measure, semiconductor quality and

reliability have improved immensely over the

years, regardless of whether the devices have

been produced in the United States, Japan, or

Europe. As an example, figure 41 shows de100%

aATE = Automatic Test Equtpment

SOURCE Adapted from R Flelshman, R J Lever and R N Parente, Tota l

Testing C/rcu//s Manufacturing, November 1979, p 32

parts that meet their own in-house standards,

A more common attitude in the United States

has been that parts need only meet the customer’s requirements; customers that demand

high quality may get it, others receive less

attention.
230 . International Competitiveness in Electronics

Figure 41.— Reliability Trend for

Analog Integrated Circuits

Cumulative units produced

SOURCE G Peattle, ‘Quality Control for ICS /EEE Spec(rurn, October 1981

D 93

creases in failure rates for analog (linear) ICs

as used in consumer electronic products. Other

types of ICs show similar trends. Nonetheless,

sources in the American electronics industry—

both manufacturers and purchasers of semiconductors—agree that, during the mid to late

1970’s, quality levels delivered by Japanese

firms were superior to those delivered by U.S.

firms. There is also broad agreement that quality levels delivered by American semiconductor firms have greatly improved since the publicity given the Japanese “quality advantage”

during 1980.24 The available data is summarized in appendix 6A. But at the same time that

U.S. semiconductor firms have made rapid

strides, Japanese manufacturers have also improved. While the gap has certainly narrowed,

Japanese firms on the average may remain

ahead in quality.

It is also important to recall that discussions

and data on IC quality have centered on products sold in the merchant market. No data have

24~uch of this publicity stemmed from a seminar entitled

“Quality Control: Japan’s Key to High Productivity,” organized

by the Electronic Industries Association of Japan and held in

Washington, D. C., on Mar. 25, 1980. Data first released at that

seminar appear in appendix table 6A-1, pt. A. A perspective common in much of the American merchant semiconductor industry

at that time can be found in T. D. H inkelman, “The Economics

of Quality: U.S. vs. Japan, ” An American Response to the Foreign

Industrial Challenge in High Technology Industries, Proceedings

of the Semiconductor Industry Association Government Policy

Conference, Monterey, Calif., June 18-19, 1980, M. Hodgson (cd.)

(Palo Alto, Calif.: Worden Fraser Publisher. 1980), p. 85.

been made public on quality levels attained by

captive producers such as Western Electric or

IBM. Captives account for about 40 percent of

all ICs made in the United States (ch. 4); the

quality and reliability attained by captive producers would, if available, be a useful indicator

of the relative technological capability of the

American industry.

The ranges in quality level included in appendix 6A, particularly table 6A-2, show a remarkable lack of consistency on the part of all

vendors, Even the top 16K RAM suppliers exhibited a factor of five difference between best

and worst lots. Much larger spreads were the

rule, particularly for the American firms. This

illustrates the danger in generalizing from limited samples of IC quality data. It also indicates

the importance of a consistent and well-controlled manufacturing process, and the difficulty of maintaining that control.

Spokesmen for the U.S. semiconductor industry have sometimes claimed that Japanese

firms create a false image of higher quality by

sorting ICs and sending only the best to important customers like Hewlett-Packard—a practice that has been termed “quality targeting”

or “quality dumping. ” The claim is further

made that this is a high-cost strategy, intended

to “buy” U.S. market share—and that after their

American competitors have been forced out,

the Japanese will raise their prices and ship

their normal product, which will be found to

be poorer in quality .25 Indeed, manufacturers

in many industries and in many countries

sometimes attempt such strategies. American

semiconductor firms will sort ICs and ship

higher quality lots to purchasers who demand

them. However, as a widespread and general

approach to marketing in the United States,

quality dumping by the Japanese seems implausible. In order to ship higher quality lots

to the United States, they would have to ship

lower quality products to other customers—in

either export or domestic markets—thus running the risk of jeopardizing those markets. It

is difficult to believe that Japanese IC manufacZ5T, D. Hillkelman, op. cit. See also “’I’he Quality Goes On

Before the (Japanese) Name Goes On, ” Rosen Electronics Letter, Mar. 31, 1980, p. 1.
Ch. 6—Manufacturing: Quality, Reliability, and Automation 231

— —

turers would do so in any concerted way, particularly at home.

It is clear from the data in appendix 6A that,

at least until the recent past, Japanese largescale ICs have had, on the average, both better quality and better reliability than comparable American parts. This does not mean that

some products from some U.S. companies were

not as good as or better than products from

Japan. As the tables in appendix 6A indicate,

the range in quality and reliability delivered by

any firm is likely to be wide; this is intrinsic

to the technology of semiconductor manufacturing, But as a generalization, the United

States had fallen behind in both quality and reliability, It is also clear that the performance

of American firms on these dimensions has

greatly improved—in part because of the competitive pressures generated by the publicity

given this issue. According to recent reports,

the quality levels of 16K RAMs supplied by a

number of American firms are now, on the

average, about the same as those of Japanese

devices .26

While this is a positive sign for the future,

it does appear that Japanese firms devote more

resources to analyzing field failures so as to

find and eliminate their causes. In Japan, electronics firms have normally maintained captive service organizations which gather and

analyze field service results, and feed them

back to design and manufacturing departments. One American purchaser of Japanese

semiconductor devices was reportedly quite

surprised to find a team of engineers dispatched to explore the reasons for a batch of

circuits with a defect rate of only 0.25 percent. 27

In the future, if American managers devote

as much attention—and as many resources—

to the quality and reliability of their products

as do the managers of Japanese firms, there is

no reason why U.S. firms should not keep pace

with, or surpass, their overseas rivals on these

dimensions of IC technology.

Quality and Reliability of Color TVs

That Japanese TV manufacturers have

achieved excellent quality and reliability, and

largely succeeded in their marketing strategies,

is self-evident. In order to bypass the franchised dealer networks that American manufacturers relied on, they had to forgo extensive

service organizations. Failure by Japanese importers to maintain both the image and the reality of a reliable, trouble-free product would

risk the largest market in the world. Most surveys continue to show the reliability of TVs

produced by Japanese firms to be better,

though differences in quality appear small.

Many of the TVs sold in the United States

by Japanese firms are now assembled here.

Quality levels achieved in the U.S. operations

of both Sony and Quasar—the firm that Matsushita bought from Motorola in 1974—have

received a good deal of publicity.28 Such plants

tend to combine features typical of Japanese

and American manufacturing operations; see

chapter 8 for a discussion of management

styles and their effects. At least as important,

TVs assembled in the United States by Japanese-owned firms contain large proportions of

imported components. Based on the findings

for semiconductor devices outlined in the previous section, imported components might be

expected to exhibit somewhat higher levels of

quality and/or reliability than similar parts

from American suppliers.

Most of the information bearing on quality

and reliability for TVs comes from sources like

Consumer Reports. Several years ago this pub-

,sOnjr, see ‘‘Statem f;nt of Sada[]11 ‘ ( ~ 1] ri \‘ \f’ ii (i :i, A ‘+\lst a 11 t

\~lce president, Sony Corp. of Ameri[ a.’ Qual)t] of [)rodu[:tlox]

and lrnprovenwn t in the L1’orkplacf’, hm ri IIR, SUIN ommittee on

“1’rade, Committee on Ways and hleans, 1 Iousc of Rcprc,>cn/,~-

tl~’f~s, Or’t. 14, 1980. 1). 62

At (.jl]as~r, (~ualit] Ieiwls impro~t’(1 rapidl} aftc~r the Mats(lshlt,i

pur(, baw, Il[)\\{:\(>r, the basel]n(’ is (Ie(:eptiie in that Motorola”

(i(:~ ( )tf?[l ft:\\’ r{~soli r( [’> to its “l’\’ 01)(’rdt I( )ns for i] nll mt)(!r ( )f }’1’a r~

prior to the salf’ TbIs cas~ is diw:usw] in rnnrf> detail in tb(’ a])-

p[’n(llk to (:11 8.
232 ● International Competitiveness in Electronics

—

lication surveyed nearly 200,000 owners of

19-inch color TVs, the most popular size, sold

during the period 1975-79. Nine of the fifteen

brands for which the origins are known–all

the Japanese makes but no others—were given

reliability ratings of “better than average”

based on the average cost of repairs during the

1979 calendar year. The remaining six brand

names—for practical purposes, all the American brands—were rated “average” (one brand)

or “worse than average” (five brands). 29 T h e

Consumer Reports survey reflects reliabilities

of sets sold during the period 1975-79 only.

However, TV designs do not change rapidly;

these trends should still be a reasonable indication of comparative reliability levels,

Similar but not identical reliability rankings

come from a survey conducted by Trendex in

the same year, 1979, but again covering TVs

manufactured over a period of years.30 Of the

12 brands included in this survey, TVs made

by Japanese-owned firms filled four of the top

five places in terms of reliability, The remaining Japanese brand ranked seventh, with the

bottom five positions filled by American firms

plus Magnavox.

Table 49 presents data from a survey of TV

repair shops that point in a direction rather different from the consumer surveys discussed

above. This table covers a smaller number of

brands: three American (Zenith, RCA, and Sylvania—the latter at that time U.S.-owned,

though since purchased by Philips); three Japanese (Sony, Quasar, and Panasonic—the latter

two are Matsushita brand names); plus Magnavox. The repair shops rated the American

brands generally superior on all three cri29’’19-Inch Color TVs, ” Consumer Reports, January 1981, p.

34. The nine brands in the “better than average” reliability

category included TVs sold by Sears, most of which are made

by Sanyo-some imported, some assembled in the United States.

Other private brand merchandisers–e. g., Montgomery Ward,

J. C. Penney–tend to purchase from both American and foreign

suppliers, Excluding both the Wards and Penney TVs because

of their uncertain origins, 15 brands remain. Of the 15, 5 are

American, 9 are Japanese, and the other—Magnavox—is owned

by Philips. As Magnavox is much more nearly independent of

its parent than the American subsidiaries of Japanese firms, it

has been considered a U.S. brand for purposes of this comparison.

30’’ Quality and Reliability of Semiconductors and CTVs: U.S.

v. Japan, ” op. cit., p. 78.

Table 49.— Rankings by Repair Shops of TV Receivers

for Quality and Reliability

Rankings in terms of picture quality and

other performance features:

1. Zenith

2. RCA

3. Sony

4. Sylvania

5. Quasar

6. Magnavox

7. Panasonic

Rankings in terms of reliability:

1. Zenith

2. Sony

3. RCA

4. Quasar

5. Sylvania

6. Panasonic

7. Magnavox

Rankings in terms of increasing costs of repair:

1. Zenith

2. RCA

3. Sylvania

4. Quasar

5. Magnavox

6. Sony

SOURCE “Quality and Reliability of Semiconductors and CTVs U.S. v. Japan, ”

report No, C972, prepared for OTA by Consultant Services Institute,

Inc , under contract No 033-1170.0, p. 79, The survey, conducted dur.

tng 1960, covered 60 repair shops in Chicago, Boston, and Northern

New Jersey.

teria—performance, reliability, and costs of

repair. In particular, the largest-selling U.S.

TVs—those made by Zenith and RCA—show up

very well, with Zenith top-ranked in each

category, In contrast, Zenith and RCA are rated

“worse than average” in reliability by Consumer Reports. Because the Consumer Reports survey covered such large sample sizes—more

than 40,000 owners of 19-inch Zenith sets, and

35,000 made by RCA—it must be given considerable weight. However, the data in table 49

are not restricted to any particular screen size,

and might be more representative of each manufacturer’s overall product line.

As is true for ICs, American manufacturers

of TVs have clearly made considerable strides

in improving quality and reliability—spurred

by competition among themselves as well as

with the Japanese, Consumer electronics firms

now screen and burn-in components more

thoroughly; they also burn-in complete circuit

boards and assembled sets to weed out early

failures. Automation has helped quality. Finally, American TV makers are using larger num-
Ch. ——-———- ———

bers of imported components—mostly from

Japan and other Asian countries. Imported

components often cost less, but in at least some

cases they have been chosen because of superior quality and/or reliability, Even picture

tubes—which are bulkier and more difficult to

ship than other components—are being imported in increasing numbers; one U.S. manufacturer stated that Japanese picture tubes had

one-third the in-process failure rate of American-made tubes .31

slZbld, p, ~O. Japanese-owned firms that assemble and sell TVs

in the United States still import many components, but are gradually increasing value added here. Mitsubishi—which produces

sets in the United States for sale under the MGA brand name—

imports about 30 percent of their parts from a subsidiary in

Singapore, and another 15 percent from Japan. Sony continues

to bring in from Japan about 35 percent of the parts for their

American-made sets. In general, the more critical components

and subassemblies from a performance and quality standpoint

are imported—e.g., circuit boards. Cabinets and nonelectronic

parts are the first to be purchased domestically. See Quality of

Production and Improvement in the Workplace, op. cit., p. 85.

6—Manufacturing: Quality, Reliability, and Automation ● 233

Consumer perceptions created by and reflected in surveys like those discussed above

can be extrapolated with some confidence into

at least the near future. Furthermore, because

TVs have a design life of 7 to 10 years, the

surveys discussed above should do a good job

of predicting the reliability of sets presently in

use. The weight of the evidence points toward

an advantage in reliability for Japanese TV

manufacturers during the 1970’s. Even if

American manufacturers today are producing

TVs as reliable as their Japanese competitors,

the image of reliability that the Japanese have

gained will persist for a number of years to

come, On the other hand, differences in quality among TVs appear to be small.32

———....—— 32 For example, “Sma]]-Screen Color TV’s, ” Consumer Reports,

January 1982, p. 17, where the distribution of brand ratings by

set performance and quality shows no systematic differences

among U ,S. and foreign brands.

Automation

Managers make decisions involving the automation of production processes largely on the

basis of costs. Automation typically involves

tradeoffs between labor cost and capital cost

that depend on production volumes; mechanized production facilities also tend to lack

flexibility, which raises the costs of adapting

them to new product designs. Factors less directly related to costs include the impacts of

automation on quality, and the possibility of

mechanizing unusually dangerous, dirty, or

onerous jobs.

Modern automated production systems usually rely on electronics, although electromechanical control systems were common until

recently. Examples of automated processing

include: 33

• automatic machine tools, ranging from

lathes and milling machines controlled by

Jqsee, in genera], M. P. Groover, A u toma tion, Production SYStems, and Computer-Aided Manufacturing (Englewood Cliffs,

N. J.: Prentice-Hall, 1980).

mechanical cams, to those that operate

under computer control, to machining

centers;

automated gaging, inspection, and testing;

examples include inspecting circuit boards

by means of video image processing to

check for solder runs or other visible defects, measuring the dimensions of machined parts, and determining the chemical composition of steel;

mechanized systems for materials handling, ranging from computer-controlled

conveyors to fully automated warehouses;

process control systems incorporating sensors and processors that implement control algorithms based on feedback, feedforward, or some combination (see ch. 3, app.

3C, on industrial process control);

use of computers in management or support functions such as scheduling of job

flows, inventory control, or statistical quality control; and

computer-aided design methods to aid in

geometric modeling, in engineering anal99-111 0 - 83 - 16
234 ● International Competitiveness in Electronics

.-

ysis, or in preparing design drawings or

equivalent design information coded for

automated production processes.

The earliest numerically controlled (NC) machine tools operated from instructions on a

paper tape or similar storage medium, analogous to the cams and other electromechanical

controls used for many years to automate manufacturing. The NC tape, however, could be

prepared with the aid of a computer, and easily duplicated or modified, In the next stage,

rather than following a sequence of instructions held in a read-only memory such as a

paper tape, direct numerically controlled

(DNC) and computer numerically controlled

(CNC) machines were developed. These respond in real time to commands from the processor of a computer. As a result, control algorithms based on gaging or sensing of machining parameters can, at least in principle, be implemented. In a DNC system, one computer

controls several machines; CNC machines

operate under the control of a dedicated processor, typically a small minicomputer or a microcomputer.

Sophisticated control systems use information from sensors for regulating the process,

typically by adjustments that keep measured

parameters within predetermined bounds. For

a machining operation, dimensions can be

measured; for a wafer fabrication line in a

semiconductor plant, possible control parameters include temperatures, pH of reagents, and

current flows during ion bombardment, In contrast to such “closed loop” systems, in which

information flows from the process back to the

controller, systems in which there is no sensing and transmission of information, but which

operate purely on preprogrammed instructions,

are called “open loop, ” A skilled machinist

closes the loop just as does an automatic control system on a CNC lathe equipped for automatic gaging. But in fact, most NC machines

still run on an open loop basis,

Electronic control systems make possible the

automation of many processes that in earlier

years were too difficult or too expensive to

mechanize. 34 In essence, the flexibility gained

through electronic controls makes automation

cost effective in applications where production

volumes are low. In the past, automation was

practical only in continuous process industries

such as food preparation and packaging, or in

high-volume batch production industries like

automobile manufacture. In the automobile industry, simple assembly operations, as well as

machining, have been carried out by transfer

lines linking a series of machines for many

years; human operators have worked along the

line performing tasks that were difficult or costly to mechanize.

Fixed and Flexible Automation

Automated production in either continuous

process or batch industries can be thought of

as spanning a range from “fixed” or “hard”

automation to “flexible” or “programmable”

automation, Fixed automation is exemplified

by an automatic lathe in which the “instructions” are encoded in the profiles of cams. To

set up the lathe for a different job, the cams

must be changed, Designing and machining a

new set of cams is a time-consuming job performed by skilled craftsmen, Conventional

transfer lines are examples of fixed automation

applied to a sequence of tasks, When an automobile manufacturer designs a new engine or

transmission, the entire transfer line might

have to be scrapped and replaced. Much the

same is true if an electronics firm using such

equipment wishes to introduce a new design

for a printed circuit board, TV chassis, or computer terminal.

Until recently, automated production equipment with the flexibility to accommodate substantial variation in the design of the product

was the exception rather than the rule.35 M a -

chines seldom adapt very well to perturbations

341. A. Alic, “Government Attitudes “reward Programmable

Automation, ” proceedings of the Twenty-third International Afachine Tool Design and Research Conference, 13. J. Davies (cd, ]

[London: Macmillan, 1983), p. 521.

sSF]exibility in the context of manufacturing systems CarrleS

a number of possible meanings; see, for example, [). Cerwin,

“Do’s and Don’ts of Computerized Manufacturing, ” }far~rard

Business Review, March-April 1982, p. 107,
Ch. 6—Manufacturing: Quality, Reliability, and Automation ● 235

. .—

in the process—e.g., a part that comes down

a conveyor sideways—much less to new product designs. When flexibility has been needed,

manufacturing operations have depended on

people. Engine lathes, which are operated entirely under manual control, are the flexible

counterpart of the automatic lathe. A skilled

machinist can make an amazing variety of different parts on an engine lathe, but the cost per

part will be high.

One reason for the lack of flexibility characteristic of fixed automation is that new hardware—fixtures, tooling—is needed to accommodate a new design. A second reason is that

the controls must be reprogrammed. A hardwired electronic control system—whether analog or digital—requires new circuitry every

time the control logic is altered, This is costly

and time-consuming, just as for an automatic

lathe that requires a new set of cams. In recent

years, computer control has become cost effective for replacing many mechanical or electromechanical control systems.

While the performance of a computer-based

programmable controller—as a control system—will generally be superior to the alternatives, this is not necessarily the case for hardware. Often, flexibility in hardware trades off

against performance, and perhaps capital cost

as well. For example, a robot can be programed

to weld together sections of pipe, but might not

be as fast as a specially designed automatic

welding machine—which might also produce

better quality welds. However, the robot could

be programed to do other tasks. In general,

then, a flexible facility may be less efficient for

making any one product than a dedicated,

hard-automated manufacturing system. 36

-———

l~R[:(:[;rlt K&[) work at Westinghouse illustrates a t}’pical appll -

[,at 1011 of flexible manufa[, turin~-bere assembl~r, one of the most

(: h ;i I leI]gI ng tasks for automation. Westinghouse makes more

than LIbO (llfferent rno(lels of small electric motors, with a n a\’er-

;iHI1 I ( )t \ i L(: of 600; model changes ak”erage 13 per day. I n SU(; h

c:ase~, Iah(]r-]ntensive manufa(;turing methods have generally

I)(!(!n ~]r(;f(’rrcd Fike(l automation I]sing transfer I incs has been

a refi I ( )[J t [[) II [) rl I J for I(I n E f) ro[l u(, t io n runs () f s i IT1 i I :i r {) r i(len t i-

(,a] ~)ro(l LI( t\, [:[)r a (l(; \(: r] [)t ion of t h(} flexible dssemhl~’ ~ystern

II n ( ] [’ r ( i(’~(’ I I )1) me rl t, S(X! R (~. Ah r,] t~a m, ‘‘A[)AS Adapt abl[’ I)ro-

~rarn mdl)lf; A\\t:mt)ly S\\t(:m,” (j’omputf?r I ‘l\ioll HI](I ,s(’11 $()[’-

BII.wI(] l?fJhJf,s, (; (; I )f)f](i ,~n(] 1, RIJ\st}l (mis ] {N”[~w }’r)rk f)](ln(]n]

[)rfl\j, 1‘}7(1), [j, 117.

As flexible automation technologies incorporating computer-based control systems improve, an enormous pool of potential applications will open; the consequences will include,

not only cost reductions and productivity improvements, but shifts in the composition of

the factory work force. Skill mixes needed in

manufacturing industries will change, and the

total number of employment opportunities in

the manufacturing sector of the U.S. economy

may shrink even as total output increases. (Employment levels and work force composition

are discussed in chapter 9.)

Automation in Electronics Manufacture

Reasons for Automating

Most applications of automation by U.S. electronics firms have been driven by costs; noncost factors have perhaps weighed more heavily for Japanese manufacturers. The industry in

Japan has at times faced labor shortages; in addition, Japanese firms may sometimes have

been motivated by potential quality improvements to automate earlier than their American

counterparts .37

Table 50 presents the results of a 1979 survey

in which Japanese electronics manufacturers

were asked to list reasons for their decisions

to automate. The most common response was

to reduce costs, with quality improvements second; in contrast, a 1975 survey found labor

shortages ranked at the top. Comparison of

1975 and 1979 results shows a rapid increase

in automation by Japanese electronics manufacturers. 38

Another example of flexible automation ir~ ass(’]l]bl}-this one

alreadj. in use—is a ma(; hinc developed i n Ja I)a n h}’ N“ i ~)i)[)r~d[’rl to

that can put together 2.88 different ~l:rsil)l]~ of a r) al)tomol)ile”

dashboard indicator, The alrcrage lot \Iz{I i~ 40, \\ltll L()(I ( t)ang[lovers per day’. See “ British G()\’t’rnn~t~nt [;) r~,j n( [~i Kohoti(” s [development, ” West Europe Report: ,S( 1(’]1( e an(~ ‘/’f’ (hr](Jh~g~, .\’o,

70, Joint Publi{; ations Researt; h Ser\ I( [~ J f)RS T8t\z(), Aug. 25,

1981, p. 14,

37f( ItO, ~, Taira s, }ragi, K, 1 Wamoto, and h. ‘1’>uk, ] J])( )t[~, ‘“1’)1[>

f’ro~r[’s~ of A[ltornation” tind the 1 rrlproternent of Rr]]ahillt\r [n

Product ion of (Jo]or ‘l’\’ Kecelvers, ” IF;FJ’E ‘1’ransa[. tiorl.s f)n Alar]-

ofac;turir)~ ~(~1. L1 l~rl’-:], I)ecember I!) 74, p. 55,

38’’ Quallt\ an{i R(:llabi]it\ of S(mi( orld~)(tors and (~TL’s: [ ‘rlltl~{i

Stat(’s 1. ]al)an, ” [J[), ( it., p. 47, ] a ~Ja n esc (: o n su mer e] e(; t ro n I [ s

flrm~ r[~[)~)rt[’(i]y spend atx)(lt a third of their R&I] dollars 011 marl-
236 ● International Competitiveness in Electronics

Table 50.—Reasons Given by Japanese

Electronics Firms for Automating

Percent of firms

surveyed a Reasons for automating

840/o Reduction in manufacturing cost

69 Improvement in quality

43 Increase in production volume

43 Improvement in workplace

conditions

32 Labor shortage

z4Mult~ple responses were common.

SOURCE: N)kkan Kogyo Shimbun, May 1, 1979, and July 11, 1979, cited in “Quality

and Reliability of Semiconductors and CTVS United States v. Japan, ”

report No. C972, prepared for OTA by Consultant Services Institute,

Inc , under contract No 033-1170.0, p. 50.

Consumer Electronics

Manual assembly was at one time the rule

for electronic products ranging from radios

and TVs to computers. Components were first

inserted and/or soldered into circuit boards, the

boards then installed in a chassis, the assembly

finally tested and adjusted. Component insertion was one of the first tasks to be mechanized.

This is relatively easy for discrete components

with axial leads, more difficult for ICs. Consumer electronics manufacturers first moved

to automatic insertion of discrete parts; as ICs

were designed into TVs, they were at first still

inserted manually. By the end of the 1970’s

much of this work had been automated as well,

using equipment roughly similar to that pictured in figure 42.

The spread of automation in the U.S. consumer electronics industry has been incremental. Firms automated at different times and for

different reasons, depending in part on strategic responses to foreign competition. In most

cases, the initial reaction, based on Japanese

advantages in labor costs, centered on moving

labor-intensive operations offshore rather than

automating.

When American TV manufacturers did respond to competitive pressures by automating,

cost was the driving force, quality and reliability improvements secondary. Meanwhile, the

ufacturing developments; see Transfer of Technology in the Consumer Electronic Industry, Sectoral Study No, 2 (Paris: Organization for Economic Cooperation and Development, Sept. 14,

1979), p. 41. This percentage is probably a good deal higher than

in the United States or Europe.

Japanese continued to take the initiative in

automation, even though their labor costs remained lower. By 1976-77, 50 to 80 percent of

all component insertion in Japanese TV factories had been mechanized.39 Computer-controlled testing and inspection of components,

subsystems such as circuit boards, and complete TVs also spread rapidly. Concurrently,

chassis were redesigned to take advantage of

the characteristics of automated production

equipment. According to one study, labor productivity in the assembly of color TV receivers

was a little greater in the United States than

in Japan in 1970, but by 1977 productivity in

Japan was more than twice that here–figure

4 3 .

40

Semiconductors

In the earlier years of the semiconductor industry, virtually all production operations—

fabrication, assembly, inspection and testing—

were labor-intensive. Among U.S. firms, the

spread of automation may have been retarded

by the widely publicized difficulties of Philco

Corp., which invested heavily in automated

manufacturing during the late 1950’s only to

see rapid changes in transistor technology

render its equipment obsolete. 41 Philco later

dropped out of the semiconductor business.

At present, semiconductor firms in all parts

of the world are automating rapidly, not only

in manufacturing but in computer-aided circuit

design. A few companies—both American and

foreign—have installed fully mechanized production lines, from wafer fabrication through

inspection, testing, wire bonding, and packaging. The benefits include increased yields as

s@ For a description of some of the technology used by Mitsubishi, see T. R. Crossley, “Study Tour of Industrial Robots in

Japan, ” European Office of Aerospace Research and Development report No. EOARD-TR-80-3, London, August 1979, pp. 32-

33. At the time of this visit, Mitsubishi was using robots of their

own design for assembling printed circuit boards for TVs. The

assembly line could be changed over for a different board configuration in 2 hours.

NI. C. Magaziner and T. M. Hout, Japanese Industrial Policy

(London: Policy Studies Institute, 1980), p. 22. The data comes

from work performed by the Boston Consulting Group.

“J. E, Tilton, International Diffision of Technology: The Case

of Semiconductors (Washington, D. C.: The Brookings Institution, 1971), p. 83.
Ch. 6—Manufacturing: Quality, Reliability, and Automation ● 237 —

Figure 42.—Automatic Installation of Integrated Circuits Onto Ceramic Substrate

a result of better process control, Toshiba, for

example, claims that its automated wafer fabrication facility has increased yields by 10 to

15 percent, and production rate by 20 to 40 percent; the control system, based on a central

mainframe computer, includes 3 minicomputers and 74 microcomputers.42 

Rates of Automation in

the United States and Japan

While much of the evidence for the push toward automation in Japan is anecdotal, and

“’’Toshiba Completes Fully Automated Procluction of IC’S, ”

Japan Report, Joint Publications Research Ser\ice JPRS 1./10264,

Jan. 19, 1982, p. 85.

Photo credit Un/versa/ /instruments Corp

quantitative data on relative extents of automation scarce, many commentators point to attitudes toward automation as an important difference between U.S. and Japanese manufacturers in both consumer electronics and semiconductors. 43 At the same time, it appears that

the more integrated American semiconductor

manufacturers—e.g., Western Electric, Texas

Instruments, IBM—automated at a more rapid

pace than smaller merchant firms. Japanese

‘3R, H. Silin, The ]apan~s~ Semicon doctor lnrfustrjr: An Ol’erview (Hong Kong: Bank of American Asia Limited, Januar\’

1979), p, 124. See “The Dri\re for Quality and Reliability, Part

l,” Electronics, May 19, 1981, for a discussion of the use of

automation by Japanese IC manufacturers, especially p. 133.
238 ● International Competitiveness in Electronics

-- —

Figure 43.— Average Labor Hours for Assembly of

21-Inch Color TV Receivers (1977)

I

Japan United West United

States Germany Kingdom

SOURCE I C blagazlner and T M Hout, Japanese /ndusfrki/ Policy (London.

Policy Studies Institute, 1980), p 23. Data are from a client study performed by the Boston Consulting Group.

electronics companies do seem to have adopted

robots more quickly than their American counterparts, Two to three times more robots are

at work in Japanese factories than in the United

States; about 40 percent of these have been installed in the factories of Japanese electronics

and electrical equipment firms.44 But again, a

number of the larger American electronic companies are well known both for their R&D in

robotics technology and for their applications

of robots in manufacturing.

Some American electronics firms may have

had difficulty in finding the capital needed for

automation. The replacement of labor-intensive

production operations by capital-intensive

equipment aggravates the problems of financing expansion (ch. 7); a transfer line for inserting components in a circuit board can easily

cost half a million dollars. In contrast, to their

smaller American competitors, Japan’s integrated electronics manufacturers can take advantage of internally generated funds—as well

as somewhat lower costs for external capital—

to invest in mechanized equipment. Furthermore, the Japanese Government has reportedly given preferential tax treatment for investments in production equipment that will

improve the quality and reliability of Japanese

“R. Ristelhueber, “Robotics-The Applications Gap, ” Electronic News, Jan. 11, 1982, p. 60,

goods, particularly those for export.45 Such actions have probably affected the timing of investments more than the eventual extent of

automation.

Although a few American semiconductor

firms make some of their own manufacturing

equipment—notably the larger, more highly integrated companies—most such equipment is

designed and built by independent suppliers,

In Japan, it is more common for electronics

firms to design and fabricate their own. Matsushita, for example, meets 30 to 40 percent

of its equipment needs internally. 46 Internal

capability for equipment development can help

speed automation.

As integration levels for ICs continue to increase, automation will become a necessity.

Fine line widths and other requirements for

very large-scale integration (VLSI) demand

levels of cleanliness that are much easier to

achieve if human intervention is minimized.

More complex circuits can only be designed

with computer-aided techniques, together with

computer-aided drafting and mask generation;

once built, such circuits can only be tested with

computerized equipment. Better process control models—now limited by gaps in fundamental understanding of the physics of electron devices—will be needed to ensure the quality and reliability of VLSI circuits. Continued

automation may reduce pressures for offshore

45’’ Quality and Reliability of Semiconductors and (;’I’\’s: United

States v. Japan, ” op. cit., p. 25.

46U. C. Lehner, “Japan Strives To Move From Fine Imitations

to Its Own Inventions, ” Wa]] Street ]ournai, Dec. 1, 1981, p. 1.

Japanese firms continue to purchase a good deal of automated

production equipment from American suppliers; as pointed out

in ch. 4, about half the equipment used by Japanese semiconductor manufacturers comes from the United States, This percentage has been declining, however, with some observers predicting

that Japan will produce 70 percent of its needs by 1985. Japanese

firms are reportedly already designing and building fifth-generation automated wire bonders, while U.S. firms are still working with first or second generation machines; see “Pushing for

Leadership in the World Market, ” Business VVee~ Dec. 14, 1981,

p. 61. In some cases—e.g., automated testing equipment—Japanese products have the reputation of being somewhat more reliable than those of American suppliers, largely because they are

simpler, However, industry opinion generally holds that U.S.

equipment is as good as or better than that made in Japan or

in Europe, as well as being less expensive. See “Can Semiconductors Survive Big Business?” Business Week, Dec. 3, 1979,

p. 81.
Ch. 6—Manufacturing: Quality, Reliability, and Automation 239

.

manufacturing because labor costs will become

a smaller fraction of total manufacturing cost.

Robotics

Industrial robots comprise a subset of programmable automation technologies mimicking some of the attributes of the human work

force, They are more flexible-in terms of ability to perform new tasks, or to carry out complex motion sequences-than other types of

programmable equipment. Because advances

in robotics depend to considerable extent on

electronics and computer science they are discussed in some detail below. In the future,

robots will be used to automate many of the

operations in making electronics products now

carried out by hand. In Japan, robots are

already being used to produce more robots by

a subsidiary of one of the major electronics

companies—Fanuc, a part of the Fujitsu organiz at ion. 47

The changing proportion of costs associated

with electrical and mechanical components

since the first industrial robots were introduced in the 1960’s demonstrates the importance of electronics for this technology. A few

years ago, about half the direct cost of making

a robot was associated with the electronics, the

other half with mechanical components. Now

only about 15 percent of the costs go into electronics, largely because of the increases in computing power available with cheap ICs. Costs

for the mechanical components have not

changed greatly, but the total costs of robots

have decreased, the mechanical parts now accounting for 85 percent of the total.

Technology

Industrial robots, those used for factory

work, are machines that can move a manipulator, or end effecter, at the end of a chain of

mechanical links, The end effecter may be a

gripping device similar to fingers; alternatively, the end of the robot arm may carry a tool,

welding torch, or nozzle for spraying paint.

4’N. (,’su I, “ Lntended Llachines Hu ild hlachincs, ’ Amcri an

,$laf, hini$t, Junt’ 1 YH1, p 142,

The simplest robots have only two or three

degrees of freedom; an illustration of a twodegree-of-freedom system would be an “arm”

that could only extend and rotate, as for tightening a bolt. The most sophisticated robots

have seven or eight degrees of freedom, which

allows them to reach around obstacles. Figure

44 shows a pair of typical robot designs.

While robots trace their descent from more

primitive manipulators having little flexibility—e.g., with position and sequencing conFigure 44.—Two Approaches to the Design

of Industrial Robots

Pho 10 c red( t C/nc{nnat{ M//ac- ~o n

(a) This robot emulates the human arm

Photo cred(t Westinghouse

(b) This robot moves rectilinearly
240 . International Competitiveness in Electronics

trolled by limit switches—state-of-the-art

designs now operate under computer control,

often a microcomputer. In routine production

applications, the robot is commonly “taught”

a sequence of motions by a human operator,

who leads the arm through these motions while

they are stored in memory. The machine can

then repeat them on command. Although satisfactory for simple applications like spray

painting or some forms of welding, off-line programing—in which the instruction sequence is

developed independently and loaded into the

computer when needed—is a major R&D goal.

Virtually all robots still operate with relatively primitive open loop control systems.48 This

is one of the factors limiting operating speeds,

as well as the accuracy with which the end effector can be positioned, Current-generation

robots are also burdened by complex and expensive actuators that tend to restrict performance. At some future time, one robot may be

able to throw a part across the factory floor to

another, but this is far in the future. Making

robots “smart’ ’-i.e., with the ability to gather

and process substantial amounts of information, then make decisions based on that information—is a related problem. Few robots can

yet make even simple decisions.

As such examples indicate, robotics technology depends on computer technology. While

computer firms like IBM, Digital Equipment

Corp., and Texas Instruments are expected to

enter the market for robots—and Fujitsu and

Hitachi are already two of the leading producers in Japan—many of the robots in current

production come from machine tool builders.

In the United States, for instance, Cincinnati

Milacron has a substantial share of the market.

From the perspective of the machine tool industry–whether the portion that builds metalcutting equipment or the manufacturers of

hard-automated assembly equipment such as

transfer lines—robots trace their descent mostly from NC machines. In fact, much of the technology in the control systems of current-gena“Government Attitudes Toward Programmable Automation, ”

op. cit. Much of the material that follows is drawn from this

paper.

eration robots is similar to that for DNC and

CNC machine tools. Companies that intend to

compete in the design and manufacture of future generations of robots will need a broader

range of technical capability; those moving into

programmable automation from other hightechnology fields may have the advantage, particularly firms with experience in automatic

controls and the modeling of complex mechanical systems,

Robots in Manufacturing

Robots are usually installed in factories

where they can cut costs (compared to human

workers) and increase labor productivity—the

same motives that drive other capital investments. In many early installations of robots,

human workers were replaced on a one-for-one

basis, a substitution facilitated by the robot’s

ability to emulate the human arm. In comparing the costs of robots to those for human workers, one-for-one replacement has often been assumed, This is potentially misleading because

a more thorough redesign of the production facility means that some robots may each replace

several people, while in other cases several

robots might be needed to do the work of one

person. A cost analysis comparing robots and

people must also take account of the number

of shifts planned for the facility, maintenance

and repair costs, depreciation, and energy consumption. A robot may use a hundred times

as much energy as a human worker. Generally speaking, when production volumes are

small, human operators will still be the least

cost alternative because of the expenses associated with setting up and programing the

robot—figure 45, Moreover, at sufficiently high

production volumes, fixed automation will be

cheaper because there is no need to trade off

performance for flexibility. In general, robots

tend to be the low-cost alternative for annual

production volumes of roughly 300,000 to 3

million units.49

The plot in figure 46 has been well publicized

by Unimation, one of the largest robot manufacturers in the United States. It compares the

4@R. Al]an, Robots Spur Productivity, ” IEEE Spectrum,

September 1979, p. 31.
Ch. 6—Manufacturing: Quality, Reliability, and Automation . 241 ———.—.—. .—

Figure 45.— Manufacturing Costs for Robots, Hard

Automation, and Human Operators as a Function

of Production Volume

Robots\

Production volume

SOURCE Off Ice of Technology Assessment

Figure 46.—Cost Comparison for Human Operator

and Robot Assuming One-for-One Replacement and

Two-Shift Operation in the Automobile Industry

SOURCE R AlIan, “BUSY Robots Spur Productiwty,” /EEE Spectrum, September

1979, p 31

costs for one of their robots with the costs of

wages plus fringe benefits for an autoworker,

assuming the robot to be a direct replacement,

According to figure 46, hourly costs for industrial robots have gone up only slightly since

their introduction in the 1960’s, a period over

which wages and fringe benefits for autoworkers increased sharply. Note that installation of

the robot is included, but not the engineering

costs for the application. For a new installation, development costs, including programing

and general debugging, can easily total twice

the purchase price of the robot.

In electronics, robots can contribute to quality and reliability by minimizing mechanical

damage to delicate parts—which also cuts direct costs—and by helping improve cleanliness.

The latter is particularly important for largescale ICs, where “clean rooms” with levels of

dust and other contaminants reduced to very

low levels are required. Because people bring

contaminants into the production area with

them, automation helps raise yields and reduce

fabrication costs.

Beyond the now routine applications like

spray painting and welding lies a great deal of

scope for robots that extend or improve on human capabilities, Some of these robots will be

larger than those currently on the market,

others smaller. While a few robots now available can handle loads in the range of 500 to

2,000 lb, most are designed with lifting capacities in the range of 50 to 200 lb. Until recently,

robots intended for low loads (e. g., under 10

lb) and precision work have been rare. Limitations on precision and repeatability have

placed severe constraints on potential applications.

50

Robots and Jobs

Despite the fact that robots are simply one

type of flexible automation, with roots in a

number of familiar manufacturing methods—

and that automation itself is as old as the industrial revolution—it is as difficult for many

people to be dispassionate and objective about

robots as it is for them to regard nuclear power

as just another means of generating electricisOElectronics firms need robots with high accuracy because

the small and delicate parts used in electronic equipment are

so easily damaged. Nippon Electric Co. [N EC) has recent]}’ described a machine with a load capability of about 5 {b and a

claimed positioning accuracy of 0.00016 inc:hes, an order of magn itude better than previous high-precision robots. NEC plans

to use it in circuit board assembly, as well as wire bonding for

ICS, See R. Neff, “Robot Moves by Micrometers, ” Electronics,

Apr. 7, 1981, p, 84.
242 ● International Competitiveness in Electronics

ty. The entire set of technologies for automating manufacturing and services poses very real

threats to the employment opportunities and

current job skills of a large segment of the U.S.

labor force, as discussed in chapter 9. But it

is the whole family that is the proper focus of

attention. While it is too early to predict the

full range of impacts of computerized manufacturing, it is likely that—as with most instances

of major technological change—these will

come relatively slowly and in piecemeal fashion. Just as these impacts are likely to be random and incremental, many will be unexpected—and to the extent that they are, people and institutions will be unprepared for

them.

Market Growth

If the effects of programmable automation

will not become visible overnight, this is in part

simply a result of time scales for production

and installation; rates of increase will be high,

but total penetration will mount rather slowly. Figure 47 gives estimates for worldwide

robot sales through 1990, According to this projection, the market will exceed $3 billion by the

end of the decade, an increase of nearly 10

times over the 1980 level. Other estimates range

both higher and lower. To set these figures in

perspective, note first that spending for capital

Figure 47. —Worldwide Annual Sales of Robots,

Past and Projected

m

USA Japa n West Other

Germany Western

European

countries

3,000 A

“ 76 77 78 79 80 80 85 90

Year

SOURCE E tieer Robots [n Modern Industry Astronaut/es & Aeronautics,

September 1981 p 52

equipment in U.S. manufacturing industries is

currently $80 billion to $85 billion per year, and

second that during the 1980’s expenditures on

robots are expected to remain well under 10

percent of total expenditures just on automated

equipment. 51 Again, from a job displacement

viewpoint, all types of automation must be considered.

Figure 48 illustrates the growth in sales by

application expected in Japan over the period

1980-90. While many of the robots sold in 1980

were for use in casting, metal forming (i. e.,

forging and stamping), and painting, the projections in the figure indicate that these applications will be far outstripped by assembly,

welding, loading and unloading of machine

tools, and inspection, Some observers predict

even more rapid market growth in the United

States than figure 48 shows for Japan,

When markets grow this rapidly, a good deal

of technical and market volatility can be expected, with many opportunities for entrepreneurial firms pursuing innovative technologies.

While there are no guarantees that robot manufacturing will follow a path similar to semiconductors, it would not be surprising to see

startups in the United Stated challenging established leaders like Unimation and Cincinnati Milacron. The multidisciplinary demands

of advanced robots—both hardware (microelectronics, kinematics and mechanical design, instrumentation) and software (artificial intelligence and computer engineering, automatic

control theory, the production engineering

skills needed to integrate robots into the

workplace)—create conditions favoring innovation and fresh thinking. New companies may

emerge to lead this industry into the third

generation of robotics, just as Unimation—

originally a startup and now owned by a larger

corporation—led the first and second generations,

51J. T. Woodward, E. P. Seskin, and J. S. Landefeld, “Plant and

Equipment Expenditures, the Four Quarters of 1982,” Survey

of Current Business, September 1982, p. 35 (capital equipment

spending); “Industrial Robotics, ” Emerging Issues in Science

and Technology, 1981 (Washington, D, C.: National Science

Foundation, June 1982), p. 28 (robotics as fraction of spending

on automation).
Ch. 6—Manufacturing: Quality, Reliability, and Automation 243

. — —. —

800

700

600

500

400

300

200

100

0

Figure 48. —Robot Sales in Japan by Application

1980

I

1990 Projection

I I

Casting Hea t Meta l Welding Paintin g Machine

treatment forming (arc and tool

spot) loading

Assembly

—

Inspection

—

.

Other

SOURCE Based on data In Robot Industry to Grow RapIdly In 1981 ,“ Japan Report, Joint Publlcatlons Research ServIce JPRS U9744, May 19 1981 p 33

Japanese firms are applying robots in man- process. More than half the costs of typical

ufacturing more intensively than their competitors in other countries—figure 49. Although

most observers feel that the United States still

leads in the relevant technologies, there are

more firms building robots in Japan—130 to

150, perhaps five times the number here—and,

indications that Japan may be ahead in learning to apply robots in typical factory environments. As figure 47 indicated, future robot installations in Japan are expected to at least

match those in the United States.

Using Robots

While the critical technical problems in the

further development of robots center around

modeling and control, the critical implementation problems for even the existing robots

center on integrating them into the production

batch manufacturing operations are associated

with scheduling and otherwise managing the

flow of production—i.e., with software, broadly

speaking. These management and production

control costs involve: getting the right parts,

materials, and supplies to the right place at the

right time; seeing that shop floor personnel

have the information (now including computer

programs) they need; and ensuring that machinery is available and in good repair when

scheduled for use. Tasks involving production

planning and machine scheduling, job flows,

inventory control, and the related routing and

coordinating functions might seem straightforward, but in fact they are extraordinarily complex; experience shows them to be among the

most critical factors in controlling manufacturing costs. Computer-aided manufacturing

holds a great deal of promise for reducing at
244 ● International Competitiveness in Electronics

Figure 49.— Estimated Numbers of Robots in Use, 1980

Japan United Sweden West Italy United France Other

States Germany Kingdom Western

countries

SOURCE: ‘CAM An International Comparison, ” American Mad(n/sf, November 1981, p. 214

least some of these costs—e.g., those associated

with materials handling, control of the inventory of tools, jigs, and fixtures, routing of

parts—but only when appropriately integrated

into the production environment. Integration

will require a great deal of rethinking at both

the design and manufacturing stages—rethinking for which cheap computing power is necessary but hardly sufficient. The potential

benefits in terms of productivity are huge, but

no one anywhere in the world knows at present how to realize them,

Computer-integrated manufacturing will affect the cost structures of many industries; as

labor productivity improves, fixed costs will increase relative to variable costs. Engineering

and software development expenses will rise

compared to blue collar labor costs. Flexibility will make small-batch production more attractive; product differentiation and product

customization will become relatively less expensive. The result will be far-reaching

changes in the product and marketing strategies of manufacturing companies throughout

the world.

International Trends

As has happened in so many other industries,

Japanese firms–which began to manufacture

robots by importing technology from the

United States and Europe—are now quite capable of advancing the state of the art on their

own. Currently, robotics technology is flowing

between the United States and Japan in both
Ch. —

Photo credit Cincinnati M[lacron

Robot welding frame assembly for computer

directions; General Electric, for example, has

begun to build robots under license from

Hitachi. While fewer than 5 percent of the

robots produced in Japan during 1980 were exported [imports were comparably small), Japan

expects to export 15 to 20 percent of its robot

production by 1985.52

Again as in other industries, the Japanese

Government—via the Ministry of International

Trade and Industry (MITI)—has designed programs to encourage and support builders of

robots. A number of Western European governments are following suit. MITI sponsored several manufacturing-oriented R&D programs

which encompassed robotics during the 1970’s.

One of the agency’s first steps to support the

robotics industry itself was the establishment

5ZM, Ka naba}rashi, ‘‘ In March of the Robots, Japan’s Machines

Race Ahead of America’ s,” Wall Street journa], NOI. 24, 1981,

p, 1.

6—Manufacturing: Quality, Reliability, and Automation ● 245

—. .—

of a leasing program. The Japan Robot Leasing Company, Ltd. (JAROL), incorporated in

1980, is owned 70 percent by 24 robot manufacturers and 30 percent by 10 insurance companies. About 60 percent of JAROL’s capital

has been borrowed from the Japan Development Bank and from commercial banks. The

consortium uses this capital to purchase robots,

which are then leased, primarily to smaller

firms.

53 While the program is similar to that

operated by the Japan Electronic Computer

Corp. for financing computers, JAROL does

more than just lease equipment; its engineering staff provides assistance in installing and

programing robots. Among its other initiatives,

the Japanese Government has also granted an

extra 13 percent depreciation allowance to purchasers of advanced types of robots, while

smaller firms that buy robots for modernization or to automate hazardous jobs can take advantage of low-interest loans. 54

Much more ambitious is MITI’s plan for a

joint R&D program aimed at making robots

smarter. 55 This effort, with a proposed annual

funding level of about 30 billion yen (roughly

$135 million), will be organized much like other

government-sponsored R&D programs in Japan, About 10 companies are expected to be

involved, plus the Electrotechnical Laboratory

of the Agency for Industrial Science and Technology, Major thrusts planned over the 7-year

schedule beginning in 1982 include:

●

●

 ✎

improved sensory capabilities—e.g., pattern recognition, force/torque sensors;

control algorithms incorporating true adaptive or “intelligent” behavior which would

allow the robot to operate more-or-less au-

—.—

63Y. Machida, “Industrial Robot in Japan, I, 7’CB Research,

Long-Term Credit Bank of Japan, hlarch/April 1981, I). 4.

bAThe Special depreciation prot’isi pUrchased between 1980 and 1983 that are com~)uter (controlled,

have six or more degrees of freedom, and meet s~)ecified standards for positioning accuracy, The added 13 percent depreciation in the first year means that a total of 53 percent can be written off (assuming the 5-year, double declining bd]dnce del)reciation procedure that is normal in Japan). See “Robotics: They Are

Smart and Ne\rer Need a Tea-B reak, ” Far ,Ea.stern Economic Rctriew’, Dec, 4, 1981, p. 70.

55’’MIT1 To Launch 7-Year Project To Develop Intelligent Robot,” )apan Report, Joint Publications Research Service JPRS

1,/10125, NoI’, 18, 1981, p. 31.
246 ● International Competitiveness in Electronics

*

tonomously, making decisions based on

sensory data it receives from the operating

environment; and

improved mechanical design, including

manipulators and mobility, the latter very

much a controls problem as well.

The program is in part a sequel to previous

MITI-sponsored work on remote control devices for maintaining and repairing the radioactive portions of nuclear powerplants. However, the robot program will be much broader.

Summary and Conclusions

In the past, Japanese electronics firms making both TV receivers and ICs—notably memory chips for the merchant market—have emphasized quality and reliability more heavily

than their counterparts in the United States.

This does not mean that the best performing

American firms may not have had quality and

reliability as good as the Japanese, or that captive manufacturers in the United States may

not have been as good or better than IC makers

anywhere, It does mean that specific types of

products—color TVs and dynamic RAMs—

have, in the past, been produced to higher average levels of quality and reliability in Japan.

The picture at present is less certain—indeed,

reliability cannot be estimated until products

are well along in their service lives. It is plain

that American firms have made major efforts

to improve quality and reliability—with considerable success. But it is not obvious that they

have caught–much less surpassed—the Japanese, who have been improving their own performance at the same time.

Japanese manufacturers may have succeeded

in creating perceptions of quality and reliability

outstripping any actual performance margins,

particularly for color TVs; certainly the strategies of Japanese electronics firms have parallels in other industries—e.g., cameras or automobiles—where the emphasis placed on both

the image and the reality of quality had an important role in the penetration of U.S. markets.

For American firms to match this image demands top management attention,

While the Japanese stress on quality begins

with management and appears to permeate

organizations from the top down, quality

assurance has often been an orphan in the

United States. Quality control personnel here

have been viewed as obstacles to production;

they have had integral roles in neither design

nor manufacturing. Japanese firms learned

many of the basic techniques of quality control from American engineers, but they have

gone a step beyond conventional practice in

much of the rest of the world by, for instance,

making individual workers responsible for the

quality of their own efforts.

Electronics firms in Japan also invest more

heavily in employee training. At all levels—

assembly workers, engineers and designers,

foremen and supervisors, sales and management—employees of American electronics

firms tend, on average, to be less knowledgeable concerning quality and reliability than

their counterparts in Japan. Although many of

the recognized authorities in these fields are

Americans, expertise is not spread as widely

here as in Japan. Moreover, U.S. electronics

manufacturers may still to some extent be paying lip service to quality and reliability, Over

time, the depth of their commitments will become more apparent. In particular, it takes

time to design quality and reliability into a

product line.

In general, Japanese electronics manufacturers also appear to do a better job of managing

the interface between design and production.

Moreover, the characteristically close working

relationships between vendors and purchasers

in Japan’s electronics industry evidently yields

benefits in quality and reliability. Production

equipment made in Japan does not, however,

appear superior to that available here; indeed,

Japanese electronics firms continue to pur-
Ch. 6—Manufacturing: Quality, Reliability, and Automation ● 247

—

chase a good deal of manufacturing equipment

from U.S. suppliers.

Japanese companies automated the production of TV receivers and other consumer electronic products earlier than most American

firms. Extensive applications of robots—in

electronics and other industries—will help the

Japanese increase manufacturing productivity still further, and will also improve quality

and reliability. At present, robots remain a

small subset of automated production equipment with limited impact, but they will be a

key part of future manufacturing facilities.

And, while robots will spread rather slowly

through industry in both the United States and

Japan–with unpredictable effects, as for any

new technology—the cumulative impacts of

these and other types of factory automation

will be massive, affecting productivity and

competitiveness, the skill mix in the work

force, and the total number of job opportunities

in the economy, Computer-integrated manufacturing will shift corporate strategies in many

industries toward greater product differentiation, Japanese companies can be expected to

apply computerized manufacturing technologies at least as fast as American firms, wherever there are benefits in terms of cost, quality, worker safety, or product design and marketing.

Appendix 6A—Quality and Reliability Comparisons

for Integrated Circuits

This appendix summarizes the data that have

been made public concerning quality and reliability levels of chips supplied by American and Japanese firms to the merchant market. The most widely noted comparisons have come from HewlettPackard Corp., a U.S. firm that purchases large

numbers of semiconductors on the merchant market, and also manufactures ICs for internal use.

Quality Levels

As indicated in table 6A-1, part A, at the end of

1979 the quality levels of Hewlett-Packard’s U.S.

suppliers were poor relative to Japanese firms.

While Hewlett-Packard had an obvious interest in

pressing their suppliers to provide high quality, this

data is not just another case of a purchaser playing its vendors off against one another; the semiconductor industry has generally accepted HewlettPackard’s test results as valid, although offering a

variety of explanations for the relatively poor showings by domestic manufacturers.

The data in table 6A-1 are all for 16K RAMs; indeed, most of the public discussion of quality has

focused on RAMs, because they are bought in large

quantities by many customers and have become a

locus of international competition. Part C of the

table shows that American suppliers of 16K RAMs

dramatically improved their quality and reliability y

during 1980, but that they continued to trail Japanese firms. Improvements by Japanese suppliers

over the time period covered in the table were negligible. Note that failure rate after burn-in-parts B

and C of the table—is essentially an indication of

infant mortality failures, and thus more closely associated with quality than with reliability’. Needless

to say, conclusions based on such results should be

generalized only with care; the table refers solely

to circuits purchased by Hewlett-Packard, and differences from shipment to shipment even from a

single manufacturer can be large.

Table 6A-2 presents data gathered for OTA on

quality levels for RAMs, 4K as well as 16K. As for

the first set of the Hewlett-Packard data, the Japanese 16K RAMs were superior by a large margin.

The 4K RAM data—though limited to only one Japanese vendor—are quite different, showing the

American-made devices to be superior.

Along with quantitative data on RAMS such as

that in tables 6A-I and 6A-2, purchasers of ICs surveyed by OTA’s contractor sometimes provided

more general comments. One purchaser. for instance, included the following comparison:

Origin
248 International Competitiveness in Electronics

—

Table 6A-1 .—Hewlett-Packard Data on 16K Random Access Memory (RAM) Circuits

—

A. Reported March 1980.

Country of Percent failing Field failure rate H-P composite

manufacture incoming inspection (o/o per thousand hours) qualitv indexa

Japan- l

b

0 0.010 ”/0 89.9

2 0 0.019 87.2

3 0 0.012 87.2

United States- 1 0.190/0 0.090 ”/0 86.1

2 0.11 0.059 63.3

3 0.19 0.267 48,1

aThis index IS based on I () equal IY Weigflted factors, of which incoming inspection and field failure rates are two, the others

Include such things as cost and delivery schedules

bEvidently, the three suppllers (not necessarily {n order) were Fujitsu, Hltachl, and NEC, American suPPliers

(again not in order) Intel, Mostek, and Texas Instruments. See “The Quality Goes On Before the (Japanese) Names Goes On, ”

Rosen Hectron/cs Letter, Mar 31, 1980, p 1

SOURCE R W Anderson, “The Japanese Success Formula Ouallty Equals the Competltwe Edge, ” Verbatim Record, Seminar

on Oua/fty Corrtro/ Japan Key to High Product/vi(y, Washington, D C, Mar 25, 1980, p 40

B. Reported November 1980.

Country of Failure rate after

manufacture burn-in

Japan- 1 0.05 ”/0

2 0.10

3 0.12 Average = 0.17°/oa

4 0.35

5 0.25

United States- 1 0,60

2 0.50

3 1.20 Average = 0.75%a

4 0.70

aAverages are not weighted by numbers of circuits from each manufacturer.

SOURCE: B LeBoss, “U S Reject Rate Still Trails Japanese,’” .E/ectrorrics, Nov 6, 1960

C. Reported April 1981.

Failure rate after burn-in

Country of First half Second half

manufacture 1980 1980

Japan- 1 0.060/0 0.04

2 0.13 Average = 0.25%a

0.13 Average = 0.24%a

3 0.40 0.40

4 0.40 0.40

United States-1 0.60 0.35

2 1.20 Average = 0.97%a0.20 Average = 0.35%a

3 1.10 0.50

aAverages are not weighted by numbers of c!rcu!ts frOm each manufacturer.

SOURCE: R W Anderson, Sern/rtaron Management, Productivity and Reirrdustria/izaf /on East Meets West, Washington, D.C ,

Apr 2, 1981.

Consistent with such patterns, an independent testing firm noted that rejection rates following screening and burn-in were twice as high (about 4 percent) for American-made ICs as for Japanese (1 to

2 percent). End users of ICs generally reported similar results, several noting that they no longer felt

it necessary to screen or burn in Japanese circuits.1

‘See, for example, J. Lyman, “The Drive for Quality and Reliability,

Part I,” op. cit., where an executive of the American minicomputer firm

Data General IS quoted as follows: “The best U.S. devices are about the

Reliability Levels

While screening and other tests can locate defective circuits and ‘measure quality, determinations

of reliability must await field experience; long-term

equivalent of average Japanese products, Good Japanese lots run at a rejection rate of about 0.03 percent, whereas a good U.S. lot shows about

0.3 percent . . That’s why the only RAMs we are not burning in are

Japanese ones, ” Other information in this paragraph is based on “Quality and Reliability of Semiconductors and CTVS: U.S. v, Japan, ” op. cit.,

pp. 74-76.
Ch. 6—Manufacturing: Quality, Reliability, and Automation ● 249

..--—— —

Table 6A-2.–Quality Levels of Japanese and U.S.

Random Access Memory (RAM) Circuits

Country of

manufacture

A. 16K RAMs

Japan- 1

2

3

United States- 1

2

3

4

B. 4K RAMs

Japan- 1

United States- 1

2

3

Average

0.30 ”/0

0.53

1 77

0.70 %

0.85

1,07

411

1.07 “/’0

0.32 0/0

0,41

0.87

Percent rejected on

Incoming inspection

Range

0.1-0.5%

Average = 0.87°/0 a0-1.8

0.1-5.0

0-2.7

Average 1.7 % o-4.7

0-6.2

0-12.4

0-5,3

0-2.0

Average o 53 ”/0 O-24.5

0.1-1.1

aA ve,ages are I ot we g hter! by n u m be rs of c I rcu I ts from each manufacturer

SOURCE Q~jal t y ~nd Pelrabl I It ~ of Semiconductors and CTVS United Slates

v Japan re [,ort prepared for C)TA by Con SUI tan t Serrlces I nst!tute

lnc u qder ~ rjnt racf No 033 1170 D 72

tests are very expensive, and burn-in failures more

properly ascribed to quality problems. Field failure

data assembled by Hewlett-Packard for 16K RAMs

were included in table 6A-1, part A. Table 6A-3 contains the remainder of the reliability data available

Table 6A-3.— Reliability Levels of Japanese and

U.S. Random Access Memory (RAM) Circuits

Country of Field failure ratemanufacture (% Per thousand hours)

A. 16K RAMs

Japan- 1 0 0062°/0

2 0.0263

3 0.0507

United States- 1 00167

2 0.0687

3 0.0889

4 0.107

5 0.1268

6 0.3421

B. 4K RAMs

Japan- 1 0 “/0

United

States- 1 0.0524

2 0.0526

3 0.1018

C. 1K RAMs

Japan- 1 0.07560/o

United

States- 1 0.0667

weighted by numbers of chips from each manufacturer

SOURCE “Cluallty and Rel!ab{l!ty of Semiconductors and CTVS United States

v Japan report prepared for OTA by Cons u It an t Stirk I es I nsf It u te

Inc , under contract No 03311700, p 72

Average . 0 027‘/oa

Average O.125% a

The frequency of soft errors caused by alpha radiat ion can be reduced by a number of techniques,

which Japanese manufacturers evidently implemen ted more rapidly than American firms-—perhaps because Japanese semiconductor firms were

more willing to accept the extra costs. One purchaser of 64K RAMS reported soft failure rates of

10-8 per hour for circuits from two Japanese manufacturers; the rates for the products of a pair of

American firms were 10 -3 and 10-6 failures per

hour.3
CHAPTER 7

Financing: Its Role in

Competitiveness in Electronics
— .— —

Contents

Page

Overview ... **. *.. .*0* ..0. ... .**, 0,. a*.**, ..** ..*.**.*,.***.,.,,..**,. 253

Sources of Funds and Financial Leverage in the United States and Japan. . . . . . . . . . 255

Internal and External Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

Price Inflation and Banking Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

Effects of Financial Leverage on Tax Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262

Risk Absorption in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262

Other Factors in Costs of Financing .0..,., .0.,0,.0 .,0...0. ● 0.,..0. ,0..0..0 . . . 263

Size and Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

Savings Rates... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

Costs of Capital for Electronics Firms in the United States and Japan: Summary . . . . . . 266

Financial Structure: An International Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280

France ........, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292

Summary and Conclusions .. .. .. .. .. .;. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294

List of Tables

Table No, Page

51. Costs of Capital for U.S. and Japanese Semiconductor

Manufacturers as Calculated by Chase Financial Policy. . . . . . . . . . . . . . . . . . . . . . . . . 256

52. Internal and External Sources of Corporate Financing. . . . . . . . . . . . . . . . . . . . . . . . . . 257

53. Total Debt-to-Equity Ratios for Selected U.S. and Japanese Electronics Firms, ,.,,. 258

54. Household Savings Rates in Several Industrial Countries . . . . . . . . . . . . . . . . . . . . . . . 264

55. Distribution of Household Assets in the United States and Japan, 1978 . . . . . . . . . . . 265

56. inflation-Adjusted Rates of Return in the United States and Japan . . . . . . . . . . . . . . . 266

57. Aggregate U.S. Venture Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

58. internally Generated Funds as a Percent of Total Capital From All Sources . . . . . . . 273

59. Assets of U.S. and Japanese Semiconductor Manufacturers . . . . . . . . . . . . . . . . . . . . . 277

60. Sources of External Financing for U.S. and Japanese Corporations . . . . . . . . . . . . . . . 282

61. Short-and Long-Term Debt as a Percent of Total Capitalization for

U.S. and Japanese Electronics Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

62. Asset Categories as Listed on Balance Sheets of Electronics Firms

in the United States and Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . 284

63. Average Assets and Liabilities of Japanese Commercial Banks . . . . . . . . . . . . . . . . . . . 285

64. Interest Rates and Price Inflation in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286

65. Household Borrowing in Japan and the United States . . . . . . . . . . . . . . . . . . . . . . . . . . 288

66. Holders of Liabilities and Claims With the Nonfinancial Sector in the

United States and France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290

List of Figures

Figure No. Page

50. Increase in Capital Costs for High-Volume Integrated Circuit Production Line . . . . . 271

51. Rates of Capital Spending by U.S. and Japanese Semiconductor Firms . . . . . . . . . . . . 274

52. Debt-Equity Ratios for Japanese Electrical/Electronics Firms . . . . . . . . . . . . . . . . . . . . 282
CHAPTER 7

Financing: Its Role in

Competitiveness in Electronics

Overview

Declines, real or imagined, in U.S. competitiveness in electronics have been ascribed at

various times and by various people to such

causes as: unfair competitive tactics by foreign

firms, trade barriers that keep American products out of overseas markets, government subsidies in other countries, and costs of capital

that are lower than in the United States. Lowcost investment funds are said to be available

in countries like Japan for reasons ranging

from higher rates of consumer savings to allocations of capital by governments or direct subsidies.

This chapter deals with only this last set of

possible causes—those related to corporate financing. Although limited in scope, the discussion has clear implications for other facets of

competitiveness. For example, financing costs

could be lower where a protected home market

reduces risk and provides a stable foundation

for international operations. Government subsidies might be indirectly channeled through

financial markets as implicit or explicit loan

guarantees, as well as in more obvious forms

such as grants for research and development

or tax havens encouraging regional development.

In mature industrial economies, a vast and

varied network of channels links companies

seeking funds with individuals and organizations that have moneys to lend or otherwise invest. The capital markets where transactions

between those seeking and those providing

funds take place accommodate both direct and

indirect investments, for short time periods

and for long. Among the direct and long-term

methods that corporations use to raise capital

are sales of stock (equity), where the purchasers

acquire an ownership position, and sales of

corporate bonds. purchasers of bonds have no

ownership relation with the issuing company,

but receive a fixed rate of return, as well as possible capital gains (or losses). * Shareholders accept a variable rate of return in the form of dividends, as well as changes in the value of the

stock depending on the success of the company. Both stocks and bonds are traded in active secondary markets in the United States

and many other industrialized nations. In general, holders of debt—of which bonds are only

one type—have first claim on the residual assets of a corporation in the event of liquidation;

the claims of stockholders are subordinate.

Highly developed capital markets such as

those in the United States also provide indirect

financing mechanisms—i.e., one or more financial intermediaries are interposed between the

investor and the final recipient of funds. Banks

are the most common intermediaries. Investors

deposit moneys—for instance, in ordinary savings accounts—which the banks then lend to

businesses. Other financial institutions function in generally similar fashion—e.g., the postal savings system in Japan, an important channel for capital that ultimately helps finance

Japanese industry. Investment banks, insurance companies, and pension and retirement

funds are other examples of financial intermediaries.

The fundamental questions in this chapter

deal with costs of capital faced by electronics

firms in various parts of the world. Spokesmen

for American companies have often compared

*Several types of corporate bonds exist. Straight bonds carry

a fixed interest rate, but their market price varies with economic

conditions. For example, if interest rates fall, the value of straight

bonds may rise. Convertible bonds allow holders to convert to

common stock at a specified price; thus capital gains are possible if the price of the company’s stock rises during the period

of convertibility.

253
254 ● International Competitiveness in Electronics

their costs for investment funds—whether debt

(bank loans, bonds) or equity (primarily stock

issues)—unfavorably with costs in other countries. In particular, costs of capital in Japan are

often said to be as little as half those in the

United States. Some observers also claim that

the pool of funds potentially available for investment in the U.S. industry is too small.

Such concerns are particularly relevant for

the rapidly growing, high-technology portions

of the American electronics industry, Firms

whose business centers on semiconductors,

computers (including software), and even the

more rapidly expanding portions of consumer

electronics (e.g., electronic games) can find

themselves with markets outstripping their

ability to finance expansion.

Problems in securing funds for rapid expansion—not only of production, but of R&D and

product development—are compounded by the

rapidly increasing capital intensity of some

portions of the electronics industry. Semiconductor manufacture is a prime example; capital

costs are going up rapidly, not only because

of escalating design cost as circuits become

more complex, but also because new generations of production equipment are much more

expensive (ch. 3). Given the predilection of U.S.

firms, in electronics as in other parts of American industry, for relying on internally generated funds—i.e., retained earnings and depreciation—whenever possible, financial managers have often been hard pressed to secure

funds for growth.

Because the chapter centers on costs of capital, interest rates and the mechanisms by

which they are determined become one of the

fundamental bases of comparison. The cost to

the borrower of acquiring funds is the interest

rate on the loan or bond. Costs of equity, following conventional practice, can be related

to costs of debt. In countries with well-developed capital markets and modest levels of

government intervention—as in the United

States—market-determined interest rates are

the primary competitive mechanism for allocations of investment funds, Industrial firms obtain funds by entering capital markets in competition with other borrowers.

The interest rate thus serves a critical function in the economy—that of the price for borrowed funds. This price serves to allocate

funds so that the pool of available capital goes

first to the most productive investments. The

mechanism is as follows. Managers of profitseeking enterprises make investment decisions

by comparing their costs in acquiring funds

with the expected profits from the uses of these

funds—i.e., with the returns on alternative investments. These projects might be new manufacturing facilities, R&D programs, or the acquisition of other corporations. If the anticipated returns are greater than the costs of obtaining funds, then the investment might be

made using money generated within the enterprise—e.g., from retained earnings—or from

outside capital markets. In either case, the interest rate is the primary factor in determining the cost of financing the project. For example, if market interest rates are high, a corporation might choose to invest in securities

rather than in its own business, In general, less

attractive investment projects will be postponed when interest rates rise, the market serving to allocate funds to other uses both within

the firm and among various companies seeking financing in the capital market,

The market-driven process described does

not always function ideally, but as a rule interest rates allocate funds quite efficiently. Still,

governments can act in various ways to influence investment decisions—either on a caseby-case basis or by favoring some sectors of the

economy over others. Outright subsidies and

loan guarantees are two of the more obvious

and common tools, Less visible and less direct

policies are also possible; some of these are explored in the discussion of financing practices

in Japan later in the chapter, Where governments intervene in capital markets, one consequence can be higher interest rates for all

borrowers except those favored by the government.

To explore international differences in

sources of funding and their costs, this chapter

compares the structure of financial markets in

the United States and Japan, together with typical financing practices of electronics firms.
Ch. 7—Financing: Its Role in Competitiveness in Electronics . 255 —

More limited discussions of France and West where governments may try to complement

Germany follow. The objective is to understand corporate strategies or to implement national

the effects of financing patterns on competi- strategies.

tiveness in the international marketplace ,

Sources of Funds and Financial Leverage in the

United States and Japan

Many executives in the U.S. electronics industry believe the firms they manage to be constrained in efforts to defend or expand international markets by relative costs of financing,

and in some cases also by shortages of capital.

The electronics industry is not alone in this

concern. Other American industries, especially

those facing intensified international competition, voice the same complaint, more especially

if they feel threatened by the Japanese. The argument has been articulated best—and empirically supported in most detail—by the U.S.

semiconductor industry, largely because its

rate of expansion and changing technical character place extraordinary demands on the financing capabilities of independent merchant

firms. The semiconductor industry’s position

with regard to financing is summarized below;

to the extent possible the argument will be generalized to other sectors of electronics—i.e.,

computers and consumer products.

The basic contention of the semiconductor

industry is straightforward, and for the most

part directed toward the industry’s primary foreign competitor, Japan: the ability of Japanese

electronics firms to gain market position

against American companies over the past few

years, both in the United States and abroad, has

been eased by cheap capital. (The meanings

that attach to cost of capital will become clearer

below.)

For one reason or another, in this view, Japanese corporations in many industries enjoy

costs of capital markedly lower than their

American counterparts, and from this source

alone gain competitive advantage; Japanese

companies would be able, in principle, to manufacture products at lower costs and market

them at lower prices. At times, U.S. firms have

also associated low-priced products with “unfair” practices in international trade (see ch. 11).

Certainly, a broad range of business tactics—

whether or not fair within the accepted framework of international trade—are easier to implement if capital is inexpensive.

The U.S. semiconductor industry has also asserted that favorable access to funds has enabled Japanese manufacturers to add capacity

in advance of market demand—indeed, to create excess capacity even in times of recession

—a “luxury” decidedly unavailable to American firms. As a consequence, when the economy improves, the Japanese are better placed

to quickly move into expanding markets, while

their competitors here struggle to build capacity and catch up. Finally, it is alleged, ample

supplies of cheap capital allow Japanese corporations to spend lavishly on the advanced R&D

so necessary in this rapidly changing field.

Lower costs of capital, together with full control over their domestic market, are viewed as

primary underpinnings of Japan’s global strategy.

What are the perceived reasons for these lower capital costs? Two main causes are frequently cited, along with related structural features

of the financial system in Japan: 1) the distinctly different capital structures of Japanese electronics companies; and, 2) the very high rate

of savings within the Japanese economy. For

structural reasons, Japanese firms can tap relatively large amounts of nonequity funds, primarily bank loans (bond markets in Japan are

still relatively undeveloped). American corporations, in contrast, rely much more heavily on reinvestments of internally generated
256 International Competitiveness in Electronics — —._ — — — —

revenues to finance growth. Nonequity funds,

it is claimed, tend to be less costly.

The second source of Japanese advantage—

high savings–by increasing the pool of funds

available to be lent, should depress interest

rates. This would have the effect of making all

types of investment capital less expensive compared to countries where savings are a smaller proportion of gross national product. Savings rates are discussed in more detail in a later

section; household savings in Japan run at

about 20 percent of income—nearly four times

the rate in the United States. There is little

agreement on why the savings rates in different

countries vary so much, and in particular why

that in Japan is so high and that in the United

States so low, Variations in the average proclivity of individuals in different countries to

save under otherwise similar circumstances

appear to be a factor; so do the extent of social

welfare programs and differing tax structures.

Combined, these two sources of financial advantage are said to give Japanese electronics

firms capital costs barely half those of their

American competitors—in 1980, about 9 percent compared to 15 to 18 percent for U.S.

semiconductor firms.l Such a result, if true, has

implications for competitiveness in many other

industries.

The conclusions of the Chase Financial Policy study cited above are summarized in table

51. According to Chase’s calculations, the typical Japanese manufacturer of semiconductors

enjoys substantially lower costs of capital than

merchant firms in this country, Only Matsushita (table 51) incurs financing costs larger

“’U.S. and Japanese Semiconductor Industries: A Financial

Comparison,” Chase Financial Policy for the Semiconductor Industry Association, June 9, 1980, p. 2.5. The most thorough discussion so far of the impact of corporate financial structure on

relative costs of capital, this report seeks to quantify Japanese

and U.S. financing costs with considerable care to identifying

the sources of the differences.

A more recent analysis comparing industry as a whole in the

United States and Japan finds average costs of capital for 1981

to be 16.6 percent here versus 9.2 percent in Japan. See, “A

Historical Comparison of the Cost of Financial Capital in France,

the Federal Republic of Germany, Japan, and the United States, ”

Department of Commerce, April 1983. In this report, no attempt

was made to adjust for inflationary expectations, nor were the

sources of the difference explored in any detail.

Table 51 .—Costs of Capital for U.S. and Japanese

Semiconductor Manufacturers as Calculated

by Chase Financial Policy

Weighted averages

of debt and equity

costs as of

June 4, 1980a

U.S. companies (calculations in dollars)

Advanced Micro Devices . . . . . . . . . .

Fairchild Camera and Instrumentb 

. .

Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Intersil c 

. . . . . . . . . . . . . . . . . . . . . . . . .

Mostek d 

. . . . . . . . . . . . . . . . . . . . . . . .

Motorola . . . . . . . . . . . . . . . . . . . . . . . .

National Semiconductor. . . . . . . . . . .

Texas Instruments . . . . . . . . . . . . . . . .

17.7%

15.5

16.8

21.1

16.7

13.8

17.4

16.5

Japanese companies (calculations in yen)

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . 8.80/0

Hitachi , . . . . . . . . . . . . . . . . . . . . . . . . . 12.1

Matsushita Electric . . . . . . . . . . . . . . . 17.1

Mitsubishi Electric . . . . . . . . . . . . . . . 7.7

Nippon Electric Co. (N EC) . . . . . . . . . 7.7

Toshiba . . . . . . . . . . . . . . . . . . . . . . . . . 7.7

aln ~erm~ of ~equ~red overall rate of return on invested caPital

bSubsequently acquired by Schlumberger

~Subsequently acquired by General Electric.

Subsequently acquired by United Technologies.

SOURCE “U. S and Japanese Semiconductor Industries A Financial Corn.

parison, ” Chase Financial Policy for the Semiconductor Industry

Association, June 9, 1960, tables 4 and 9, pp 5,3 and 7,6

than any of the U.S. companies, at least for the

time period examined. Nonetheless, the range

in capital costs faced by firms in either country is relatively large,

There are two major reasons for the wide divergences in capital costs in table 51. First, borrowing costs used in the calculations for Japanese firms were lower than rates for American

companies, The second primary source of difference lies in the dissimilar capital structures

of corporations in the two countries—the

greater use of debt by Japanese firms, principally in the form of bank loans (most American

firms with substantial debt carry this in the

form of bonds),

If Japanese firms use substantially more debt

than U.S. companies—as they do—and if debt

financing is less costly than equity—as the computational method used by Chase assumes—

then a total cost derived from a weighted average of the two sources must favor Japan, This
Ch. 7—Financing: Its Role in Competitiveness in Electronics . 257 —

would imply cost advantages for Japanese companies, not only in electronics but in any industry making similar use of leverage.

Internal and External Financing

Table 52 illustrates something of the range

in international differences in corporate finance. Japanese capital structures are heavily

weighted toward external financing. Japanese

corporations, on the average, received less than

half their capital from internal sources—i.e.,

from depreciation and reinvested profits. And,

while Japan is at the high end in use of external capital, the United States is at the low end,

relying much more heavily on internally generated funds.

The category of external finance includes

both loans—which in all five countries are extended primarily by banks—and securities. The

two major categories of securities are bonds

(like loans, debt) and stocks, representing equity holdings. 2 Note that Japanese firms rely

much more heavily on loans than securities

(either loans or equity) for their external funding; in general, companies in Japan employ

much higher financial leverage than do American corporations (leverage can be defined in

several ways, perhaps the most common being

the ratio of debt to equity in a firm’s capitalization). Table 53 compares debt/equity ratios for

U.S. and Japanese electronics companies. The

reasons that corporations in Japan make

——

‘For a standard introduction to corporate finance, see J. C.

van Home, ~undamenta]s of Financial A4anagernent, 4th e~

(E;nglewood Cliffs, NJ,: Prentice-Hall, 1980).

greater use of financial leverage—and the

consequences—are taken up later.

The conclusions of the Chase study concerning the impact of debt financing on capital

costs in Japan are grounded in well-accepted

methods of calculation, The cost of capital for

a particular investment can be estimated using

the relative proportions of the company’s

sources of capital as weights in the computation for the investment. For example, if a company pays 15 percent interest on debt instruments, and its risk-adjusted cost of equity (explained below) is 20 percent–and if the debtequity ratio is 1,0—then the firm’s overall cost

of capital would be 17% percent, The returns

expected from a given investment can then be

compared to this estimated cost of capital, The

computational method is deceptively simple

and—except for various subtleties involved in

determining the appropriate interest rate for

debt and the risk measures for equity—can be

applied in straightforward fashion.

All other things equal, then, Japanese firms

would enjoy clear financial advantages from

their greater relative amounts of debt (higher

leverage) so long as the interest rate on debt

is less than the risk-adjusted cost of equity—

the normal case. Several questions follow: If

financial leverage lowers costs of capital, why

don’t U.S. firms emulate the Japanese by using

more debt in their capital structures? Wouldn’t

stockholders benefit from this choice by earning higher returns? There are also potential tax

benefits: since corporations can deduct interest

paid on debt as an expense, but not dividends

paid to stockholders, would not greater use of

debt decrease Federal tax obligations and inTable 52.—internal and External Sources of Corporate Financinga

Internal finance

(reinvested profits, External finance Ratio of internal

depreciation) Loans Securities b Total to external finance

United States . . . . . . . . . . 69.40/o ‘ 12.40/o 18.20/o 30.60/o 2.27

Japan ... , . . . . . . . . . . . . . 40.0 49.0 11,0 60.0 0.67

United Kingdom. ., ... . 51.4 10.3 38,3 48.6 1.06

West Germany . . . . . . . . 63.1 29.6 7.3 36.9 1.71

France . . . . . . . . . . . . . . . . 65.0 27,4 7.6 35.0 1.86

al~.70 The~~ patterns have probably not ctwwed 9reat1Y

bCorpora et securlttes are mostly stocks and bonds

SOURCE Y Suzuki, Money and t3ank~r?g (n Contemporary Japan (New Haven, Corm Yale University Press, 1980), p 14
258 ● International Competitiveness in Electronics

———. -—— —— — —..—.—

Table 53.—Total Debt-to-Equity Ratios for

Selected U.S. and Japanese Electronics Firms

1975 1979

United States

Advanced Micro Devices. . . . . . . . . . . . . . . 81 0/0

Control Data Corp. (CDC) . . . . . . . . . . . . . . 38

Digital Equipment Corp. (DEC). . . . . . . . . . 30

General Electric . . . . . . . . . . . . . . . . . . . . . . 41

Honeywell . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

IBM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O

Motorola . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

National Semiconductor . . . . . . . . . . . . . . . 25

RCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Texas Instruments . . . . . . . . . . . . . . . . . . . . 14

Japana

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200%

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Matsushita Electric . . . . . . . . . . . . . . . . . . . 14

Mitsubishi Electric . . . . . . . . ............370

Nippon Electric Co. (NEC) . ............350

8%

20

32

25

32

17

0

30

37

125

21

190%

96

16

270

400

aThe financial data for Hitachi, Matsushita, and Toshiba—as used by chase

Financial Poiicy-includes affiliated tradngc ompanlesamongthe consolidated

subsidiaries, while that for Fujitsu, Mitsubishi Electric, and NECdoes not See

the Chase Financial Policy report cited in the source note below, p. 61

SOURCES: United Statea — Derived from annuai repotis, also “Financial Issues

in the Competitiveness of the U S. Electronics Industry, ” repori prepared for OTA by L. W. Bergman & Co. under contract No. 033.1550.0,

pp 52, 56 Japan-Derived from data in “U S. and Japanese Semicon.

ductor Industries’ A Financial Comparison, ” Chase Financiai Policy

for the Semiconductor Industry Association, June 9, 1960, Appendix

Japanese Semiconductor Companies, Financial Statements and Supporting Schedules.

crease aftertax profits? If so, isn’t this another

reason to encourage U.S. electronics firms to

increase their leverage? (Japanese tax treatment

of interest payments is similar to U.S. law i n

this respect.) At this point, the layperson might

think that Japanese firms have simply taken advantage of financing choices also open to

American companies,

Risk

The answers to the questions above, and the

key to understanding the U.S. electronics industry’s unhappiness with Japanese financing

practices, relate to a second aspect of financial decisionmaking—risk. Investment decisions inevitably involve risks for those who

supply funds—whether external funds or internal—because there can be no certainty that future cash flows will be sufficient to compensate investors. In essence, the risks borne by

investors are of two types. First, cash flows are

variable—more so in some types of businesses

than others. In one year, the funds remaining

after expenses—hence available for distribution

to shareholders or for retention in the enterprise—may be plentiful; in another, such moneys may be scarce or nonexistent. Stockholders

are generally believed to desire stable earnings

from year to year, accepting greater variability in rate of return only if compensated by a

higher average return.

In contrast to stockholders, who share in the

ownership of the firm, creditors merely lend

it funds; they generally have first claim on cash

flow, as well as on the assets of a firm, and

receive a “guaranteed” rate of return—i.e., the

interest rate on bonds or other debt instruments. While creditors seldom share in the first

type of risk—variability in returns—they may

sometimes choose to subordinate their claims

rather than force a firm into bankruptcy. In the

recent example of Braniff International, the

airline’s creditors several times allowed payments of both principal and interest to be deferred before Braniff finally entered bankruptcy.

The Braniff case illustrates the second type

of risk—loss of all or part of the investment itself, as well as loss of revenues from interest

payments or distributions of profits. This is a

risk borne by both owners and creditors. But

because creditors have first claim, they are

more likely to recover at least part of their investment in the event of business failure. This

is the reason interest rates on debt are generally

lower than the risk-adjusted cost of stockholders’ equity: holders of debt face lower risks

because they have first claim on assets. At the

same time, they must accept a nominally fixed

rate of return—generally lower than that accruing to shareholders. (In fact, the effective rate

of return on bonds is not necessarily fixed, as

pointed out earlier, but this is not important

here.)

The discussion above is necessarily schematic, and corporations can avail themselves of

other methods of financing, which fit into the

subordination ordering in various ways. But

as a general rule, common stockholders come

last–i.e., can recover their assets only after all
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 259

—

other creditors and investors have been paid.

This subordinated status makes shareholders

sensitive to the degree of leverage employed

by the firm; their exposure to risk increases

with higher leverage. Not only does more debt

in the firm’s capital structure tend to increase

the variability of returns to shareholders, but

added debt worsens their position in the event

of a forced liquidation. Typically, common

stockholders must be compensated through

higher returns–which can include capital appreciation—before they will accept the risk inherent in greater leverage.

As a consequence, adding more debt will not

necessarily lower a firm’s cost of capital.3 Indeed, neglecting tax effects, the choice of debtequity ratio, over rather wide ranges, should

have little, if any, impact on capital costs. Even

assuming no increase in interest rate as a firm

borrows more—which is not very realistic—the

lower costs of debt are generally offset by the

higher required returns to common shareholders as leverage increases. Several cautions must

be added. While this conclusion is commonly

accepted as applying for U.S. capital markets,

it is not clear that it always holds in the same

way in other countries. Furthermore, taxes do

matter, and the fact that interest payments

lower a company’s tax bill usually would argue

for adding to the proportion of debt in a firm’s

capital structure. But at some point more debt

will be accompanied by higher interest rates,

since the debt itself becomes increasingly risky

for potential holders.

With all of this said, how is it possible that

Japanese companies can, on the average, employ debt-equity ratios markedly higher than

American firms, without seeming to bear higher costs of both debt and equity? The usual response holds that the Japanese financial system

differs from that in the United States, and

forces that tend to raise the cost of capital as

leverage increases are absent in Japan (or function differently than they do here), This implies

one or more of the following:

1. Japanese investors exhibit risk aversion

behaviors markedly different from their

counterparts in the United States,

jIbid., ch. 18.

2.

3.

4.

Some Japanese investors are accepting

risks for which they receive less compensation—for whatever reason—than they

desire.

Some classes of borrowers in Japan pay

premiums for funds, these premiums

counterbalancing the low rates available

to other borrowers—or, alternatively, some

potential borrowers cannot get funds at all

because of capital rationing.

Some risks which private investors in the

United States must bear are, in one way

or another, reduced for private investors

in Japan.

Each of these four possibilities will be briefly

examined.

Risk Aversion Behaviors

Financial and business risks must be absorbed within any system that operates to

transfer funds from savers to commercial borrowers. The presumption is that people have

an aversion to risk and, if they are to accept

such risks, they must be compensated by interest payments, capital appreciation, or dividends on shares. Still, it is not necessarily true

that all people—or all economies—will exhibit

identical patterns of risk aversion. Japanese investors, for example, might demand less remuneration for a given level of risk than

Americans, (It is also possible that the Japanese

are less reluctant to postpone consumption—

a possible explanation for the higher savings

rate mentioned earlier, with its tendency to

force down interest levels.)

Compensation for Risk

The second possibility suggested above was

that some individual or institutional investors

in Japan might be compelled to accept less

compensation than they desire—i.e., less than

they would receive in a capital market that

functioned differently. It does appear that Japanese banks—which provide much of the capitalization for electronics firms through

loans—are accepting what are essentially quasiequity positions. That is, by the standards of

countries like the United States, banks in Japan

are accepting the greater risks normally asso-
260 ● International Competitiveness in Electronics

— .

ciated with equity. While banks can diversify

these risks by maintaining a portfolio of corporate loans, to the extent that such risks are

systematic, diversification will be ineffective

(“systematic risk” is simply that which cannot

be reduced by diversification), The question remains: Why do banks in Japan accept financial risks that would not be acceptable elsewhere in the world? This question is taken up

later in the chapter.

Preferential Treatment of

Selected Borrowers

Some observers assert that “target” industries in Japan are selected to receive bank loans

at interest rates well below market levels.4 This

would imply, in the normal circumstance, that

other borrowers will pay higher than market

rates; still other potential borrowers might not

be able to secure funds at all. The bias is usually alleged to favor large firms at the expense

of the far greater number of small establishments in Japan, and to favor growth industries

—even though such industries may, in the

shorter term, offer rates of return both lower

and more variable than alternative investments, In general, both semiconductors and

computers would be classed as rapid growth,

long payout industries—in Japan as well as in

the United States,

If some borrowers are, in fact, favored with

lower than market interest rates in Japan, this

question follows: Why doesn’t competition

among lenders force Japanese banks to allocate

resources to the firms and industries promising the greatest returns, as in the United States?

4L. C. Thurow, for example, has claimed that Japanese inroads

into U.S. and world semiconductor markets are financed with

funds provided by the government-owned Bank of Japan: “But

the Japanese are entering this industry with massive amounts

of debt capital ultimately lent by the Bank of Japan, Their aim

is to jump directly into large-scale, capital-intensive techniques

of production; proceed rapidly down the learning curve; sell at

prices lower than those of the rest of the world; and capture most,

if not all, of the market. If American industry limits its investments to those that can be financed by retained earnings, they

will simply be driven out of the semiconductor industry. ” See,

“Prepared Statement of Dr. Lester C, Thurow, ” Productivity in

the American Economy, hearings, Task Force on Economic Policy and Productivity, Committee on the Budget, House of Representatives, Jan. 12, 13, and 15, 1982, p. 34.

Subsidization of Risk

The foregoing question is often answered, at

least in part, by appeal to the fourth point—

namely, that on some loans Japanese banks can

shift part of the risk to other parties. In particular, for loans to companies whose activities

are deemed to further national interests, the

Japanese Government may effectively guarantee the loan, at least to the extent of providing

protection against bankruptcy, Some observers, indeed, suggest that many loans by Japanese banks are simply government loans

passed through the banking system. In this

view, some of the “normal” risks of debt financing are absorbed by the government rather

than the banks; interest charges below market

rates reflect government subsidization.

As with the other points raised above, the

question of whether and to what extent the Japanese Government subsidizes risk can be answered, at least in part, by empirical evidence.

While the actual functioning of the country’s

financial system is taken up in a later section,

the Japanese economy is no different from

others in that capital is a scarce resource allocated by various mechanisms among an enormous variety of investments. If the government

or the banking community chooses to step in

by selecting target sectors to receive capital at

rates that were directly or indirectly subsidized, the consequences are quite predictable.

The target sectors would gain at the expense

of the rest of the economy—for which credit

would normally have to be rationed. In other

words, no country can subsidize all industrial

sectors simultaneously—although manufacturing might be favored over agriculture, or the

private sector over the public. In fact, there is

no question that capital was allocated by the

Japanese Government during the earlier postwar period; what is not so clear is whether

more than remnants of these policies remain.

Price Inflation and Banking Practices

One question that even the more sophisticated analyses, such as the Chase study mentioned above, have not adequately addressed
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 261

— ——.——— —— ——

is the impact of inflation on international financial comparisons, The effects are too complex

to fully review here, but differing inflation rates

among the world’s economies are a major factor in apparent differences in costs of capital.

The reason is that observed market interest

rates depend in part on expectations by investors with respect to price inflation. If expectations differ between a pair of countries, then

market interest rates will diverge from this

cause alone. But to the extent that the divergence in interest rates simply reflects the underlying inflation rates in the two economies,

differences in costs of capital based on these

interest rates are not “real. ” only a difference

in costs of capital after adjustments for inflation would confer advantages in international competition.

The difficulty is that future inflation can only

be projected; the presumption is that the market mechanisms which set interest rates take

such projections into account. Interest levels

enter the calculation of capital costs for U.S.

and Japanese electronics firms in table 51 in

at least two ways: 1) through the cost of equity computation, which is based on a “riskless”

interest rate; and, 2) in the choice of interest

rate for the cost of debt. The riskless interest

rate applies to investments for which the risk

borne by the lender can be considered negligible, at least in comparison to the risks of equity. Government notes, bonds, or bills are typical examples of “riskless” investments.

The riskless rates applied by Chase Financial

policy were: 10.2 percent for the United States,

derived from the June 1980 Treasury bond rate;

and 9.0 percent for Japan, the yield on the most

widely traded debenture (a type of bond) on the

Japanese market–lo-year issues of Nippon Telegraph and Telephone Public Corp. (NTT). The

analysis takes the degree of risk for these instruments to be, if not zero, at least small and

comparable in the two countries. *

These two interest rates do not differ by

much; indeed, their closeness accounts for part

——

* NT”r debentures may actually carry somewhat greater risks,

depending on whether the Japanese Government backs such

issues. If NTT debentures are in fact riskier, the effect would

be to decrease the risk-free rate in Japan, and hence the riskadjusted cost of capital.

of the cost advantages calculated for the much

more heavily leveraged Japanese companies.

But are they close in real, rather than nominal,

terms? The answer depends entirely on longterm inflationary expectations—expectations

which were probably considerably higher in

the United States than in Japan during 1980. *

The nominal interest rate differential favoring

the Japanese might well reverse, and favor the

United States, could the real rates be compared.

Differences in banking practices between the

two countries also affect the true costs of capital. For instance, banks in Japan typically demand that greater compensating balances be

kept on deposit against corporate loans. 5 B e -

cause the firm pays more for the funds it has

borrowed than it receives on its deposits, this

practice raises the effective interest cost of the

loan, Large compensating balances mean that

the usual measure of financial leverage—debtequity ratio—overstates the true degree of leverage.

These observations on the effects of inflation

and compensating balances emphasize the

complexity of cost of capital comparisons as

applied to funds from external sources. They

do not confirm or deny the general trends in

table 51, though perhaps throwing doubt on the

magnitude of the differences resulting from the

Chase analysis.

— —

*The Chase study from which table 51 comes did attempt to

compensate for varying inflationary expectations. The Japanese

cost of capital in yen was converted to a dollar cost using the

difference between the two interest rates cited above, said to

represent “the premium investors require for recei~’ing interest

and principal payments in U.S. dollars rather than yen” [p. 7.7).

But by implying that the 1.2 percentage point difference

represents dissimilar inflationary expectations, this procedure

amounts to assuming that the riskless rates in the two countries,

expressed in dollars, are equal. This seems unlikely; it would

imply that the capital market in Japan is both efficient and perfectly linked to that in the United States, neither of which is true.

It is more reasonable to assume that differences in inflationary

expectations were considerably larger than 1.2 percent in

mid-1980.

W. Suzuki, Money and Banking in Contenlporar~r ]apan (New

Ha\ren, Corm.: Ya]e LJniversity Press, 1980), p. 50. Japanese ~irnrs

often keep 25 percent or more of borrowed funds deposited with

lending banks. Furtherrnom, banks are more likely to lend to

firms that are already large depositors. In the United States, compensating balances have typically been in the range of IO to 20

percent, but this requirement is increasingly being replaced by

an explicit fee. The fee arrangements generally result in lower

borrowing costs. See “The Perilous Hunt for Financing, ”

Business tk’eek, Mar. 1, 1982, p. 44.
262 . International Competitiveness in Electronics

— —

Effects of Financial Leverage

on Tax Payments

While the Japanese Government might support electronics firms through a variety of capital and other subsidies, the study by Chase

Financial Policy summarized in table 51 is

based solely on a leverage argument—i.e., on

the advantages of debt as a source of corporate

financing. In the absence of other sources of

financial advantage, leverage provides lower

capital costs primarily through its effects on

corporate tax payments. Although these are not

trivial, the tax advantages that accrue to Japanese firms as a result of high debt-equity ratios

reduce their costs of capital by only a few

percentage points—probably less than 2—compared to American firms. The reasons are outlined below.

In order to isolate the effects on cost of capital stemming from tax shields on debt, assume

that interest rates in the United States and

Japan are the same–say 10 percent–but that

corporate tax rates differ. For purposes of illustration, use the nominal tax rates in the two

countries—48 percent for the United States, 40

percent for Japan.6 For leverage, assume a ratio

of total debt to total capital equal to 0.67 for

Japan and 0.17 for the the United States. * As

a result of the tax shield created by leveraging,

costs of capital would be lowered by:

Japan . . . . . . . . . 0.67 (0.4) (0.1) = 0.0268

United States .0.17 (0.48) (0.1) = 0.00816 —

Subtracting gives . . . . . . ........0.01864 or 1.864°/0

That is, the tax shield created by greater

leverage would give Japanese firms a cost of

‘3This is the nominal rate for retained income in Japan; distributed profits are taxed at 30 percent. While nominal rates suffice for illustration, they bear little resemblance to the taxes that

corporations actually pay after deductions, credits, depreciation

allowances, etc. The “effective” tax rates in the two countries

in the late 1970’s—total corporate taxes paid divided by total corporate profits—were about 37 percent in the United States, 29

percent in Japan. See H. Gourevitch, A. Wilson, and D. Culp,

7’ax Rates in Major industrial Countries: A Brief Comparison,

Congressional Research Service report No. 80-224 E, Dec. 15,

1980, p, 8.

*The 0.67 figure is used at several points in the summary of

the Chase Financial Policy study —e.g., p. 2.7. It is essentially

the median figure for Japanese semiconductor manufacturers.

Medians for U.S. semiconductor firms in the years examined

by Chase were 0.16 to 0.18 (p. 2.2).

capital advantage of about 1.9 percentage

points compared to firms in the United States.

In fact, this example overstates the advantage

because the median figure (0,67) for Japanese

firms ignores the impact of absolute size,

Hitachi and Matsushita—which have less than

median leverage—are much larger than the

others; Nippon Electric Co. (NEC), which has

the highest debt-to-capital ratio—0.80—is considerably smaller. When the debt-to-capital

values are weighted by total assets, the debtto-(total) capital ratio for the Japanese companies is 0,52, a result that is considerably affected by Matsushita, which had negligible leverage. Using this figure for Japan, along with

the leverage value that Chase suggests in their

study as a desirable target value for American

firms desiring to reduce their costs of capital–

0.33--the comparison becomes:

Japan . . . . . . . . . 0.52 (0.4) (0.1) = 0.208

United States .0.33 (0.48] (0.1) = 0.01584

Subtracting gives . ............0.00496 or 0.496°/0

These two changes reduce the cost of capital

advantage of the Japanese firms from 1.9 percentage points to only half a point. This second

comparison is not necessarily either more or

less meaningful than the first; the lesson is that

tax advantages are quite sensitive to small

changes in leverage. The computation is far

less sensitive to the tax rate itself.

These examples show that, while the use of

leverage does lower a firm’s cost of capital, the

effects are relatively small. A cost of capital

lower by 2 percentage points might translate

to manufacturing costs lower by 1 percentage

point—not very significant. The difference that

does result can be regarded as an implicit financial subsidy from the Japanese Government

via the tax system. (The question of special tax

provisions for certain industries is independent.)

Risk Absorption in Japan

As mentioned earlier, Japan’s banking system absorbs risks normally assumed by shareholders in the United States—in particular, the

risks of high leverage in Japanese electronics

companies. The first question is whether, in
Ch. 7—Financing: Its Role in Competitiveness in Electronics . 263

— —

fact, the risks of bankruptcy, reorganization,

and business failure are increased by the

greater use of financial leverage in Japan. If so,

the frequency of failures—especially during

economic downturns—should be higher than

in countries like the United States where, on

the average, leverage is much lower. Indeed,

bankruptcies in Japan have risen to rather high

levels in times of general economic downturn.

In 1977, for example, Japanese enterprises

failed in record numbers. 7 The rate of bankruptcy that year was four times greater than

the comparable U.S. figure, and these failures

involved corporate liabilities of over $16 billion, more than five times the 1977 level in the

United States. While 1977 remains the peak

year in terms of both number of business failures and total liabilities, in every year since

1976 Japan has experienced more than 15,000

bankruptcies (excluding small businesses) with

total liabilities exceeding 2 trillion yen (roughly

$10 billion).8 Although bankruptcies in elec-

—————

l;. ~. Saxonhou\(>, “In(lustrlal Restru{,turing In ]apan,” /ournal

of Japane.w ,?tu[lie~, \ 01. 5, 1978, p, 273. Elsewhere Saxon house

states: ‘ < Det)t-equ it ~ rat io~ whl(. h are four or fi~e times the Americ a n 1 e~el result i n t]a n k ru ~)tc ~ rates w h i (: h are also four or fi~re

time.s the Arnerl( an le~e]. I,arge Japanese firms do go bankrupt.

I n recent years ]apan has had two close to $1 billion in liabilities hankrupt(, ie~ “ See ‘‘Statement of Gary R. Saxonhouse

lleforf~ the I{ OL]se F’or[’ign Affairs (;omm]ttee, Subcommittee

A\ Ian and Pa(, ifi(. Affairs and Sub(:ommittee on International

E;conomi(, Po]i(. } and Trade,” Oct. 1, 1980.

‘(II1I y fl rm \ with 1 i at) 1 I it ies of more than 10 million jen are

i nclu(ied Figures for 1968 through 1980 can be found in ‘‘Japan

1981 —An International Comparison, ” ]apan Report, Joint

I)uhlir.ations Research Service JPRS 1,/10760, Aug. 24, 1982, p.

7, those for 1981 in ‘corporate Failures in Japan Last Year I-’ell

1 .5% to 1 7,610, ” L$’a]f Street \ourna], Jan, 15, 1982, p. 28.

tronics have been infrequent—in part because

growth rates and cash flows have remained

high, allowing firms to service their debt—risk

is clearly present.

In the Japanese financial system, these risks

tend to be shifted to the banking community.

Banks assume quasi-equity positions by accepting debt in highly leveraged firms. If a company finds itself in financial difficulty, the

banks are literally forced to take action aimed

at reorganization. The alternative is to proceed

with bankruptcy. When large corporations

have faced trouble, the choice, not surprisingly, has often been restructuring—sometimes accompanied by infusions of even more funds,

Typically the banks have forced a complete

reassessment of corporate strategy; not infrequently the ailing firm’s executives have been

replaced by a bank-appointed managerial team.

Sometimes observers in the United States

conclude that these interventions by Japanese

banks serve to reduce risks to businesses, or

risks to the banks, or both. To believe this implies believing that bankers are on the average

wiser than managers of industrial corporations. In fact, these interventions do not lessen

financial risks, but are caused by the much

greater exposure of the banks. Such interventions are less common in the United States because American banks do not provide as great

a fraction of corporate financing.

Other Factors in Costs of Financing

Size and Diversification

Many of the leading international competitors in electronics are large, diversified companies (ch. 4). This is the case for American

corporations like GE or IBM, European manufacturers like Philips or Siemens, and many

Japanese electronics firms. But other U.S. entrants in world markets, notably the merchant

semiconductor firms, remain much smaller.

These firms, have generally depended more

heavily on one or a few product lines than their

competitors in Japan. Size and diversification

affect capital costs quite directly, with the advantages going to big companies with broad

product lines. Such firms can absorb and

spread risks more effectively.

Lenders look to a stable pattern of financial

returns as one indicator of security for their
264 ● International Competitiveness in Electronics

own repayment. Diversified companies exhibit

more stability, hence lenders are willing to

supply funds at lower rates of interest. Large

diversified firms are also, on average, evaluated

as better risks by bond rating companies like

Moody’s or Standard & Poor’s. Texas Instruments taps a lower cost bond market than, say,

Advanced Micro Devices; IBM lower than Digital Equipment Corp.; GE lower than Zenith.

The conclusion is: costs of capital will be

higher for U.S. as opposed to foreign electronics companies when the American firms are

significantly smaller and less diversified.

There is a great deal of variation in the sizes

of firms within the electronics industries of the

United States, Japan, and the European countries. Nevertheless, in Japan and Europe it is

primarily larger companies that are active on

a world basis, more the exception than the rule

for companies the size of Nixdorf (West Germany) or Oki Electric (Japan) to be strong international competitors, In the United States, the

situations of companies like Mostek, Fairchild,

or Intersil have changed dramatically as a result of their acquisitions by much larger concerns. Still, the United States remains unique

in the number of relatively small electronics

firms that seek to compete worldwide, including many of the new startups making semiconductor and computer products.

In Japan, the evidence suggests that the government and banking system—as in a number

of other countries—overtly discriminate among

borrowers on the basis of size.9 But even if foreign capital markets were identical in every

respect to American markets, and operated

with no more government intervention than in

this country, the larger average size of the major foreign competitors—particularly in semiconductors—would give them at least a small

relative advantage.

On the other hand, larger semiconductor and

computer firms in the United States clearly

have not reaped great benefits from their own

ability to tap somewhat lower cost sources of

external capital. Thus, one can question how

QR. E. Caves and M. Uekusa, Industrial Organization in japan

(Washington, D. C.: Brookings Institution, 1976), pp. 37-38.

important such differences might be internationally. Over the years, fast-growing and profitable small- and medium-sized firms have coexisted with the giants of the U.S. industry—

indeed have often outstripped them; size and

diversity did not appear to give RCA or GE

much help in computers or semiconductors.

In dynamic, technologically advancing industries, other competitive forces far outweigh

small differences in interest rates on bonds or

bank loans,

Savings Rates10

As mentioned earlier, international differences in savings rates could affect relative costs

of capital, Within a closed economy, a high rate

of savings creating an ample supply of investment funds will tend to depress interest rates.

Given the international linkages among capital

markets, this simple argument is not by itself

sufficient to relate savings levels to interest

rates, but may still have weight. For reasons

that are poorly understood, the savings rate in

Japan has been extraordinarily high for many

years, Table 54 gives data on household savings for the 1976-79 period; the figures for all

five countries have remained fairly constant

over the past two decades. High savings rates

have characterized both the corporate and

household sectors in Japan, but it is personal

savings that have been most surprising in view

of interest rates that have been below prevailIOFor a general introduction to savings rates, see C. Elwell,

Investment and Saving: The Requisites for Economic Growth,

Congressional Research Service report No. 81-207 E, Nov. 15,

1981.

Table 54.—Household Savings Rates in

Several Industrial Countries

Average savings rate,

1976-79a

United States . . . . . . . . . . . . . . . . . . . 5.80/o

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1

West Germany . . . . . . . . . . . . . . . . . . 13.4

France . . . . . . . . . . . . . . . . . . . . . . . . . 13.5

United Kingdom ., . . . . . . . . . . . . . . . 8.3

aperCentageof household disposable Income saved

SOURCE: K. Sate, “Why Have the Japanese Saved So Much? On Determinants

of Japanese Household Saving, ” presented at Japan Economic

Seminar, Washington, D. C., Jan 23, 1982, p 1
Ch. 7—Financing: Its Role in Competitiveness in Electronics 265

—— —— —

ing rates of inflation—as shown later (see table

64)—and have also been significantly lower for

savings accounts than for alternative investments such as bonds.11 Despite this, Japanese

households carry the largest portion of their

savings as cash or deposits; the contrast with

behavior in the United States—illustrated in

table 55—is striking. Householders in Japan

keep a substantially lower portion of their assets in corporate stocks.

This extraordinarily high savings rate–half

again as much as in France or West Germany,

and nearly four times that in the United States

(table 54)–when combined with closely controlled savings institutions, is often said to produce artificially low interest rates on loans to

Japanese businesses. The argument is essentially on the supply side: low interest yet abundant sources of capital have allowed Japanese

corporations to expand rapidly while maintaining low prices, especially in export markets.

As one consequence of rapid growth, the companies would enjoy economies of scale, along

with modern, highly productive manufacturing

facilities, Past this point, low capital costs

would be less of an advantage, but Japan’s

firms could by then compete comfortably on

other grounds.

Numerous variations on this theme have

been propounded, many stemming from the

Japanese Government’s well-known low interIISee, for examp]e, H, C, Wallich and M. 1. Wallich, “Banking and Finance, ” Asia New Giant, H. Patrick and H, Rosovsky [eds.) [Washington, DC.: Brookings Institution, 1976), pp.

260-261.

Table 55.—Distribution of Household Assets

in the United States and Japan, 1978

United States Japan

Cash, plus demand and savings

deposits . . . . . . . . . . . . . . . . . . . . 39.20/o 68.70/o

Bonds . . . . . . . . . . . . . . . . . . . . . . . . 9.6 8.1

Stocks, including mutual funds . . 23.5 10.0

Life insurance . . . . . . . . . . . . . . . . . 5.6 12.6

Other a . . . . . . . . . . . . . . . . . . . . . . . 22.1 0.6

100.0”/0 100,00/0

aF~r the l,Jnlted States includes money market and Pension funds—the latter

accounting for the major portion of th IS category, for Japan, consists mostly

of company savings plans

SOURCE Adapted from E Lincoln, “Financial Markets In Japan, ” Counc!l Report

No 47, Un~ted States-Japan Trade Council, Dec 19, 1980, p 9

est, high growth strategy in the earlier postwar

years. Some observers go so far as to imply that

no resource allocation problems exist in Japan

because of a virtual glut in investment funds.12

Often such assertions are linked with the target

industry argument mentioned earlier. If true,

this would mean that Japan’s chosen industries

enjoy low financial costs for reasons entirely

apart from their high debt-equity ratios.

But capital markets should not be viewed

from only one side. In this case, there are potential impacts on the demand side as well as

the supply side. Growth affects both the demand for funds and the supply, Businessmen

foresee abundant sales opportunities in expanding economies and invest to meet the new

demand. This places heavy pressures on capital

markets. On the supply side of these markets,

individual consumers may experience rapid

growth in real income but adjust their consumption habits more slowly—meanwhile saving their unspent income. Thus, a case can be

made that Japan’s high savings rate is a consequence rather than a cause of rapid economic growth—i.e., that income growth has outstripped consumption.

In fact, neither demand-side nor supply-side

perspectives tell the whole story; both are

needed. In Japan, inflation-adjusted interest

rates on savings have recently been comparable

to rates in the United States—table 56. This

table compares rates of return available on

long-term government bonds in both countries

(a rather arbitrary choice) to the respective inflation rates, the difference being “real” rate

of return. As the table shows, since 1978 investors in Japan have received higher real returns

than those in the United Sates. This suggests

that artificially depressed interest rates have

not recently been a source of abnormally low

12 ReSpon5e of W. Rapp, Technolog~~ Trade, hearings, COrnrnittee on Science and Technology, Committee on interstate and

Foreign Commerce, and Subcommittee on International Trade,

Investment and Monetary Policy of the Committee on ~anking,

Finance and Urban Affairs, House of Representatives, and House

Task Force on industrial innovation, June 24, 25, 26, 1980, p.

421. Rapp stated, “The Japanese have basically solved that problem by generating too much capital, so that they are actually

wasting it to a certain degree now, so it is overkill. They don’t

really have a capital allocation problem now,

99-111 0 - 83 - 18
266 . International Competitiveness in Electronics

— —

Table 56. —inflation-Adjusted Rates of Return in the United States and Japan

United States Japan

Long-term Inflation Real rate Government Inflation Real rate

government rate ratea

of return bond rate ratea

of return

1975 .., . . . . . . 8.20/o 9.20/o – 1 .0 ”/0 9.20/o 11 .9 ”/0 –2.70/o

1976 . . . . . . . . 7.9 5.8 2.1 8.7 9.3 –0.6

1977 . . . . . . . . 7.7 6.5 1.2 7.3 8.1 –0.8

1978 . . . . . . . . 8.5 7.5 1.0 6.1 3.8 2.3

1979 . . . . . . . . 9.3 11.3 –2.0 7.7 3.6 4.1

1980 . . . . . . . . 11.4 13.5 – 2.1 9.2 8.0 1.2

1981 . . . . . . . . 13.7 10.4 3.3 8.7 4.9 3.8

a~a~~d on ~OnSUmer Price indexes.

SOURCE Based on data from International Finarwia/ Sfat/st(cs, International Monetary Fund, various Issues.

costs of capital for Japanese electronics firms,

In other words, there is little evidence of any

across-the-board supply-side stimulus that

might stem from an ability by Japan’s Government to persuade people to save even at relatively unattractive interest rates. As the table

demonstrates, corporate (and recently government) demands for funds have driven up interest rates in Japan much as in other developed economies.

This does not dispense with the possibility

that the Japanese Government intervenes in

capital markets to subsidize target industries.

Certain industries—or firms—could be favored

by government repayment guarantees to lending banks, effectively transferring the risk of

default from the commercial banking system

to the public at large. Alternatively, the Bank

of Japan could be encouraged to rediscount

bank loans at favorable rates. Finally, through

the postal savings system the government itself

takes in about a third of all savings deposits.13

These funds could be channeled to favored industries at interest rates largely determined by

government fiat,

It is quite true that in early post-World War

II Japan, allocations of investment funds were

more a function of administrative control than

relative interest rates; favored industries had

access to funds at subsidized rates of interest,

while personal savers and small businesses

bore the brunt of the costs. This point is taken

up later, when the overall structure of the JapalsThe Japanese ~jnancja)System (Tokyo: The Bank of Japan!

1978), p. 22.

nese financial system is described in more detail. Still, this practice seems largely to have

disappeared; government capital allocations do

not now seem to provide borrowers in Japan

with a notable edge over U.S. competitors. Government financial institutions accounted for

about 30 percent of all corporate loans in 1950,

but as of the end of 1980 their share had fallen

to 13 percent; during the 1970’s, loans from

government institutions accounted for only

about 5 percent of total capital flowing into

Japanese industry. 14 The percentage is even

lower in the electrical machinery sector, which

includes electronics; here, government institutions accounted for only 8,2 percent of outstanding loans as of December 1980, Nonetheless, some observers continue to hold that the

Japanese Government effectively socializes the

risk of corporate borrowing.15

Costs of Capital for Electronics Firms

in the United States and

Japan: Summary

It does seem clear that Japanese electronics

manufacturers can get external capital at somewhat lower rates than their counterparts in the

United States. But at present, this capital cost

advantage, in inflation-adjusted terms, appears

14E. Lincoln, “The Japanese Government’s Role in Business

Financing, ” ],!?1 Report, Japan Economic Institute, Washington,

D. C., Jan. 8, 1982, p. 12.

15E. Sakakibara, R. Feldman, and Y. Harada, The Japanese

Financial System in Comparative Perspective, Joint Economic

Committee, Mar. 12, 1982, p. 26, The authors reach no conclusions about the effects on interest rates or cost of capital, however.
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 267

Photo credit GCA Corp

Wafer processing equipment for making

integrated circuits

to be small—certainly less than 5 percentage

points. The sources of this advantage are multiple: government policies in Japan that have the

effect of subsidizing interest rates for favored

investments no doubt continue to account for

a good deal of the margin. Except for the taxshielding effects of their higher leverage, Japanese electronics companies do not have access

to cheaper capital because of the preference

for bank loans in their capital structures. While

greater leverage transfers business risks to the

banking system, it does not allow the Japanese

to avoid risks.

A difference in financing costs of 2 or 3

percentage points is nontrivial but will not

drastically alter the market postures of competing firms. For purposes of comparison, assume a sales-to-capital ratio of 2—within the

typical range for much of the electronics industry—and a 3 percentage point difference in capital costs. Moreover, assume that this 3 percentage point margin applies for the total investment in a production facility—which is unlikely. Even then, the result would be a potential

manufacturing cost difference of about 11⁄2 percent, and might translate into a price difference

of the same magnitude. Smaller capital cost differences would reduce this advantage commensurately.

Such a 2 or 3 percentage point advantage in

capital costs represents an average over many

firms in both Japan and the United States. The

difference in average costs of capital in the two

countries is smaller than the differences in

capital costs among competing electronics

firms within either country. Although table 51

does not accurately portray cost of capital differences between the two countries, it will illustrate this point if taken as representative of

firm-to-firm differentials. The range in costs of

capital for the eight U.S. semiconductor firms

listed in the table is 7 percentage points, that

for the six Japanese manufacturers nearly 1 0

percentage points. The interfirm differences—

and the resulting competitive advantages or

handicaps—are much larger than OTA’s estimate of the average differential between the

two countries.

Relative availability of capital for electronics

firms in the United States and Japan has greater potential impact. Favored Japanese electronics firms seem to have little difficulty in acquiring funds for expansion and modernization. In

contrast, some U.S. companies—particularly

the smaller ones—believe themselves subject

to capital constraints. That is, they may find

themselves unable to raise as much capital as

they would like at any reasonable cost.

Capital availability is a subject left to a later

section, but note one major difference between

electronics and other American industries that

make this same complaint. Some domestic steel

companies, for instance, have had difficulty attracting external funding because of their inability to convince prospective investors of the

industry’s potential for growth and future profits. While a few segments of electronics face

similarly limited prospects, the financing problems faced by most U.S. entrants are more

closely related to the large amounts of new
268 ● International Competitiveness in Electronics

capital—particularly compared to existing net than with absolute costs of capital, are taken

worth—required to maintain their share in a up below. The next section extends the comrapidly expanding worldwide market. In semi- parative treatment of financing to several other

conductor manufacturing, rising capital inten- countries, while carrying forward the U. S.-

sity compounds the difficulty. These matters, Japan comparison,

concerned more with the dynamics of growth

Financial Structure: An International Comparison

Many countries are attempting to build competitive electronics industries because they believe them essential for a growing and healthy

economy. Government assistance, often financial, has flowed to electronics companies:

Great Britain provides explicit subsidies;

France has combined subsidies with trade protection. A number of the rapidly developing

countries are following suit, as outlined in

chapter 10. Still, Japan remains the primary

competitor in electronics, and its financial system is treated in much more detail than that

of France or West Germany, the two other

countries examined below, The focus on semiconductors continues because U.S. firms in

this part of the industry have faced the most

pronounced financing problems,

Funding rapid expansion is a challenge that

semiconductor companies share with manufacturers of small computers and peripherals,

software firms, and new entrants in other portions of the industry; Atari, the manufacturer

of video games, has reputedly been the fastest

growing technology-based company in history,

while one firm making game cartridges saw its

sales grow 1,000 percent (to $50 million) during 1981. 16 In order to remain competitive,

firms in such markets must be able to finance

growth at rates that are literally explosive,

United States

Sources of financing for American electronics companies vary depending largely on their

size, extent of diversification, and maturity.

‘EL. Wailer, “Home Video-Game Sales are Dazzling,” ,Electronics, Jan, 27, 1982, p. 78.

New corporate startups have been frequent

during the industry’s postwar history–not only

in semiconductors and computers, but in many

other product lines. Hewlett-Packard—a diversified manufacturer of test and laboratory

equipment, calculators and computers, and a

leader in integrated circuit (IC) technology

through its captive operations—got its start just

before the war in a garage in Palo Alto, Calif.17

In many respects typical of the firms that later

gave this region the name Silicon Valley, the

company’s founders began by designing its

first product themselves—an audio oscillator

supplied to Walt Disney Studios for the production Fantasia.

Venture Capital

Businesses typically draw on far different

sources of funds in their early stages of development than later, progressing through a fairly

predictable sequence as they grow and mature.

This progression, which illuminates some of

the unique characteristics of U.S. capital markets, is rather different from that in other countries, For purposes of illustration, consider a

startup firm with origins like those of HewlettPackard or the many semiconductor manufacturers that sprang up during the 1960’s. Often

these enterprises were formed by small groups

of engineers and managers spinning off from

a somewhat older company with the aid of

funds from the venture capital market. The

process is not unique to the semiconductor industry: Control Data Corp. was founded in

1958 by a group of ex-Univac employees. While

startups had become rare by the mid-1970’s,

17”At War, ” Electronics, Apr. 17, 1980, p. 203.
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 269

—

many new ventures in microelectronics, computer peripherals, and software have been established since 1980. 18

Where rapid growth creates expectations of

high returns, capitalization for new companies

often comes from specialized financiers who

provide equity funds to the venture capital market. Along with electronics, biotechnology is

a current example. In such cases, ownership

is typically shared among venture capital organizations and the founders of the firm. Stock

options have been a common means of attracting talented individuals to startups, and have

been used to build handsome compensation

packages for key executives or technical specialists without cutting too deeply into cash

flow,

Annual returns of 25 to 50 percent over a

period of perhaps 5 years are typical goals of

institutional venture capital organizations. In

the past, wealthy individuals or families sometimes founded private corporations for seeking new and risky—but potentially highly profitable—investments. Today, corporate venture

capital organizations are also prominent—

subsidiaries of larger companies seeking to diversify. Corporate venture funding is more likely to go toward second- or third-round financing of young companies than to new startups,

and investments tend to be larger than those

of independent venture capital organizations.

Sometimes eventual ownership is an objective;

in other cases corporate venture capitalists are

simply seeking capital appreciation. Occasionally the funding organization provides capital

largely to gain proprietary technology. This has

been the apparent goal of investments in U.S.

electronics firms by a number of foreign companies. Both Siemens (West Germany) and Fujitsu (Japan) have invested in this way. Siemens

owns 20 percent of Advanced Micro Devices,

Fujitsu 26 percent of Amdahl, a leader in technology for large computers.

An alternative source of venture funding, the

Small Business Investment Co. (SBIC), was cre15NUrneroUS examples can be found in J. W. Verity, ‘‘StartuP

Fever is Spreading, ” and R. Emmett, “Venture Market Mysteries, ” Datarnation, September 1982, pp. 180 and 194.

ated by the Small Business Investment Act of

1958, Although most SBICs concentrate on

neighborhood businesses, a few have national

outlooks. Venture capital partnerships and

funds have also blossomed in recent years; the

U.S. venture capital industry now includes

about 600 firms and should continue to expand

as a consequence of new ERISA (Employee Retirement Income Security Act of 1974) rules

allowing “prudent” participation of pension

funds in venture activities. 19 In rare circumstances funds can be raised through public

stock offerings, but this avenue is more likely

to be available later in development.

Venture capital markets are highly cyclical.

One influence has been taxation of capital

gains. In general, high taxes on capital gains

discourage potential investors. Table 57 summarizes the results of a study prepared for the

National Venture Capital Association, together

with more recent data that bears on this point.

The maximum tax on capital gains in the

United States was reduced from 49 percent to

less than 30 percent in 1978. Although total

venture investments rose dramatically, such

trends do not prove a cause-and-effect relationship. They do suggest that the tax revision was

a powerful contributing factor in the upswing.

At the same time, a variety of other forces

affect the ups and downs of venture funding.

The cyclicality reflects the confidence of potential investors on the supply side and of potential entrepreneurs on the demand side concerning prospects for the economy and the propitiousness of risky new undertakings. The timing of startups depends on more than economic

conditions. Venture organizations look carefully at the abilities of a new firm’s leaders;

both capitalists and managers look for “technological windows” that offer unusual opporestimate of the industry breakdown is as follows: mivate .

venture capital firms, 200 to 250; SBICs, 300 or more; corporate

venture capital organizations, about 50. See J. A. Timmons and

D, E, Gumpert, “Discard Many Old Rules About Getting Venture Capital, ” Fiar\wrd Business Review, January-February 1982,

p. 152.
270 International Competitiveness in Electronics

— —

Table 57.—Aggregate U.S. Venture Investment Activity (millions of dollars)

Higher round investments

New commitments (prior commitments) Totals

1977

Amount . . . . . . . . . . . . . . . . . . . . . . $56 $28 .$84

Number of investments . . . . . . . . 126 126 252

1978

Amount . . . . . . . . . . . . . . . . . . . . . . $92 $31 $123

Number of investments . . . . . . . . 196 150 346

197P

Amount . . . . . . . . . . . . . . . . . . . . . . $145 $65 $210

Number of investments . . . . . . . . 290 248 538

1980

Amount . . . . . . . . . . . . . . . . . . . . . . NA NA $657

1981

Amount . . . . . . . . . . . . . . . . . . . . . . $500 $900 $1,400

NA = not available.

algTg data annualized from first 6 months Data taken from 55 respondents. To OTA’s knowledge, no fullY comparable data

on venture investments for later years are available

SOURCES 1977.79—’’Financial Issues in the Competitiveness of the U S. Electronics Industry, ” report prepared for OTA by

L W Bergman .% Co. under contract No. 033-1550.0, p 9, quoting from “Survey of Venture Capital Investment,

1977-1 979, ” prepared for the National Venture Capital Association by D J. Brophy and P L Schaefer of the University of Michigan 1960 -Government-/ndustry Cooperation Can Enhance the Venture Captal Process,

GAO/AFMD-82-35 (Washington, D.C : General Accounting Office, Aug 12, 1982), P. 3.1981 –J. W Dizard, “Do We

Have Too Many Venture Capitalists?” Fortune, Oct. 4, 1962, p 106.

tunities. Some of the upsurge in investments

in table 57 is related to booming interest in applications of microprocessors; of the new venture capital deals nationally since 1979, perhaps half have been in electronics or closely

related fields.20 At the peak of the most recent

cycle—i.e., mid-1981—many observers of venture capital markets concluded that entrepreneurs were having an easy time finding startup funds; some claimed that the supply of venture capital considerably exceeded demand

during 1981, and that poor risks were being

financed.

21 In more normal times, potential

startups may face a long and arduous search

for capital,

Table 57 will serve to illustrate another point:

venture capital makes only a small contribution to the overall funding needs of American

industry. Annual venture financing at something over $1 billion, and a total pool of ven-

.

‘“’’Financial Issues in the Competitiveness of the U.S. Electronics Industry, ” report prepared for OTA by L. W. Bergman

& Co. under contract No. 033-1550.0, p. 12; “Startup Fever is

Spreading, ” op. cit.

Zlsee, for example, A. po]lack, “Few Places for Venture CaPital:

Funds Outpace Investment Opportunities, ” New York Times,

June 17, 1981, p. Dl; J. Levine, “Once Again, It’s A Buyer’s Market,” Venture, June 1982, p. 80.

ture capital of perhaps $5 billion to $6 billion,

pales alongside other sources of capital for U.S.

business and industry: bank loans, $230 billion;

other short-term debt, $250 billion; corporate

bonds, $490 billion; commercial mortgages,

$280 billion; equities, $1,3 trillion. 22

Costs of Entry

Although a substantial fraction of new venture investments continue to flow into electronics, in some segments of the industry entry

costs are becoming prohibitive. Among the exceptions are firms able to generate cash flows

in other lines of business, NCR is an example:

an established manufacturer of computers and

other business equipment, the firm had made

ICs exclusively for internal consumption. In

1981 NCR announced plans to produce semicustom logic circuits and certain kinds of

memory chips to be sold on the outside, becoming one of the few new entrants in the merchant market contemplating a fairly broad

product line.23 The reason is straightforward.

Costs for establishing a new semiconductor

‘

z

’’ The Perilous Hunt for Financing, ” op. cit. The estimates

are totals outstanding at the end of 1981.

Z“(A Surprise NCR Leap Into the Chip Market, ” Business

Week July 13, 1981, p. 22.
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 271 — . . . — —

firm have risen by a factor of 10 over the past

decade; as figure 50 indicates, the end is not

in sight. The rapid increases in capital intensity shown in the figure stem largely from the

more expensive production equipment required for current-generation ICs (ch. 3, especially table 2).

Rising entry costs are one reason why the

1980-83 group of semiconductor startups have

picked narrow market niches rather than attempting to compete in a broad range of products, Examples include: custom chips, or in

some cases just design services; specialized

device families such as linear ICs or programmable logic arrays; and, in one case, gallium

arsenide circuits. While entry via niche markets is the usual pattern in this and other industries, none of the semiconductor startups appear to be aiming at the mass-produced memory or microprocessor markets; the most recent

new entrant to attempt this was Inmos, established in 1978 with the aid of $90 million in

direct investment by the British Government.24

——.

24 — .—

L’[JK ~~ard to Cut Stake in Inmost” Electronic News, Mar.

29, 1982, p. 54. The National Enterprise Board, which has had

considerable autonomy to fund British industry [ch. 10), provided

50 million pounds, with Inmos recei~.ing an equal amount in

loan guarantees and grants for specific projects.

Figure 50.— Increase in Capital Costs for

High-Volume Integrated Circuit Production Line

.

1970 1975 1980 1985 1990

Year

SOURCE R W Broderson S[gnal Processing Using MOS VLSI Technology

VLS/ E/ectron/cs M(cros?ructure Sc/ence, VOI 2, N G Elnspruch

(ed I (New York Academic Press 1981) p 206

Entry barriers can be higher still in mainframe computers, where the new firms in recent years have entered with plug-compatible

machines—Amdahl, Magnuson, in 1981 Trilogy. The one exception during the 1970’s was

Cray, established with venture funding to build

specialized supercomputers. An added hurdle

stems from the preference by many customers

for leasing rather than purchasing large computers. Financing leases is a severe strain on

smaller companies; lease cancellations were

one of the immediate reasons that Itel, a conglomerate that had entered the plug-compatible

mainframe business, declared bankruptcy in

1981.

Leasing has been a major part of IBM’s strategy in mainframes; competing firms—none of

which has assets near IBM’s—face a major constraint in financing leases. 25 Not only are they

limited by their smaller size in securing funds

at rates comparable to IBM’s cost of capital,

but the risks of competing with IBM are large

and well known—Itel’s failure presumably adding to the concerns of potential lenders. Without a source of particular advantage such as

Amdahl or Cray get from their reputations as

technological leaders, cost and availability of

capital will remain formidable barriers for entry into the mainframe computer market.

Entry costs are also daunting at the high performance end of the minicomputer industry,

though firms such as Prime (1972) and Tandem

(1974) did begin operations during the past

decade. The microcomputer segment has still

seemed attractive; the entry of IBM into the

personal computer market at the end of 1981

has not seemed to dampen the enthusiasm of

prospective entrepreneurs and venture capitalists.

Early Growth

In the startup stage, equity capital from venture or other sources goes to purchase or lease

plant and equipment and cover the initial expenses of developing, manufacturing, and marketing the first products. Later, more familiar

“J. T, Soma, The Computer Industry (Lexington, Mass.: Lexington Books, 1976), p. 41.
272 International Competitiveness in Electronics

financial markets can be tapped, External financing is critical at this stage; the company

may be growing rapidly, with production outstripping sales as inventories build and distribution channels are filled. New firms often

operate below their break-even points for a

number of years, and cash flow problems are

common,

Once sales have begun, local banks will normally provide short-term loans up to about 80

percent of net receivables, this amount being

rolled over—i.e., the loans rewritten at prevailing interest rates—every 3 months or so. Longer term financing may come from incremental

venture capital commitments; many venture

organizations prefer to participate in secondor third-round financing because they can better evaluate a company’s prospects once it has

products to show. While at this stage limited

public offerings may also be possible, stock

sales to the general public have been less common in electronics than in other industries.

Many electronics manufacturers have been

able to finance quite rapid growth through retained earnings and employee stock option and

purchase plans. Indeed, the managers of electronics companies started by individual entrepreneurs or small groups have often shunned

external equity markets to avoid stock dilution

and the loss of close control.

When sales reach annual levels in the vicinity

of $10 million, credit lines typically become

more regularized, Revolving credit and term

loans provide short-term financing. In addition,

banks will generally extend lease credit for

capital equipment—particularly helpful in electronics because it reduces the pressure to raise

funds for purchasing equipment at a time when

long-term investment requirements are expanding rapidly. Because capital equipment

can quickly become obsolete, staying at the

forefront of the technology can strain resources. On the other hand, for firms with adequate cash flows, rapid obsolescence means

short writeoff cycles and tax savings from

depreciation.

In any case, firms with growth patterns that

take them beyond the $10 million level find

capital more abundant and less costly. At this

point, electronics companies exhibit financing

patterns that depend on the preferences of

owners and managers, as well as opportunities

in relevant capital markets, Some firms offer

new equity shares to the public; others issue

shares but limit purchases to their own executives or employees. Some sell bonds, often in

addition to equity, to add leverage to the capital

structure. But while financing patterns differ,

they share a characteristic common to most of

U.S. industry: American electronics firms

typically attempt to finance expansion internally, even when this delays dividends indefinitely. Only if self-generated sources prove

inadequate do companies enter external

markets.

Internal and External Sources of Funds

Table 58 illustrates the extent to which American semiconductor firms rely on internal

funds—i.e., depreciation and retained earnings.

When the companies listed in table 58 have

resorted to external financing, this has ranged

from virtually all capital stock (Intel) to substantial amounts of debt (National).

Although both new and established firms in

the U.S. electronics industry will no doubt wish

to continue relying on internal funds, a number

of factors converging during the early 1980’s

foretell financial dilemmas for some companies. Among those common at least to manufacturers of semiconductors are:

1.

2.

3.

Growth in unit sales over the coming years

may exceed even the rapid rates of the previous decade,

Revenue growth will continue to trail

growth in unit sales as manufacturing

costs and sales prices decline. Historically,

semiconductor prices are driven rapidly

downward as costs fall because of learning curve phenomena. The sharp drops in

memory chip prices during 1981—when

16K RAM (random access memory) prices

fell from $4 each to about $1–are symptomatic.

Capital intensity will continue to rise because new production equipment—e.g., for

fine-line lithography—is much more expensive than in the past.
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 273 —. —— - .-. ——

4.

5.

6.

Table 58.—internally Generated Funds as a

Percent of Total Capital From All Sources

Texas National Advanced

Year Instruments Semiconductor ———————Intel Micro Devices

1974 ., ... . . . . 890/o -

760/o 890/o 93% -

1976 ., ... . . ... . 79 82 79 96

1978 . . . . . 87 97 87 67

1980 ., ., . . 65 60 46 71

aFlscal year

— — —

SOURCES 1974.78–’’Flnanclal Issues (n the Competltlveness of the U S Electronics Industry, ” report prepared for OTA by

L W Bergman & Co under contract No 033.05500, p 31 1980—Annual reports

Engineering and design costs are also escalating, due to the increasing complexity of ICs.

Global competition, particularly from the

Japanese, is becoming more intense, and

will be based on low prices to an even

greater extent than in the past. Although

forward pricing in anticipation of learning economies has been characteristic

even of competition among domestic

firms, pressures from the rapidly expanding Japanese industry may cut still further into sales revenues.

Competition is also forcing companies to

pay more attention to quality and reliability, requiring costly test equipment. As IC

designs increase in complexity, testing

procedures become more time-consuming

and expensive.

Figure 51, comparing capital spending rates

in the United States and Japan over the past

few years, illustrates the rise in capital intensity. Capital spending in both countries fell

sharply in 1975 when the market for semiconductors slumped; since that time, the U.S. trend

has been steadily upward. Japanese spending

rates have been higher because they have been

adding capacity faster.

While capital spending in the United States

averaged around 10 percent of sales during the

1970’s, rates in the last 3 years have been

significantly greater (fig. 51). Continued increase will be difficult for many merchant

firms without substantial outside funding.

Capital needs of U.S. semiconductor manufacturers during the current decade will probably be in the range of $30 billion, with some

industry sources expecting considerably higher

figures. Such estimates compare with capital

expenditures totaling $4.5 billion during the

1970’s.

26

The changing character of semiconductor

production and marketing is not unique.

Smaller American manufacturers of computers, as well as peripherals, are confronting

more intense foreign competition at a time

when developing technologies are placing

severe demands on their financing capabilities.

New firms are entering markets for peripherals

such as terminals and disk drives designed to

be compatible with the products of established

companies, Microcomputer applications of all

sorts are on the rise. Computer software is one

of the most rapidly growing portions of the industry, New entrants have often depended on

venture capital for their original financing,

and—again like semiconductor manufacturers—followed growth patterns relying on internally generated funds supplemented with limited amounts of debt,

Parallels exist even in consumer electronics.

A good deal of the production of established

products—radios, televisions, audio equipment—has moved abroad, taken by Far Eastern

‘

e

’’ Hungry for Capital to Sustain the Boom, ” Business tl~eek,

June 1, 1981, p. 74. J. F, 13ucy of Texas Instruments has estimated

spending at $25 billion to $35 billion for the decade of the 1980’s,

while G. Moore of Intel places the figure much bi,ghcr, in the

range of $65 billion. An estimate of $30 hill ion results i 1 sales

are pro jected through 1990 based on t]) e t w

 with capital spending assumed to remain at 1 :]. 7 ~>[~rcent of

sales, the average o~’er the past 3 ~’ears. Spending rates ma}’

rise—some predictions point to 15 percent of sales in coming

years (see E. Williams, 4’Electronic Components, ” Fjnancial

Times, Mar, 5, 1982, sec. I I 1, p. I)—hut the total is much more

sensitive to the sales projection than to the capital spending rate.
274 ● International Competitiveness in Electronics

u-l

t-u

1

1

5

0 [

Figure 51.— Rates of Capital Spending by U.S. and Japanese Semiconductor Firms

1973 1974 1975 1976 1977 1978 1979 1980 1981

Year

al”t~~~~t~d ~ircUltS only, of 12 manufacturers 1973-1979, 11 manufacturers 1980, 1981

b1973.1980 Weighted averages for 11 U S merchant semiconductor manufacturers; 1981 estimated

SOURCES United States— 1973.1977, Bureau of Census; 1978-1981, Department of Commerce and Semiconductor Industry Association Japan —1973. I 979, Japan fact

Book ’80 (Tokyo Dempa Publications, 1980), p 203; 1980, 1981, Japan .Ecorromic Journa/.

competitors or transferred offshore by U.S.

companies. But the broader market for consumer electronics remains dynamic, as the example of video games showed, Along with video cassette and disk players, as well as home

computers, these are precursors of an array of

electronics-based innovations for personal and

home use to be introduced over the next two

decades. Many of these products will be hightechnology items made possible by advances

elsewhere in the industry. Some may come

from small companies organized by entrepreneurs with strong technical backgrounds, as

has happened with semiconductors, microcomputers, and software. Unquestionably,

fierce competition from abroad will continue

in consumer products; financing could become

a problem here too if small firms need to support rapid expansion.

Financing Startups and Growth

in the Coming Decade

But why should future financing be troublesome for an industry which—by all indications

—can expect expanding markets overseas as

well as at home? Not all observers believe the

problems will be that great; those who do generally point to a pair of related concerns:

1. It may not be possible to finance growth

from internal sources in the proportions

common in earlier years, thus requiring
Ch. 7—Financing: Its Role in Competitiveness in Electronics . 275

greater dependence on external sources of

capital.

2. Costs of external funds will be high, and

may place U.S. firms at a disadvantage

compared to competitors in Japan, The

profit levels required may be difficult for

American firms to reach.

The first point deals with the continuing ability of electronics companies to fund growth internally, To expand sales, manufacturers must

either purchase assets that are more productive or use existing assets more effectively. To

supplement assets, funds must come from one

or more of the following sources: moneys accumulated through corporate operations (retained

earnings plus depreciation); capital generated

by the sale of additional stock; or borrowings

of one type or another.

As discussed previously, borrowing without

parallel increases in equity alters a firm’s

leverage, This, in turn, tends to increase the

variability of returns to equity, increasing the

risks to owners. In countries like the United

States, where capital markets are relatively

competitive, managements choosing higher leverage eventually confront two problems: I) common stockholders become increasingly sensitive

to their risk positions, and make adjustments

that tend to depress stock prices; and 2) lenders

also may object, ultimately refusing to supply

additional debt. As capital intensity increases,

financial managers face an intricate set of decisions,

The important relationships can be expressed as follows:

This expression is simply an identity. The first

term on the right-hand side, asset turnover, is

a broad measure of asset productivity. Defined

as the ratio of sales to total assets, it indicates

the efficiency with which a company utilizes

its assets to generate revenues, and depends

on such factors as the firm’s capital intensity

and the degree of competition characterizing

its markets. The second term—the ratio of assets to equity—is one way of measuring a firm’s

leverage, an alternative to debt-equity ratio,

Profitability, the third, depends on many factors: product mix, competition, and labor productivity, to mention just a few,

Industry analysts tend to focus on the asset

turnover ratio, which may fall as a consequence of expensive capital equipment (this

should, however, improve productivity). Thus

to preserve existing returns to equity, firms will

either have to adopt higher leverage ratios or

somehow improve profits on sales. Given the

constraints likely to be exercised by the U.S.

financial community, there are clear boundaries to the first option—i.e., to increasing the

relative proportions of debt in a firm’s capitalization. The second possibility—greater profitability—will be equally problematic if international and domestic competition continues to

be stiff.

There is a second difficulty. In the identity

above, note that if each term were to be held

constant, growth would have to involve a balanced expansion of debt and equity. But the

left-hand side of the equation dictates that, if

a given increase in equity is to be financed internally—i.e., through retained earnings—there

must be a proportionate increase in aftertax

returns to equity (profits). (This assumes that

electronics companies use aftertax earnings to

fund growth instead of paying dividends, a policy followed by most of the rapidly growing

companies during the 1970’s.) Thus, growth

must be accompanied by an increase in profits.

There is no requirement that new capital be

restricted to funds generated internally. Firms

could tap markets for both equity and additional debt. Managements, however, often object

to stock offerings on the grounds that new issues are “expensive.” Aside from the costs of

floating the offering, before the current boom

executives commonly cited what they perceived as low price-earnings (P-E) ratios in security markets. From the perspective of management, selling new stock under such conditions would have provided too little capital

compared to their expectations of future

growth, earnings, and presumably dividend
276 ● International Competitiveness in Electronics

——

payments. P-E ratios of 2 or 3 for electronics

stocks were cited as indications of “unrealistic” rate of return requirements—as implying

that the market was demanding returns in the

range of 33 to 50 percent. New equity issues,

in this view, should be delayed until the market

returned to more normal conditions—i.e., until stock prices and P-E ratios rise.

Whether or not this makes sense depends in

part on how stockholders are perceived. To

those who believe that equity holders are, in

fact, owners of the corporation—and if existing

stockholders have first rights in the purchase

of new issues—then stock prices may appear

too low to management but the firm’s “loss”

is exactly offset by the “gains” of these stockholders. That is, existing owners would be able

to buy new stock “cheaply.” The existing owners would be unaffected by variations in the

issue price based on market conditions. On the

other hand, equity may be viewed as effectively

another form of subordinated debt—in reality

separated from any control. In this case, managers would perceive equity as “borrowing”

and its costs would be evaluated like any other

debt in cost of capital calculations. Statements

on the high cost of equity by managements of

electronics firms often seem to point toward

this second belief.27

Then to the second point above: Will external funding be available at a cost manufacturers are willing and able—in the face of competitive pressures—to pay? At the moment, the

availability of funding does not appear to be

a limiting factor, but this could change as firms

increase their leverage. Lending institutions

typically establish standards on levels of debt

considered prudent—guidelines that depend on

liquidity and the variability of cash flows to the

borrowing firm. Effective limits on debt, therefore, differ from company to company. Even

if some companies can borrow what they need,

the total volume of funds required by the U.S.

electronics industry seems so high that others

will almost certainly need new equity.

ZTFor similar arguments applied to the Japanese case, see

Wallich and Wallich, op. cit., pp. 268-269.

While equity from venture capital sources

has been more freely available since the 1978

revision of capital gains tax rates, most of the

firms needing capital will be well beyond this

stage. Nor is it likely that such sources could

provide enough money; the venture capital

market is far too small. Still, there remain portions of the electronics industry where initial

capital requirements are less than in semiconductor manufacturing–e.g., computer software, specialized industrial equipment—and

where startups should find capital relatively

abundant. Considering the effective reductions

in corporate income taxes resulting from the

Economic Recovery Tax Act of 1981, the total

venture capital pool should continue to expand,

Even so, many observers predict that the cost

of funds will be too high, From this perspective, investments may simply not promise adequate rewards; American companies in parts

of the industry that face mounting competition

from abroad may have difficulty in attracting

funds from wary lenders with numerous alternatives, some offering better prospects for safety and high returns. Finally, some commentators believe that the total supply of investment

capital in the United States is smaller than it

could or should be because of a variety of disincentives affecting savings and investment

built into the American tax system.28 While the

capital market will certainly supply funds in

an amount equal to total demand at some set

of interest rates, such observers believe that

supply constraints artificially force these rates

to levels too high compared to other countries,

Several of these matters are at the heart of

economic policy debates still before Congress;

the capital formation question, in particular,

has been widely discussed for years, and has

not been resolved by the tax policy changes instituted in 1981,29 The issues are often complex

and technical. As a consequence, the discussion below concentrates on matters that are

particularly relevant to electronics.

ZaFor a twica] commentary, see A. Sloan and C. Miles, “Showdown at Capital Gap,” Forbes, Jan. 7, 1980, p, 38.

Zesee, for example, Capjtil Formation, hearings, Joint Economic Committee, Congress of the United States, June 9, 1976.
Ch. 7—Financing: Its Role in Competitiveness in Electronics . 277 —

Capital Supplies and Financing Costs

for the U.S. Electronics Industry

As mentioned previously, American electronics firms—with some prominent exceptions—tend to be smaller than their major international competitors. And, in part because

their lack of diversification results in sharper

swings in cash flow, small companies confront

higher financing costs than large integrated

manufacturers, Therefore, on the basis of company size alone, U.S. electronics producers are

likely to face higher costs of capital than many

of their competitors in Western Europe or Japan.

The semiconductor industry again provides

a ready example. Table 59 lists total assets for

a sample of U.S. and Japanese companies.

While Japan’s semiconductor manufacturers

Table 59.—Assets of U.S. and Japanese

Semiconductor Manufacturers

— —

‘Total assets ‘

(millions of dollars)

1979

U.S. merchant firms

Advanced Micro Device s $109

American Microsystems ., 80

Inte l 500

Intersi l . . . 83

Mostek 161

Motorola ., ., 1,904

National Semiconductor ., ., . . . . . 385

Texas Instruments . . 1,908

U.S. captive producers

IBM ... . . ... ... ... .$24,530

Western Electricd 

., . . . . . . 7,126

Japanese companies

Fujitsu . . $2,030

Hitachi ., . . : : : ., . 6,790

Matsushita Electric . 5,190

Mitsubishi Electri c 4,490

Nippon Electric Co (N EC) ~ ~ ~ ~ ~ ~ 3,110

Toshiba .. . 6,180—

1980

$165

81a

767

98b

—c

2,112

561

2,414

$26,703

8,048

$2,380

7,450

5,640

4,910

3,560

6,450

aAcqu I red I n early 1982 by Gou Id, wh Ich had 1980 assets of $1 6 bl I I Ion

bAs of Sepfember 1980, in early 1981 In!ersil was purchased by General Ele~

trlc G E s 1980 assets were $185 billion

cAcqu I red I n 1980 by U n I ted Tech n 01 og Ies 1980 assets $73 LII I I ton

dAs~etq {nr Western Electric ori ~ does not rIclude assets rf ATRT Bell op~rst(~q

romparwes or other AT&T subsldlarles

‘Asset f! gu res do not I n c I ude aff I I I ates Conversl o ns from yen tu dol I ars based

on exchange rates from Economic Report of (he Pre.s(deri t (Washington D C

Fe brua~ 1982) p 345 1979 218 yon per dollar 1980 226 yen per dollar

SOURCES U.S. firms —Annual reporls Japanese firms - Japa~ C,xnpany Hand

book (Toky(~ Toyo Kelzal Sh!nposha)lhe Oriental Eronomlst 1979

1981 )

are substantially larger than the typical

American merchant suppliers, several of the

U.S. firms already have been acquired by much

bigger companies. Intersil may look puny compared to Hitachi or NEC, but this is hardly true

of its new owner, GE. It is quite possible that

further rationalizations of this type will continue, perhaps in part to assure continued funding for expansion, although many of the currently attractive candidates for purchase have

now been acquired. Finally, as table 59 also

notes, the two largest captive manufacturers

in the United States, IBM and Western Electric, have assets much larger than the Japanese

producers.

For U.S. companies that are not affiliated

with larger firms, the question of differential

funding costs remains. Based on the usual

assumptions concerning prudent amounts of

leverage as discussed earlier, the difference in

debt financing costs between a firm the size

of Intel (table 59) and companies like Motorola

or Texas Instruments probably averages about

1.2 percentage points (in fact, as table 51 illustrates, the firm-to-firm differences at any

point in time clearly depend on many factors

beyond size). All else equal, Japanese firms

making semiconductors would probably have

about the same advantage as a result of their

size and diversity, But, because debt accounts

for only a fraction of a company's capitalization, the impact of this difference in interest

rates is smaller, and other forces are likely to

weigh heavier in the competitive balance. After

all, the American firms included in table 59

were formed, grew, and flourished even though

their capital costs were greater than such competitors as RCA, GE, and GTE, all of whom entered the semiconductor market in its early

years.

The related question—whether interest rates

in the United States have been driven to excessive levels by supply constraints—is too involved to cover in any detail. I t is true, for example, that interest rates to corporate borrowers are lower i n Japan for equivalent proportions of debt (to the extent that equivalence

can be ascertain. But such comparisons,

based on different currencies, can easily mis-
278 ● International Competitiveness in Electronics

lead. In part, they reflect differing inflationary

expectations as mirrored in interest rates. Adjustments for inflationary expectations are

problematical; to some extent, it might be possible to make such adjustments based on patterns

of variation in the exchange rate. But a variety of factors other than inflationary expectations affect foreign exchange markets, especially in the short run, and the gyrations of the yen

against the dollar in recent years have generated a wholly independent source of controversy.

30

The inflationary trends reflected in high U.S.

interest rates can themselves deter new investment, in electronics and in other sectors of the

economy. Inflation adds to uncertainty in the

cash flows that can be anticipated from investments; these mount as investment horizons

recede. High rates of price inflation tend to

discourage longer term commitments; instead,

they favor investments with relatively quick

payoffs. American managers—in electronics as

in other industries—have been charged with ignoring long-term growth opportunities while

concentrating on the short run. Part of this

hesitancy to commit resources is tied to uncertainties created by price inflation and the attendant impact on interest rates. That is, differences in short-term compared to long-term

managerial behavior between American and

Japanese corporations may not be caused by

differences in capital availability, or by differences in real interest rates, so much as by

uncertainties associated with high and variable

rates of interest and inflation.

The United States has not had a great deal

of success in controlling inflation over the past

few years; while current economic policies

may help to keep down the inflation rate, adjustments in expectations often lag well behind.

Can the electronics industry expect to benefit

more directly from the changes in U.S. tax law

adopted in 1981? After all, many of these — <

30see, for ~xaml)lc, II. H a rtland-’I’hunberg, ‘‘Value of Yen Fuels

[J. S.-Japan (AIp: Exchange Rate, Not Quality, Makes Imports a

Better Buy, ” Los Angeles Times, Apr. 29, 1982, Spokesmen for

American business often blame competitive problems on an

undervalueci making Japanest’ imports cheap in the [ J.S.

market.

changes—cuts in personal income taxes as well

as effective reductions in corporate taxes—

were directed at enlarging the supply of funds

for investment. Unfortunately, increasing

capital supplies—which all else equal will

decrease the costs of investment—tends to be

more easily said than done, al For instance, tax

changes that affect both supply and demand

for funds may leave interest rates unchanged.

Under this circumstance, neither the availability nor the cost of funds for American electronics firms would change.

In part because of these complicating factors,

it is not yet clear what the net effects of the

Economic Recovery Tax Act of 1981 on aggregate capital formation will be, much less the

differential impacts on various sectors of the

economy. Thus far, there is scant evidence of

broad positive effects on capital investment in

industry; many observers are skeptical that the

revisions to U.S. tax law will have much effect

on levels of personal savings, which they feel

are central to freeing up new investment for

industry.

32 Internationally, even before the

more rapid depreciation schedules and other

reductions in corporate taxes enacted in 1981,

the United States had in place tax policies that,

according to at least some analyses, favored

capital investment more strongly than taxation

in Japan and most of the European nations .33

Slover th[~ postwar p~riod, investment ]evels as a fra~tiOn of

the country’s gross national product have fluctuated markedly

from year to year, but with no evidence of any long-term trend

either up or down. See J. J. Enzler, W. E. Conrad, and L. Johnson,

“I]ublic Policy and Capital Formation, ” Federal Reserve Z3u~letin,

October 1981, p. 749. For an excellent summary of international

differences in capital formation, see V. C. Price, “Capital Formation and Investment Policy, VI Westf?rn h’conomies in 7’ransition: Structural Change and Adjustment Policies in Industrial

Countries, 1. Leveson and J. W. Wheeler (eds. ) (Boulder, CO1O:

Westview f’ress, 1979), p, 185.

SZK, w, Arenson, “The Low LJ, S. Rate of Savings, ” New York

Times, Dec. 22, 1981, p. 1)1.

%. F. Kopits, “Tax Provisions to Boost Capital Formation Vary

Widely in Industrial Nations, ” 7’ax Notes, NOV. 17, 1980, p. 955.

The effects of international differences in taxation on competit iveness are extraordinarily complicated. The same difficulties that apply to other international comparisons are at

work, compounded by the complexities of the tax codes in each

country, Effective rates of taxation can be compared in a number

of different ways, with results that depend on factors such as

projected inflation rates. Even when the tax differences

themselves are carefully analyzed, the problem of relating the
Ch. 7—Financing: Its Role in Competitiveness in Electronics . 279 —

At the same time, a number of nations use

financial subsidies other than tax incentives

more actively than the United States to support

certain of their industries .34

Regardless of effects on overall supplies of

capital, the accelerated depreciation schedules

implemented by the 1981 Tax Act seem likely

to place electronics firms at a disadvantage

relative to other industries with which electronics competes for funds. More rapid depreciation lowers tax obligations and increases

cash flows from new investments. Faster depreciation raises profits for projects that were

formerly marginal or unattractive; the result

should be to increase the overall demand for

investment funds and the overall rate of investment in industry. For most industries depreciation is more rapid under the new law—but not

necessarily for electronics.

The 1981 Tax Act permits equipment such as

that used in production or R&D to be depreciated over either a 3- or a 5-year period. Formerly, production equipment was depreciated at

rates at least nominally related to actual ob-

~fft!{ts of t d \ ~Jol i{, \ t{) e(.(~ nom i( p~rfc) rm a nc e rcmai ns. See, for

,klajor ln(/ustriaj Coun /r;f!s: )1 Bric~C;om-

~x+rl.s~)n, 01). cit.

74]. \lutti, ‘Il]xf?.s, SfIhsI(iJes []nd (;o[r]~~etit]~(?]]f:ss lnternationalIJ’ {L$’ashington, [).( ;.: N1’A Committee on Changing International

R[?a!it 1(!s, ]anu,lry 1982).

.4

Pho/o cred{t Un/versd/ /ns[rurnef7 Is

Automated machinery for electronics assembly

solescence. All equipment used for R&D can

now be written off over 3 years; so can any

equipment that could, under the old law, be

depreciated in 4 years or less. All other equipment is now eligible for a 5-year writeoff. 35

Although electronics firms probably purchase little equipment with useful lives less

than 3 years, this is nonetheless now the

minimum depreciation period. To the extent

that a company was formerly able to write off

some of its equipment more quickly, it may suffer a reduction in cash flow. While this should

be no more than a minor factor, the new depreciation procedures will place some electronics manufacturers—indeed, firms in any industry where technological change results in

rapid obsolescence—at a disadvantage with

respect to industries that reap greater benefits

from the new depreciation schedules. The latter tend to be industries where technological

change is slower, and equipment has a long

useful life. Steel and other heavy industries are

examples. 36

Focusing on levels of domestic savings can

also lead to underestimates of impacts flowing

from international financial markets. Nations

need no longer rely on domestic savings for investment; international capital movements are

large and continuing to grow. For the United

States, these long-term capital flows, both portfolio and direct investment, have been negative

for many years—i.e., the flow of funds out of
280 /international Competitiveness in Electronics

————— ———-——— -. .- —— .

higher overseas than at home, Therefore generating more savings in the United States will

not necessarily increase the rate of domestic

capital formation; funds may flow abroad instead, At the same time, were the cause of high

interest rates in the United States simply a

shortage of funds for capital investment, money should quickly flow here from abroad. International capital markets operate quite efficiently under such circumstances.

Japan

To what extent have Japanese electronics

firms been aided by the unique structure of the

country’s capital markets, a factor that has

been claimed to give Japan’s corporations advantages in international competition?

Postwar Trends in the Japanese

Financial System

Japan’s financial system has changed more

than most over the past 35 years, and the country’s markets and financial institutions are now

far removed from their grossly underdeveloped

state in the early postwar period. The transformation of the Japanese financial system has

paralleled, first, the reconstruction of Japan’s

economy, and, following that, the country’s

dramatic industrial expansion. The yen has

become a major international currency, while

Tokyo-only partly by governmental design--is

emerging as a world banking center.

Given the speed with which the Japanese

financial system has evolved, it is easy to be

misled by images from the past. Yet the future,

even more than the present, should be the real

concern; effects on international competitiveness are functions of the dynamics of change

in financial markets in the United States, Japan,

and elsewhere. Insight into competitive trends

depends on these dynamics.

Because systemic changes in Japan have

been evolutionary rather than revolutionary,

elements of validity often remain in descriptions of financial institutions that are otherwise

outdated. For example, some discussions imply that government, the Bank of Japan, the

commercial banking system, and various industrial sectors are all hierarchically linked,

with control over resource allocation vested in

the Ministry of Finance. Although hardly the

case today, this is probably a fair—if simplistic—representation of the situation two or three

decades ago. And even now, at the level of individual investment decisions, the Japanese

system responds much more directly to the

wishes of government than does that in the

United States. But if government guidance still

exists, it is a far weaker force now than 20 years

ago, and the investment climate in Japan much

more fluid.

Now to more concrete questions: Why do

Japanese corporations utilize much greater proportions of bank debt in their financial structures than firms in the United States or Western Europe? (Leverage in European electronics

firms tends to be greater than for American

companies but less than that of Japanese.) The

answer lies partly in the historical development

of industrial groupings in Japan, most of which

contain one or more banks.38 Japanese manufacturing companies for many years have depended much more heavily on close working

relationships with banks—even to the extent of

participation by banks in management decisions-than have firms in the United States or

Europe (West Germany is a partial exception,

as discussed below). In other parts of the world,

banks generally enter the picture only if

reorganization follows bankruptcy, whereas in

.WJr]>tle ~e ~r[) ~1 1)$ (; ~1 IC(j z;) i/M tsu he fore 11, fun (.t it) n .!

something 1 ikt: 1101(I i [lg (~[lm [)a n ies. F’or general Ixi(:kgrou

M. [ lehusa, Indwtrlfil ~)r,ganizat~~)n in ]a~~~r),

(III. cit., c}]. 4; also, lnd~].strial ~;r(~uping.s in ]apan, rekisf?d c(I.

1980-81 (Tokyo: I)odw(?ll Attirketing Consultants, July 1980),

As an illustration, consider the Hitachi group. It consists of

nearly 50() firms; as of 1977, H itar:h i, l.td. held ma jurity sh a r(!s

in 40, and minority shares-t ypir:allj in the 20 to 50 ]wr(:[’r~ t

range-—in the rema illder [J. Gresser, High Techno]ogj’ dn [i

]apanese Industrial Poli[;j: A Strategy for [ ‘.S. Policjrmakf+rs,

Subcommittee on Trade. Committee on Ways and Means, HoI]se

of Representatives, [)[’t. 1, 1980, p. 2]. While many of the affil Iat(?s

make electrical and ele{:tronics i~roducts-and H itachi, l.td, is

the largest electrical and elect ronics firm in Japan—others produce nonelectrical machinery, transportation equipment,

chemicals, and primary metals. Members of the group are linke(i

with the Da i- I cl] i Kiin~}() Bank, the F(1 j i H a n k, ii nd the San ma

Bank, as well as the lrld~lstrial [~ank of Jai)an (Irr(i[]sfria) Grc)/]/jings III )apan, pp. 120- 121).
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 281

Japan-even with the weakening of the industrial groups following the postwar disbanding

of the zaibatsu—banks have continued to influence managerial direction for firms that are

financially healthy as well as those in trouble.

This close relationship within the industrial

group is one reason Japanese banks are willing to absorb risks more like those of shareholders. Lead banks, it is said, frequently subordinate their credits voluntarily. That is, the

banks act much like holders of equity, and defer to others lower in the hierarchy of claims

on assets when economic conditions dictate.

What appears to Americans an oppressive debt

load, may not be so from the perspective of a

borrower in Japan.

The close relationship between banks and

electronics companies in Japan is only part of

the story. Following World War II, Japan’s

capital markets were undeveloped, with viable

public markets for neither corporate debt nor

equity. Financial intermediation was carried

out almost entirely through the banking system.

Of necessity, industrial expansion had to be

financed by channeling funds through commercial banks.39 Moreover, it was not an accident that alternative financing methods did not

develop more rapidly as Japan progressed economically. The government could conveniently

guide the economy through the commercial

banking system. Government decisions to foster economic growth by extending credit to industry at the expense of consumer credit and

infrastructural development were implemented

in this way. Today, the extent of government

influence over the lending decisions of major

commercial banks in Japan remains considerably greater than that exercised by Western

governments, France excepted (while West

German banks have a good deal of leverage

over corporate managements, the government

influence on the banking community is much

less than in France, as discussed later in the

chapter). The lack of alternative sources of

financing for Japanese companies enhanced

the government’s ability to direct economic

growth; “window guidance” and a variety of

wC, A{; kely and H. tshi, “Fiscal, Monctarj, and Related Poli[:it;s, ” Asia ,hreL$’ ~;iant, op. cit., p. 153.

other industrial policy tools would have been

weaker instruments if corporations had been

able to look elsewhere for capital.

Reliance on External Funding

Although debt-equity ratios have decreased

considerably in recent years, as shown in

figure 52, Japanese electronics companies remain heavily leveraged. And, because banks

are so deeply involved, even the definition of

leverage must be adapted to the Japanese case.

In the United States, the usual indicators of

leverage are based on the long-term debt in a

company’s capital structure—i.e., obligations

that mature after 10 or more years, most of

which are bonds. Leverage can then be defined

as the ratio of the value of this long-term debt

to the value of the firm’s equity, or to its total

capitalization, In Japan, as the figure indicates,

such a ratio would be misleading because

much of a typical firm’s capital comes from

short-term bank loans. Table 60, which lists

sources of external funds for Japanese and

American corporations, shows that companies

in Japan have depended much more heavily on

loans from financial intermediaries, mostly

banks, than on bonds. Bonds are issued by

American firms at nearly 10 times the rate in

Japan, although in recent years these patterns

have been changing somewhat. U.S. industry

has been relying to an increasing extent on

short-term bank loans—probably because uncertainty concerning future rates of inflation

makes corporations wary of floating bond issues at recent interest levels.40 In neither country have stock issues been a major source of

capital; still, American firms have relied more

heavily on new equity than their counterparts

in Japan.

Financing patterns exhibited by electronics

companies in Japan differ, but not greatly, from

those for Japanese industry as a whole. Electronics firms have financed growth with internal funds to a greater than average extent,

Table 61 compares leveraging for electronics

companies in

40’’ The Per]lous

Japan and the United States. NeiHunt for Financing, ” op. cit.
282 International Competitiveness in Electronics

120

100

80

60

40

20

0

Figure 52.— Debt-Equity Ratios for Japanese Electrical/Electronics Firmsa

—

1972 1974

—

1976

Year

Total Long-term

debt/equity debt/equity

1978 1980

(Long-term

not

available

for 1980)

aAverage~ for 75 flrm~ In 85 firms in 1974-78, 14 firms In 1980

SOURCES. 1972 -78—’’Flnanclal Issues in the Competitiveness of the U S. Electronics Industry,” report prepared for OTA by L W Bergman & Co under

contract No 033-15500, p 171

1980-Derived from data In Japan Company Handbook (Tokyo. Toyo Kelzai Shtnposha/The Oriental Economist, 1981).

Table 60.—Sources of External Financing for

U.S. and Japanese Corporations

Proportions by source,

1965-72

United States Japan

Loans from banks and financial

intermediaries. . . . . . . . . . . 51% 890/o

Bond issues . . . . . . . . ... . . 37 4

Stock issues . . . . . . . . . . . . . . . . . . . . 12 7

—.— 100 ”/0 100 ”/0

SOURCE T Maruyama, “Financing Japanese Business, ” The Conference Board

Record, May 1976, p 47

ther the six Japanese electronics firms, nor, except for RCA, the seven in the United States

stray too far from the patterns typical of each

country. As the table shows, the Japanese companies have depended much more heavily on

external capital—a point that has been emphasized previously (table 52). The heavy reliance on both short- and long-term debt in

Japan’s electronics industry contrasts sharply

with U.S. semiconductor firms. Electronics

companies in Japan utilize very large absolute
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 283

— — — — .

Table 61 .—Short” and Long-Term Debt as a Percent of Total Capitalization for U.S. and Japanese Electronics Firms

— —

Weighted average of

All Japanese S IX Japanese electronics four U.S. semiconductor

industry, 1975 companies, 1979a manufacturers, 1979b

Short-term deb t

—.——

34.2 % 38.0% ‘-8.1 0/0

Long-term debt 37.5 29.0 12,7

Total deb t 71 7 67,0 2 0 8

Individual U S. companies, 1979

DEC IBM RCA

0.8 % 5 3° 0 18.40,

231 90 372

24.0 144 556

Shareholder’s equit y 2 8 3 33.0 79,2 7 6 0 8 5 6 44.4

Total capitalizatio n 100 % 100”/0 100 “/0 100% 100% 100 ”/0

Long-term debt/equity 1.33 0,88 016 030 011 084

Total debt/equit y 2 5 3 2,03 0,26 0.32 0 1 7 0 5 6 — . —

aFuJlt~u H ftachl Matsushita M ttsub!shl, NEC and Toshiba

bAdvanced M{cro Devices Motorola, National Semiconductor, Texas Instruments

SOURCES JaDanese comnanias —”U S and JaDanese Semiconductor lndustr!es A Flnanclal Com Dar!son, Chase Flnanclal POIICV for the Semiconductor Industrv

As’soc(atton, J ;ne 9 1980, p 62 Arnedcan firms—Annual reports

amounts of short-term debt which is automatically turned over as it falls due—i.e., the loans

are rewritten, normally at an interest rate consistent with prevailing market conditions. As

pointed out earlier, these practices seem to

place Japanese banks in positions of considerably greater risk than would be acceptable here.

Tables 60 and 61 emphasize the extent to

which capital structures in Japan are weighted

toward external financing. These practices

must be taken into account when calculating

costs of capital. The American financial system—and therefore the methods of establishing

capital costs commonly used here—presumes

a mix of alternative sources of financing. Not

all of these are widely available in Japan; some

do not even exist.

In the United States, for example, individual

portfolio holders adjust their security positions

in response to changing market conditions,

trading off risk against potential returns.

Americans—even those with modest assets—

have become sophisticated investors, switching

in and out of certificates of deposit, money

market funds, corporate stocks, and other investments in response to small swings in relative rates of return. The escalation in real estate

prices during the 1970’s, reflecting high rates

of return on investments in land and housing

as well as tax advantages, is another example.

In Japan, individuals do not have this range of

investment opportunities; for example, markets

for corporate bonds barely exist. The welldeveloped capital markets in the United States

maintain a state of dynamic equilibrium with

respect to one another which is not always attained in countries like Japan. Japanese capital

markets—and those in many other countries—

are narrower; nor are they as closely linked.

Neither individual markets nor individual investment decisions respond as quickly or as

concertedly to changing conditions, Borrowers

have fewer potential sources of funds. Japanese

corporations must use bank financing; savers

must rely on bank deposits or government savings institutions, Under such circumstances,

Japanese banks have little option but to accept

risks that would be unacceptable in the United

States—their other lending opportunities are

too limited,

Ledgers of Japanese companies differ from

those of American firms on the asset side as

well as the liability side. Table 62 illustrates

some of these asset side differences. Japanese

electronics companies carry much more cash

and other liquid assets, reflecting in part requirements for compensating balances imposed by banks; they have less tied up in accounts receivable and inventories. The fixed

assets of Japanese firms—plant and equipment—are proportionately smaller, in part

because of grossly understated land values; in

some cases plant and equipment valuations

may be reduced further by depreciation rates

higher than in the United States. 41

41011 the Undervaluation of assets in Japan, see, 1. Kuroda an(i

Y. Oritani, “A Reexamination of the Unique Features of Japan’s

Corporate Financial Structure, ” ]a~anese ~conomicstu~ie.s,
284 ● International Competitiveness in Electronics

Table 62.—Asset Categories as Listed on Balance Sheets of Electronics Firms in

the United States and Japan (percentage of total assets)

Advanced

Micro National Texas

U.S. companies (1979) Devices Motorola Semiconductor Instruments

Cash and marketable securities 7% 5% 2% 60/0

Accounts receivable, net . . . . . . 28 26 32 29

Inventories, net . . . . . . . . . . . . . . 13 29 27 18

Other current assets . . . . . . . . . . 7 5 2 4

Total current assets ., . . . . . . 55 65 63 57

Net plant and equipment . . . . . 45 34 35 42

Other noncurrent assets . . . . . . — 1 2 1

Total noncurrent assets . . . . . 45 35 37 43

Total assets . . . . . . . . . . . . . 100 ”/0 100 ”/0 100% 100 ”/0

Japanese companies (1978.1979) Hitachi Matsushita Mitsubishi Toshiba

Cash and marketable securities 22 ”/0 180/0 15“/0 22 ”/0

Accounts and trade related

notes received . . . . . . . . . 21 15 31 22

Inventories, net . . . . . . . . . . . . . . 19 17 26 19

Other current assets . . . . . . . . . . 5 6 9 6

Total current assets . . . . . . . . 67 56 81 69

Net plant and equipment . . . . . . 16 12 13 15

Other noncurrent assets . . . . . . 17 32 6 16

Total noncurrent assets . . . . . 33 44 19 31

Total assets . . . . . . . . . . . . . 100% 100 ”/0 100 ”/0 100 ”/0

SOURCES U.S. firma-Derived from data in Moody’s /ndusfria/s, 1980 Japanese firms—llerived from data in U.S. and Japanese

Semiconductor /ndustr7es A Financia/ Cornparlson, Chase Financial Policy for the Semiconductor Industrv Assoclatlon, June 9, 1980, appendixes

But the important point of table 62 is the

large fraction of short-term, liquid assets held

by Japanese electronics firms. These assets do

not earn high returns. Thus, on the one hand,

lower financing costs for Japanese firms are

partially offset by lower returns on their large

holdings of short-term assets. On the other

hand, the greater risks that Japanese banks apparently accept are partially ameliorated by the

high levels of these same current assets. The

result is to reduce the capital cost advantages

of Japanese electronics firms while helping explain how they can carry such high levels of

debt.

(footnote continued from p. 283)

summer 1980, p. 82. In general, depreciation rates in Japan are

comparable to those in the United States except for selected investment categories that are favored by accelerated schedules.

See, “Corporation Income Tax Treatment of Investment and Innovation Activities in Six Countries, ” PRA research report 81-1,

prepared for the National Science Foundation, Aug. IZ, 1981,

pp. 90-95; also J. A. Pechman and K. Kaizuka, “Taxation,” Asia

New Giant, op. cit., p. 317, and Tax Rates In Afajor Industrial

Countries: A Brief Comparison, op. cit.

What Role Does Japan’s Government Play?

The relatively underdeveloped state of Japanese capital markets gives the government leverage over allocations of funds for investment.

In the absence of a wide range of alternatives,

both financial institutions and industrial corporations are more susceptible to government

influence. Does, then, the Japanese Government indirectly subsidize target industries

using the banking system as a conduit? A variety of mechanisms would be possible—for instance, government funds could flow to the

banking community in the form of low-cost

loans earmarked for certain uses. The funds

might come from tax revenues or from private

savings deposited in government-controlled institutions such as the postal savings system.

Unfortunately, just because the possible

routes are indirect, evidence bearing on this

question is scarce. The most useful comes from

the collective financial statements of Japanese

banks—table 63. The liability side of the ledger
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 285 —. —. .

Table 63.—Assets and Liabilities

of Japanese Commercial Banksa

Value

(billions of yen) Percentage ——

Assets

Cash . . . . . . . . . . . . . . . . . . . . 7,559 6.30/o

Securities . . . . . . . . . . . . 14,335 11.8

Short-term assets . . . . . 86,634 71.9

Other. . . . . . . . . . . . . . . . . . . . 11,947 10.0

120,475- 100 %

Liabilities

Deposits . . . . . . . . . . . . . . 86,302 71.6 0/0

Borrowings from the Bank

of Japan . . . . . 1,570 1.3

All other borrowings . . . . . 315 0.3

Short-term liabilities . . . . . 18,605 15.4

Reserves. . . . . . . . . . . . . 2,210 1.9

Other. . . . . . . . . . . . . . 11,473 9.5

120,475 100 %

aA~ of the end Of 1975

SOURCE ~he Japanese F/nanc/a/ System (Tokyo The Bank of Japan, 1978)

is of particular interest—specifically, borrowing from the central bank, the Bank of Japan.

Although quasi-independent, the government

holds majority ownership in the Bank, the operations of which are closely monitored by

the Ministry of Finance.42 As the table shows,

lending by the Bank of Japan to commercial banks—the “overloan” phenomenon—

amounted to only 1.3 percent of total liabilities

in 1975 (the percentage is no doubt less today). As

This is too little, by itself, to give the Bank or

the government much influence over the rest

of the banking system. Nor could funds from

the Bank of Japan significantly reduce costs of

money to commercial banks. Such weight as

the government might exercise would, therefore, have to flow from other sources; some

American observers hold that informal channels are quite sufficient.

The situation was different in earlier years,

when overloans were much larger; their decrease as a proportion of the total liabilities of

Japan’s commercial banks is another indication

of the changing character of the country’s fi4ZK, Haitani, The Japanese Economic S}’stem: An ]nstitutiona]

O~rer\fiew (Lexington, Mass.: I,exington Books, 1976), pp.

164-165.

~sAn [)ver]oan simply means that commercial banks—individually or in the aggregate—are in debt to the Bank of japan.

See Suzuki, op. cit., pp. 1-13.

.—

nancial markets. Then does Japan’s Government still influence lending decisions? In the

past, target industries were certainly favored

with low-cost capital, although the extent and

force of this on industrial development is much

less at present than 20 years ago. The government appears to act largely through informal

and indirect mechanisms, rather than explicitly

allocating low-cost funds. Economic development goals set by government after extensive

consultation with financial institutions and industry have traditionally been supported by the

banks. Because of the close working relationships among government, the banks, and private industry, suggestions made by government

officials tend to be consistent with the predispositions of bank managers.

In practice, loans flow preferentially to larger

companies, most of which are associated with

one or more of the major banks through an industrial grouping. Interest rates on these loans

are typically below those for small borrowers

(such discrimination is common in all industrial countries), Still, despite the higher financing costs faced by new and small companies,

firms such as Sony and Honda have become

highly successful during the postwar period.

Some have even managed to establish their

own industrial groupings; Matsushita, which

had fewer than 2,000 employees before the

war, is the most prominent case in electronics.

Costs of capital in Japan depend far more on

broad controls exercised over interest rates

paid by the banking sector on deposits and

charged on short-term loans than on government guidance of investment flows, High rates

of capital formation have been rooted in savings—the mirror image of investment—as illustrated previously in table 54, The savings rate

in Japan is especially surprising because for

many years the government followed a deliberate policy of keeping interest on savings and

other investments low. The effect was to prevent interest rates from becoming the primary

mechanism for allocating capital, as would

have occurred with market-determined rates.

But if in earlier years capital rationing gave advantages to some sectors of the economy,
286 . International Competitiveness in Electronics — .- — ——————

others paid the cost. In general, large corporations benefited at the expense of household

savers.

Table 64 shows that personal savers in Japan

have earned zero or negative real rates of return (after adjustments for inflation) for much

of the past 20 years, depending to some extent

on the repositories chosen. During the period

1961-69, interest on major categories of personal savings—as listed in the table—remained

fixed at government-imposed ceiling levels.

Longer term savings earned interest at about

the rate of inflation; hence the real returns were

essentially zero, Shorter term deposits earned

negative returns. Much the same was true during the 1970’s. With price inflation considerably more erratic —in large part because of sudden increases in energy prices, notably in

1974—interest ceilings were periodically adjusted, but negative returns remained the rule,

Have these savings been channeled through

the banking system, appearing as loans to industry at artificially low rates? The question

can be asked in another way: What trends

would interest rates have shown had they been

freer to adjust, and had savers enjoyed more

alternatives in placing their funds? If, in fact,

the Japanese Government has rationed capital,

Table 64.—interest Rates and Price Inflation in Japan

Annual

change in

Consumer

Price Index

1961-69a 5.50/o

1970 7.7

1972 4.5

1974 24.5

1976 9.3

1978 3.8

—— Annual average interest rates

One-year

Demand Postal savings time —

deposits

2. 190/o

2.25

2.0

3.0

2.5

1.0

deposits

5.50/0

5.75

5.25

8.0b

6.75

4.5

Ordinary

3.60/0

3.6

3.36

4,32

3.84

2.4

2-3 year

.

5.5 %

5.75

5.5

8.0

6.75

4.6

a~nterest ~ate~ were held fixed over this period; the values given are the cellinCJ

set by the government The change in Consumer Price Index is the average for

the period

%wo-year or more

SOURCES. Price index—Kafsuyo Redo Tokei (Useful Labor Statistics) (Tokyo:

Nihon Seisansei Honbu (Japan Productivity Canter, Labor Productivity

Documents Center), 1981), p. 136, data based on Shohlsha Bukka

Shlsu (Consumer Price Index) (Tokyo Soritu Tokei Kyoku (Prime Min.

ister’s Office, Statistical Bureau).

Interest Rates— 1%1-1974, H C Wallich and M. I Wallich, “Banking

and Finance, ” Asia’s New Giant, H. Patrick and H. Rosovsky (eds.)

(Washington, DC. Brookings Institution, 1976), p 261. 1976 artd 1978,

Bank of Japan, Research Division, New York, N Y.

the answer must be as follows: left free to adjust, interest rates would have been higher. O n

the other hand, if the government’s actions

served primarily to allocate funds among sectors of the economy, then the answer is less obvious. To the extent that commercial banks borrowed from the Bank of Japan—and overloans

were large during the 1960’s—then interest

rates were probably depressed relative to levels

that better developed financial markets would

have set, particularly if overloans had been prohibited. The current impacts are uncertain, if

only because overloans have declined in recent

years.

The Japanese Government has other means

to help selected industries get investment capital. There is, for example, the Japan Development Bank—a public corporation through

which moneys from postal savings and trust

accounts can be funneled. In the early postwar

years, the Bank was a major instrument of government policy, but its influence rapidly declined; the Development Bank provided 22 percent of all capital invested in industrial plant

and equipment in 1953, but only 5 percent in

1961 .

44 Between 1965 and 1974, loans from

government financial institutions—of which

the Development Bank is but one—averaged

just 4.2 percent of new industrial funds.45 Still,

this small percentage came to about $3 billion

annually, more than sufficient for major impacts on international competitiveness if concentrated on well-chosen targets.

Continuing Change in Japan’s

Financial System

In terms of competitiveness, and from the

perspective of the American electronics industry, the critical questions deal with the

future. Change in Japan has been rapid, and

the pace may even accelerate. There are at least

two reasons:

1. Shocks to the Japanese economy stemming

from high energy prices beginning in

1973-74,

‘C. Johnson, Japan Public Policy L’ompanies (Washington,

DC.: AEI-Hoover Policy Studies, 1978), p. 98.

iSHaitani, op. cit., p. 169.
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 287 —..

2. Changing aspirations and expectations

among savers, consumers, and the general

public, along with the increasing complexity of Japan’s maturing economy,

The explosion of energy prices—with deep

impacts on an economy that depends almost

totally on imported fuels—has stimulated a

reevaluation of economic goals. The government is paying more attention to efficiency in allocating resources, backing away from

earlier commitments to high rates of economic

growth regardless of costs elsewhere. As people’s expectations rise, Japan is devoting more

resources to the public sector, aiming to improve the quality of life, broadly conceived.

Although public sector expenditures remain

well below levels common in Western Europe

or the United States, more money is going

toward environmental protection and a variety of social welfare programs. Defense spending is slowly increasing, partly in response to

U.S. pressures. Finally, the Japanese are discovering that the days are over when a few sectors—growing very rapidly—could lead the

country’s economic expansion. Future growth

will be slower and more balanced.

These trends in the Japanese economy will

be mirrored in the financial setting for industry, where change is already well underway. For example, the government has lost

some of its influence over interest rates; as

Japan takes a more active role in international

financial markets, with funds flowing in and

out in greater volumes, interest levels will more

closely follow those in other industrial nations.

The dynamics of the Japanese financial system

are carrying it steadily toward the American

model of open capital markets. This does not

mean that the Japanese Government will abandon its past efforts to guide the economy. Japan

will remain a nation where industrial policy

is a powerful force. But, as large Japanese firms

continue to expand internationally they will

have more latitude for independent action,

and the government will necessarily play a

lesser role in the allocation of resources.

Four clear trends can be discerned in the

evolution of the Japanese financial system: 46

1.

2.

3.

4.

Interest rates are becoming more responsive to underlying conditions in capital

markets, and as a result are less subject to

the dictates of government.

Corporations, especially larger ones, are

developing alternative sources of funding

and relying less on banks.

Banks, partly as a consequence, are looking to individuals and small businesses as

borrowers.

The Japanese Government, in response to

trends-already visible, is moving- toward

closer links with the international financial community.

While pressure in Japan for market-determined interest rates is not new, only recently

have events combined to make this outcome

a virtual certainty .47 One precipitating factor

has been the government’s own need, following several years of deficit spending, to enter

the capital market. The national debt rose from

11.7 trillion yen in 1972 to 62.3 trillion yen in

1978 ,

46 In earlier years, the banking system

would have absorbed bond issues floated by

Japan’s Government to finance this debt, with

interest rates set at low levels to minimize costs

to the treasury. But as such bonds have become

a larger portion of bank portfolios, and as an

active secondary market for government bonds

has developed, bank managers have become

less willing to accept new issues at belowmarket rates. The government has had to raise

yields to levels consistent with secondary markets. At least for government issues, a longterm bond market more typical of industrialized economies is developing.

Banks have also sought more freedom to set

interest rates on certificates of deposit (CDs);

‘J. E. W, Kirby, “The Japanese and Their Changing Economic

Environment, ” Business in Japan, revised cd., P. Norburry and

C, Bownas (eds.) [London: Macmillan, 1980], p. 85.

4TM, Borsllk, “Japan/] nterest Rates: Consequences of Rates Sensitivity,” Far Eastern Economic Review, Mar, 26, 1982, p, 59.

qaKirby, op. Cit., p. 88.
288 International Competitiveness in Electronics

Japanese banks, after much negotiation and the

acceptance of a variety of restrictions, were

permitted to issue CDs beginning in mid-1979.

By now, movement toward more flexible financial markets would be hard to stop, If interest

rates are decontrolled in a portion of the economy, pressures elsewhere will lead to a parallel freeing of rates or else to severe distortions.

Such forces are particularly potent given the

widespread desire to see Japan become an international financial center,

In terms of the U.S. electronics industry,

movement in Japan toward market-determined

interest rates should help defuse concern over

government-subsidized financing. Furthermore, as Japanese capital markets become better developed, new financial instruments will

come into play. Firms will be able to secure

capital from a wider variety of sources, at least

some of which will be less susceptible to government pressure.

49 In short, investment decisionmaking will become more decentralized,

as in other highly industrialized, capitalistic

countries. Both business executives and government officials in Japan have been concerned over the high rates of bankruptcy of recent years. Many of these failures have been

caused at least in part by the highly leveraged

positions of Japanese corporations. As a consequence, companies have been attempting to

broaden their sources of financing in both

number and kind—one of the reasons some

companies are marketing securities overseas,

To attract foreign investment, Japanese companies will have to offer rates of return competitive with those in other countries and other

currencies. This suggests that capital costs in

Japan are unlikely to diverge very far from

those in other parts of the world.

Finally, the orientations and strategies of the

major commercial banks in Japan are shifting,

As corporations seek more broadly based financing, and as the profit levels of banks decline, bank managers have been forced to re49 Japanese industrial firms floated more than twice as many

bond issues in foreign markets as domestically during 1980. See

M. Kanabayashi, “Japanese Business Borrowings Abroad Surged

to Record in Year Ended March 31, ” Wall Street ]ournal, May

12, 1981, p. 36.

evaluate their own portfolios. Many are attempting to develop alternative markets for

loans, including foreign lending and expanded

consumer credit. The Ministry of Finance has

recently given banks a good deal more latitude

in making overseas loans, although informal

quotas still exist.50 Symptomatic of the change

is the announcement of a loan at favorable

rates to Fairchild for the construction of a

semiconductor plant in Japan.

5 1

Lending to households is also on the upswing. Mortgages, installment buying, and

other forms of consumer credit have been more

the exception than the rule, but bank loans for

housing expanded fivefold during the decade

of the 1970’s, and now account for some 10 percent of total bank credit. 52 Today, as table 65

indicates, households still borrow much less

in Japan than in the United States. Continuing

movement toward greater consumer lending

and more diversified bank portfolios again

points toward capital markets in which the

primary allocative mechanism will be the

market-determined interest rate.

Internationally, Japan has made an explicit

decision–involving both government and the

financial community—to take a more prominent role in matters affecting the world’s

currencies.

53 This shift reflects a number of

‘J. Marcom, Jr., “Borrowers Are Eager To Get Yen Loans But

Must Grapple With Japan’s Delay s,” Wall Street Journalr July

7, 1982, p, 24,

51’’ Japan Offers Loan to Fairchild for IC Plant . . “ Electronics,

June 2, 1982, p. 73.

sZKirby, op. cit., p. 91.

53’’ Japanese Official Says Government Wants the Yen to

Become Major U.S. Import WeekI-y, Feb. Z,

1983, p. 572.

Table 65.—Household Borrowing in Japan

and the United States

Mortgages and consumer installment

loans outstanding as a percentage of GNP

Japan United States

1965 . . . . . . . . . . . . . . 2.30/o 60.8 ”/0

1970 . . . . . . . . . . . . . . 4.6 59.4

1975 . . . . . . . . . . . . . # 12.1 63.7

1978, , . . . . . . . . . . . . 17.5 68.1

SOURCE E Sakakibara, R. Feldman, and Y Harada, The Financ/a/ System in Comparatwe Perspective, Jo~nt Economic Comrmttee, Congress

of the United States, Mar 12, 1982, p 21
Ch. 7—Financing: its Role in Competitiveness in Electronics ● 289 — .

Photo credit Perk/n- E/rner

Electron-beam lithography system used for making

integrated circuits and masks

converging events, the most important of

which have been Japan’s continuing trade surpluses. These surpluses have led to demands

in other parts of the world that the yen be used

as an official reserve and unit of account in

private transactions, Foreign-held balances

have been increasing rapidly as an active international market in yen develops. 54 Finally,

foreign investment by Japanese corporations

is expanding swiftly. Japanese foreign direct

investment nearly doubled between 1979 and

1981, reaching a level of $8.9 billion in fiscal

1981 .

55 The international position of th e

Japanese is beginning to look strikingly like that

of the United States 20 years ago, with current

account surpluses offset by outflows of direct

investment funds.

sqFore~gn holdings of yen reached the equivalent of about $10

billion by mid-1980–still small in absolute terms but doubling

over a period of 11,2 years. See E. W. Hayden, “Tokyo as an International Financial Center, ” Atlantic Community Quarterl~r,

~wl. 19, fall 1981, j). 351, which also outlines forces contributing

to slackening go~ernment influence over Japan’s financial markets, Hayden emphasizes that continuing distortions can be expected for some ~ears to come.

5

5’’ Japan Capital Abroad Reaches Record in FY 81,” Japan Report, Joint f%hlications Research %-vice JPRS 1,/10616, June 25,

1982, p. 10. ~’or examples of Japanese in~restmf?nts in Europe,

see A. 1,. Otten, “Japanew Firms I)ress European Ventures To

Help Profits and I)eter Protectionism, ” ~’a]) ,Street ]ourrra), Apr.

16, 1982, p. 54,

————————.——

The internationalization of the yen will have

a major effect on Japan’s financing practices.

As long as the economy could be insulated

from outside impacts, the government could

successfully hold down interest rates. This insularity is breaking down as banks, private

businesses, and individuals take advantage of

the wider range of financial opportunities now

open to them. To the extent that Japan becomes

a center of international finance—a process

already well underway—the domestic financial

system will become irrevocably linked to larger

world markets, And, as the United States and

other Western nations have discovered, an integrated international market renders an independent monetary policy aimed at controlling

interest rates virtually impossible.

France

In general, French electronics firms have not

emerged as strong international competitors—

nor have U.S. companies confronted insurmountable difficulties in competing within

France, although the ingenuity of the French

in creating nontariff barriers may match that

of the Japanese. Therefore this section—and

that following on West Germany—outlines

financing methods much more briefly than for

Japan,

In some ways the French financial system

more closely resembles the Japanese case than

the American.56 Like Japan, France has a tradition of government intervention in what would

be private investment decisions here, and the

government exerts a good deal of control over

allocations of capital.

France turned away from some of its earlier

practices in the late 1970’s, and toward freer

markets for capital as well as goods, Although

the outlines of Mitterrand’s industrial policy

remain somewhat vague—more in terms of

mechanisms than objectives—the Socialist

Government has begun to alter a number of the

specific practices inherited from earlier ads~~>bis sect ion is I a rg[;] ~, based on ]. Z~rsman, @\rernmen ts,

hlar~ets, and Cro\~th: Fi;lancial .S~rstems and the Politics of industrial Chan#e ( lthac. a, N’ .Y.: Cornell U ni~’ersity Press, 1983),

(;11 3,
290 ● International Competitiveness in Electronics

— .

ministrations, But regardless of swings of the

pendulum, government intervention in capital

(and other) markets is a longstanding tradition

in France, and the thrust of French policies as

they relate to investment is not likely to change

radically.

On the whole, the French financial system

seems more tightly controlled by government

than the Japanese system, and certainly far

more so than in the United States—in part

because so much of French industry is nationalized. One major difference between the

French and Japanese cases is that France has

been a great deal more tolerant of foreignowned enterprises, One-fifth of the country’s

200 largest firms fall in this category. When

faced with weak domestic industries—including, at various times, semiconductors and computers—the French Government has sometimes

chosen to allow, even encourage, foreign

ownership.

Industry in France, as in Japan, gets most of

its external financing from institutional

lenders, generally banks. Relative to such countries as the United States or Great Britain,

securities markets are small; within these

markets, sales of bonds far outweigh equities,

Even the comparatively small French bond

market serves mostly as a source of funds for

government and for nationalized companies,

plus financial institutions of various types,

Manufacturing firms look predominantly t o

banks for their credit needs, roughly paralleling the situation in Japan.

French industrial policy as it relates to investment is based on underpricing capital, then

using a mixture of formal and informal mechanisms to ration funds to investors, Market-determined interest rates play a distinctly

secondary role. To some extent, lending institutions—which must restrict total loans to a

prescribed amount or be penalized—are fre e

to choose recipients of funds. But the government also has a voice, primarily through the

Ministry of Finance.

The Ministry can act in a number of ways,

At one level, its influence is informally exercised through a network of contacts within the

financial community. At another level, the government intervenes more directly. For example, a particular bank’s loan limits might be

relaxed to allow funds to flow to a favored firm

or industry. Sometimes, companies receiv e

grants or loans directly from the government.

5 7

Selected firms and industries may also benefit

from low interest rates or loan guarantees.

The ability of the French Government to intervene in capital allocation decisions is

facilitated because—much more than in th e

United States—the savings function is split

from the investing function. That is, the financial institutions that take deposits differ from

those that lend money. Typically, funds collected by deposit-takers are first lent to intermediaries specializing in longer term investments. These intermediaries, in turn, lend

to private enterprises. Direct transactions between deposit-taking institutions and corporate

borrowers are infrequent. Table 66 illustrates

the contrast with the United States. On the

average, the deposits and loans of American

financial institutions are much more nearly

balanced. Almost one-third of the total value

of loans to nonfinancial concerns in France

STFor examp]es in electronics, see, E. DiMaria, “French Govt.

to Bolster IC Industry With Grants and Loans,” Electronic News.

Apr. 27, 1981, p. J.

Table 66.—Holders of Liabilities and Claims With the

Nonfinancial Sector in the United States and Francea

United States France

Deposit-taking institutions (banks,

savings and loans):

Proportion of total deposits ... . . 57.3 % 71.7%

Proportion of total loans/claims ... 51.8 48,3

Long-term credit Institutions:

Proportion of total deposits ... 5.5 8.2

Proportion of total loans/claims ., . . . 7.9 32.9

Investing institutions (insurance companies,

pension funds):

Proportion of total deposits ., . . ... 32.3 11.3

Proportion of total loans/claims . 31,2 9.3

Other financial institutions:

Proportion of total deposits ... ... . 4.9 8.8

Proportion of total loans/claims . . . . . . 9.1 95

aAs of the end of 1975

SOURCE J Zysman, Governments, Markets, and Growfh Fmanc/a/ Sysfems and

the Po/ifics of /nduslr/a/ Change (Ithaca, N Y Cornell University Press,

19a3)
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 291 —.-—. — ...— — .—

flow through specialized long-term lending institutions, an indication of their importance.

Many of the institutions that take deposits

or lend funds in France are at least quasipublic; with the completion of the Mitterrand

government’s program—which includes the nationalization of an additional 18 commercial

banks, plus the country’s two largest investment banking houses—three-quarters of all

deposits pass through publicly owned banks.58

This gives the bureaucracy many tools for influencing investment decisions, Even where

financial institutions are private, the government can mediate between savers and investors; its most powerful weapon—even if seldom

called on—is simply the ability to undercut

private lenders with public funds.

Despite the pervasiveness of its influence

over investment decisions, the French Government faces severe constraints in employing this

tool of industrial policy. French industry—particularly in high-technology sectors like

electronics—has seldom been as competitive

in international markets as West German or

Japanese industry, much less American. While

exceptions such as aerospace exist, the comparative weakness of French corporations

limits their ability to operate autonomously in

world markets. The French have lagged conspicuously in MOS ICs and minicomputers;

low-cost capital has not proved much help in

building a strong technological base for the

country’s electronics industry. Indeed, several

of the larger French manufacturers are controlled by foreign multinationals. Many more

are partly owned by foreign firms, often

American. Examples have included CII-Honeywell Bull and Matra-Harris Semiconducteurs. Subsidiaries of foreign-owned enterprises need not depend on French financial institutions for capital; even minority ownership,

which is often coupled with dependence on

foreign technology, gives substantial leverage

in dealing with the bureaucracy or with government-controlled financial institutions. Furthermore, French companies that prosper be-

—.— .———

‘oP. Lewis, “France Begins $8 Billion Takeover of Private Industry and Banking, ” Nevv York Tjmes, Feb. 15, 1982, p 1.

come less subject to the allocative dictates of

the government, Not only do successful firms

get less attention simply by virtue of their competitiveness, but such companies can more easily generate capital internally, or tap international sources.

Operating within these constraints, the

French Government has used the financial system to affect the country’s electronics industry

in two basic ways. Not only has the government supported the industry with both direct

and indirect financial assistance, but—often as

a precondition for loans or grants—the government has sometimes insisted that the industry

restructure. While restructuring has frequently been aimed at fostering competitiveness,

maintaining employment has also been a

motive.

In electronics, the best known examples of

government-directed restructuring have been

associated with the Plan Calcul, which effectively ended in 1976 with a merger of the computer firms Compagnie International pour

L’Informatique (CII) and Honeywell Bull, the

latter partially U, S.-owned. The French Government promised as much as $700 million

over a 5-year period to the new concern, along

with further assistance through purchases of

both hardware and software (ch. 10). By such

methods, private firms in France are encouraged to behave in ways consistent with the

goals of the government; the carrots and sticks

tend to be more visible than in Japan,

France is now pursuing a similar strategy in

microelectronics, As discussed in detail in

chapter 10, the aim is to develop an indigenous,

internationally competitive industry—in part

by encouraging joint ventures through which

American firms transfer technology to a

French partner. One carrot here is the promise

of R&D funding reported to total more than

$300 million over a 5 year period, The U.S.

partners have tended to view this as perhaps

their only route to sales within the large,

lucrative, and closed French telecommunications market.

Quite apart from direct government aid, electronics firms find that their status as technological leaders compared to the rest of French
292 . International Competitiveness in Electronics

industry makes it relatively easy to locate funds

for R&D or expansion, Through its pervasive

influence, France’s bureaucracy can assure

favored industries funding from either private

or quasi-public sources.

But again as in Japan, the extent of government influence on corporate financing has diminished over the years. During the 1970’s,

companies meeting with success internationally could deal with French banks and capital

markets largely free of government intervention. The government was more concerned

with firms and industries no longer able to

compete; to considerable extent, French industrial policy has been preoccupied with such

sectors as textiles, steel, and shipbuilding. A

good deal of assistance has gone to firms in

these industries, which have been depressed

in France as in much of the developed world,

In this respect, the French Government has behaved like that in other industrialized nations,

including the United States. 59 

The French are now aggressively promoting

potential technological leaders like electronics,

hoping to encourage firms that might prove

able to compete internationally (ch. 10). The

plans of the Mitterrand government are extraordinarily ambitious in the spending levels

proposed for the support of new industrial

technologies, with much of the effort in electronics focused on semiconductors, France’s

record in attempting to promote technologically advanced industries has thus far been

mixed: disaster with the Concorde; success

with the Airbus and helicopters, as well as

nuclear power; notable progress in telecommunications; little relative movement as yet in

microelectronics. Direct and indirect financial

subsidies may contribute to technological success, but by the recent history in France are

far from sufficient,

West Germany

Financial mediation in the Federal Republic

again involves parties having much closer

Susee V. C. price, Industria] Policies in the European Community (London: St. Martin’s Press, 1981), for an excellent discussion

of how governments in Western Europe have attempted to deal

with the problems of distressed industries,

working relationships than typical in the

United States. In particular, the stockholdings

of banks are a major source of their very considerable leverage over German companies of

the Aktiengesellschaft (AG) variety. The AG,

or joint stock companies, were once far more

numerous in West German industry, and most

of the large concerns are still organized in this

fashion, Over the postwar period, the number

of Gesellschaften mit beschränkter Haftung

(GmbH)-–privately held, limited liability organizations—grew rapidly; banks interact less

closely with these.

One source of banking influence over the AG

form of corporation stems from its two boards

of directors: the shareholders elect a supervisory board, which in turn appoints an executive board, the latter responsible for

operating management.

60 The supervisory

board makes major decisions on matters such

as new investments or product lines. While no

individual can belong to both the boards of a

single company, there are no bars to simultaneous service on the supervisory boards of

several companies, even if they are competitors. Officers of banks holding equity in a

West German firm often become directors, and

a single bank may be represented on the supervisory boards of a number of competing enterprises. About 10 percent of the members of the

supervisory boards of the 100 largest AG firms

are bank officers—nor is this the only mechanism by which West German banks influence

business activities.61

Indeed, the role of banks is even more central in West Germany than in Japan. There are

three major reasons. The first is simply that

German banks are allowed to hold common

stock, as they can in Japan though not the

60J. Kocka, “The Rise of the Modern Industrial Enterprise in

Germany, ” Managerial Heirarchies: Comparative Perspectives

on the Rise of the Modern Industrial Enterprise, A. D. Chandler,

Jr. and H. Daems (eds.) (Cambridge, Mass.: Harvard University

Press, 1980), p. 77.

Olsee E. HartriCh, The Fourth and Richest Reich (New York:

Macmillan, 1980), ch. 13; also R. Medley, “Monetary Stability

and Industrial Adaptation in West Germany, ” Monetary policy,

Selective Credit Policy, and Industrial Policy in France, Britain,

West Germany, and Sweden, staff study, Joint Economic Committee, Congress of the United States, June 26, 1981, p. 92.
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 293 —.——————. —

United States. But, whereas Japanese banks are

limited to a maximum of 5 percent ownership

in a single company, the holdings of German

banks have not thus far been restricted

(although such legislation has been considered

by the parliament in recent years). The second

reason relates to financial structure. German

industrial companies, again like their Japanese

counterparts, are highly leveraged, tending to

rely on bank loans rather than bonds. On the

average, firms in the Federal Republic carry

about four times as much debt as equity on

their books.62 The high proportion of debt is

even more striking in light of the third characteristic of West German financial practice:

this debt is heavily concentrated in the portfolios of only three banks—the Deutsche Bank,

Dresdner Bank, and Commerzbank, all needless to say very large. These three banks hold

seats on the boards of 70 of the 100 largest German corporations. 63

Beyond the shares they own, banks in the

Federal Republic frequently control proxy

rights on privately owned shares carried in

their vaults, These shares combine with direct

equity ownership to create an impressive concentration of voting power. The banking community can vote more than 90 percent of the

shares for many of the large publicly held corporations in West Germany .6A Because major

decisions must be approved by at least 75 percent of the shareholders, an effective veto is

held by one or more banks if they control only

a quarter of a company’s common stock. Even

more so than in Japan, banks in the Federal

Republic absorb clear and explicit equity risks.

West Germany’s competitors in Europe frequently complain over the relatively high

leverage of German corporations, focusing on

capital costs, together with the major holdings

by banks of both equity and debt.65 Their rea8’J. Ross-Skinner, “~erm~ny’s powerful Banks, ” 1krI ~~urje~~’,

]~nuar] 197!J, P, G8.

p, 115 .

“NI. Krcile, “West (~ermany: The Dynamics of Expansion, ”

Between Poner and PIent~: fi’oregn Ec:onomic Policies of Adt’an[;e{l industrial State,s, [). ]. Katzenstein (ed. ) (Madison, Wis,:

[Jni\ersit} of Wis[;onsin Press, 1978), p. 191,

~s~j, \’, ~forgan and R, Harrirrgton, Capital hlarket.s in the EE(~:

The Sources and 1‘ses of i$fediurn- and I.ong- Term }’inance

([+t)ult~er, [;oIc), Pref\, 1 977], p, 323,

soning is virtually identical to that now heard

in the United States concerning Japan: financing costs are lower because the major German

firms make heavy use of low-cost bank loans.

As for highly leveraged Japanese firms,

however, the magnitude of any advantage in

cost of capital will depend largely on the tax

benefits accompanying a high proportion of

debt in a German company’s financial structure. To the degree that inside knowledge and

control provide better information, the involvement of banks in the management of German

companies may also lower their perceived

risks. If so, the banks might choose to lend on

better terms. The same could be said about

Japan, although the limits on direct ownership

make it a less significant factor, In any case—

West Germany or Japan—only small reductions

in interest rates could plausibly flow from such

sources.

The deep involvement of West German banks

in corporate financing has its corollary in a

relatively underdeveloped capital market.

While stock exchanges exist, trading volumes

are much lower than in the United States. Secondary markets for other types of financial instruments are rare. In fact, for most transactions in German financial markets, orders must

be placed with the banking community. The

usual modes of personal saving are bank accounts, insurance, and pension funds. Bonds,

including those of financial institutions, account for less than 15 percent of savings, equity

ownership less than 1 percent.

While banks carry great weight in the Federal

Republic, government influence on the financing of private business is far less pervasive than

in France or Japan. Although government ownership of business accounts for about one-fifth

of all fixed capital investment—about the same

as in the United Kingdom—public ownership

in Germany is largely confined to the transportation, electric power generation, coal, chemicals, and shipbuilding sectors. 66 In recent

‘E, Chven-Sm ith, ‘‘C,o\’ernment 1 ntervention in the Economv

of the Federal Republic of Germany, ” Go Iernmenta] lrrter~ention

in the Det’eloped Econom}~, P. Maunder (cd. ) [London: Croom

Helm, 1979), p. 160, The investment figures were 21 percent in

Germany for 1972 and 19 percent in the United KinRdom for
294 ● International Competitiveness in Electronics

——.——

years, some of the government’s holdings have

been sold to private interests. Both Federal and

Lander (state) Governments maintain ownership interests in banks, but their primary concern appears to be financing projects involving housing, agriculture, and small business.

Government-owned banks do not compete for

business with private banks. While direct government subsidies to industry are substantial,

amounting to several billion deutsche marks

annually (about half as much in dollars), most

of the subsidies have been directed toward social welfare objectives or the support of industry in West Berlin and the border areas. Still,

Federal funds have aided aircraft design and

production, along with shipbuilding, coal mining, and housing construction.

(footnote continued from p. 293)

1975. See Public Enterprise in the EEC, W. Keyser and R. Windle

(eds.] (Alphen aan den Rijn, The Netherlands: Sijthoff and Noordhoff, 1978), Part 111–Federal Republic of German~, p. 3 and Part

Vll– United Kingdom and Ireland, p, 40,

Summary and

This chapter—as several others—concentrated on the U, S.-Japan comparison because

Japanese companies are the most effective and

aggressive competitors in the world electronics

industry outside the United States.

From the narrow viewpoint of financing

costs, it appears that government support for

Japan’s electronics firms–now manifesting

itself particularly in semiconductors and

computers—has resulted in somewhat lower

costs of capital than would otherwise be the

case. But in real, inflation-adjusted terms it is

unlikely that this cost of capital advantage exceeds a few percentage points—almost certainly less than 5. By itself, the effect would be to

make expansion somewhat less costly for Japanese firms, but the competitive advantage

gained from this source alone would be small.

Differences in costs of capital faced by firms

within the industries of the United States or

Japan are larger than the differences between

average costs of capital in the two countries.

The picture that emerges, therefore, is one

of close working relationships between West

German industry and the banking sector. Commercial banks provide the bulk of external

financing for companies in industries like electronics, and take a correspondingly active role

in management. In terms of control over the

nation’s economic activities, the banks occupy

a central position and wield considerable

power. While a variety of political interests

have recently pressed for reductions in the

presence of the banks, thus far change has been

minimal. Government, in contrast, plays a less

dominant role than in many other industrialized nations. Recently, the willingness of the

West German Government to let market forces

determine economic direction has come under

strain. The eventual consequence may be a

greater degree of intervention in macroeconomic matters (ch.10).

Conclusions

Although Japanese electronics companies continue to utilize greater financial leverage than

American firms, the advantages of this practice are marginal at best, Higher debt-equity

ratios do not give Japanese electronics firms

significant benefits in financing compared to

American manufacturers.

Other analyses have resulted in estimates for

the difference in cost of capital between the

United States and Japan that are considerably

larger. The explanation lies in expectations

concerning future price inflation in the two

countries, which other studies have not fully

considered, To gain “real” returns, lenders

must demand interest rates in excess of the inflation rate. Price inflation in the United States

has exceeded that in Japan by considerable

margins over the past few years, and the inflationary expectations of lenders have reflected this history. The direct consequences

for costs of capital are perhaps less important

than the effects on time horizons for corporate
Ch. 7—Financing: Its Role in Competitiveness in Electronics ● 295

investment decisions. High and uncertain future inflation rates lead managements to anticipate large swings in the cash flow returns

from capital. The longer the time horizon, the

greater the possibility that, at some future

point, the returns will be insufficient to cover

interest expenses, Such uncertainties bias investment decisions in the United States toward

the short term.

Still, even if the real, inflation-adjusted costs

of financing are not that much higher here than

in other parts of the world, costs of capital are

great enough to create serious dilemmas for the

financial managers of American electronics

firms. These dilemmas stem from the limits on

debt broadly acceptable within U.S. financial

markets, the need for rapid growth in capitalization to meet expanding market demand for

electronics products, rising capital-intensity in

some parts of the industry, and heightened

foreign competition.

In addition to greater capital equipment

costs, manufacturers of computers, semiconductor devices, and related products face

mounting expenses for R&D and product development simply as a result of advances in

technology and the increasing complexity of

electronic systems, As in the past, competition

will be strong even among domestic firms;

added competitive pressures will come from

the Japanese. When the industry was small, and

new startups drove the technology, competition was a vital source of U.S. strength, Now

that the industry is maturing, the ingredients

of success are changing. Managers of American firms are reassessing their business

strategies—particularly in terms of pricing—

while finding themselves hard-pressed to

finance R&D and new production facilities,

In recent years, American industry has not

raised much capital from sales of stock. To increase equity without selling stock, electronics

firms must generate substantial flows of retained earnings from profits and depreciation.

To some extent, the depreciation schedules implemented by the Economic Recovery Tax Act

of 1981 will increase cash flows available for

reinvestment, as will other changes in the tax

law. But competition is likely to hold down profitability, thus limiting the ability of American

electronics manufacturers to finance rapid expansion through reinvested earnings.

Compounding the difficulty for firms in

many portions of the industry is the rising level

of capital intensity. More expensive production

equipment is a fact of life for semiconductor

firms. Equipment used for R&D as well as

manufacturing rapidly becomes outdated. This

is not necessarily a problem so long as writeoffs

keep pace. But the changes in depreciation

schedules adopted as part of the 1981 Tax

Act—which fix depreciation on most equipment at 5 years for all industries—could disadvantage electronics firms, In the past, depreciation schedules were based, at least nominally,

on the actual useful life of the investment. The

new law shortens depreciation schedules for

other industries, where plant and equipment

often have much longer useful lifetimes, With

all industries now depreciating on essentially

equivalent schedules, firms in electronics and

other technologically dynamic industries are

likely to find themselves at a relative disadvantage. Their domestic rivals for investment

funds benefit from greater increments in depreciation rates and hence in cash flows,

augmenting their ability to attract capital for

new investment.

U.S. electronics firms obtain financing from

a variety of sources, depending largely on their

size and stage of development. For many of the

younger companies, the original source was

the venture capital market—where investors

provide money to infant businesses in the hope

of greater returns than safer investments would

yield. Venture organizations generally expect

most of their return in the form of capital appreciation; as a consequence, their investment

decisions are sensitive to taxation of capital

gains. The 1978 reductions in capital gains

taxes were an important force in enlarging the

pool of funds available for new ventures in

electronics.

As successful firms grow beyond the infant

stage, they gain access to a greater variety of

sources of capital—e.g., lines of credit with
———

296 ● International Competitiveness in Electronics — .

banks, bond markets. They may also be able

to float public stock offerings. But managements of electronics companies, following the

prevailing American pattern, have strongly

preferred internal funding of growth. Some

companies utilize considerable debt (table 53),

but leverage in U.S. electronics firms for the

most part remains low.

Such financial patterns—particularly those

established by merchant semiconductor manufacturers during the 1960’s and 1970’s—will

not be easy to maintain during the 1980’s.

Greater demands for capital equipment and for

R&D are combining with intense foreign competition to make the financing of growth by

small, independent companies more problematical. But despite the attention focused on

international competition, the fundamenta l

problem is growth—together with the upswing

in capital intensity. Many once-independent

firms have already been acquired by larger corporations, at least partially in consequence of

their needs for capital.

As a result of these forces, the U.S. electronics industry will almost certainly be compelled to rely more heavily on external funds.

This is one of the reasons for the concern over

costs of capital. Many industry leaders have

expressed doubts that supplies of capital will

be adequate–or that, if capital is available at

all, the costs will be too high, particularly compared with costs of capital in Japan. Of course,

funds will always be available for investments

that promise sufficiently high returns. Free

capital markets will clear at some interest rate,

and it is this interest rate—or price—that serves

as the allocative mechanism in the U.S. financial system. But it is quite possible that—from

a broader perspective than simply returns to

capital—projects that are otherwise desirable

will not be funded. Examples include the longterm basic research that undergird a hightechnology industry like electronics.

As a result, the question of whether interest

rates in the United States may be prohibitively high is a difficult one. The supply-side thrust

of programs initiated by the Reagan administration was intended to produce significant

growth in the pool of capital available for investment, If effective, such programs should

result in lower market interest rates. But many

of the steps taken will also stimulate deman d

for funds. It has not yet been possible to

separate the effects on supply and demand

flowing from these policies; the vital question

of how future U.S. costs of capital will compare with costs in other countries, also uncertain, takes the whole matter a step further.

Turning to Japan, in years past capital costs

for electronics firms there may have been significantly lower than in the United States. The

reasons are several. Capital has, at various

times, been channeled to favored industrial sectors, including electronics, By controlling i n -

terest rates, the Japanese Government effectively circumvented the market as a mechanism

for allocating funds, But while remnants of this

control remain, government influence over financing decisions by banks is now much

weaker than 20 or even 10 years ago. Furthermore, as capital markets in Japan continue to

evolve they will take forms more like those in

other industrialized countries—i.e., marketdetermined interest rates will become the major mechanism for capital allocation, Stronger

linkages with capital markets in other countries

will mean that rates of return—and hence costs

of capital—will not be much different in Japan

than in the United States. Thus, even if Japanese electronics firms enjoyed lower costs of

capital in years past, these advantages are likely

to diminish in the future,

At the same time, the savings rate in Japan

continues to be extraordinarily high, though

declining somewhat at the end of the 1970’s.

It may continue to gradually fall, but rates of

capital formation remain much greater than in

the United States even considering increasing

public sector demands as a result of large

budget deficits, Moreover, Japan’s Government

has a well-practiced capability for intervening

in capital markets and steering investment

toward favored sectors of the economy. What

the Japanese have called “administrative guidance” will not simply disappear. Still, the

changing character of the country’s financial
Ch. 7—Financing: Its Role in Competitiveness in Electronics 297

— —

markets means that Japan’s electronics firms

will have less of an advantage in the future

compared to their rivals in the United States

and Europe—some of which may even find

themselves tapping sources of capital in Japan

to finance their own expansion.

As these trends proceed, major Japanese corporations will no doubt continue to diversify

their capital structures, relying less heavily on

commercial banks. Corporate borrowing in

Japan as a percentage of gross national product is declining as firms diversify their sources

of funds, The leverage of Japanese electronics

companies gradually decreased over the 1970’s,

as figure 52 showed, while public sector borrowing has risen. Government bonds are becoming major long-term tradable securities.

Securities of many types, both domestic and

international, are becoming more widely available in Japan, and market forces are having

their effects on interest rates. The government

will have more difficulty in managing investment flows, and the capital structures of

Japanese electronics firms will continue moving closer to those in the United States. Assuming these trends continue—and there is every

reason to expect them to—at least some of the

concerns of American industry with respect to

Japanese financial practices should diminish.
CHAPTER 8

Human Resources: Education,

Training, Management

.
Contents

Page

Overview ..eo*. o*. e.OoO** *ooo. *oo*. sso***o o0.06*6e OooO**o Oo.OOO***e ** o 301

Education and Training ● ****.*.***.**.*..*...*...*****, .** ..**.**. * 302

U.S. Secondary School Education in Science and Mathematics. . . . . . . . . . . . . . . . . 303

Secondary Schooling Abroad, Especially in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304

University and Continuing Education in the United States . . . . . . . . . . . . . . . . . . . . 305

University and Continuing Education in Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

International Differences in Education and Training . . . . . . . . . . . . . . . . . . . . . . . . . . 317

Supply and Mobility of Labor ..,...., ● *...*... . . . . . . . . . ● ***..*,. ● *....** 318

Overall Labor Market Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

Personnel Supplies for the U.S. Electronics Industry . . . . . . . . . . . . . . . . . . . . . . . . . . 320

The Question of Mobility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

Organization and Management ● .*.*,** ...**.**. ,. ,**  ...****.. ● ****. * 326

Organizational Types and Management Styles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327

Worker Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330

Japanese and American Management Styles: How Much Difference?. . . . . . . . . . . . 333

Summary and Conclusions .*..**.* ...***..* ● O...***, . . . . . . . . . ........9 . . 334

Appendix 8A.--Japanese and American Management Styles: A Comparison . . . 336

List of Tables

Table No. Page

67. Engineering Graduates as a Percentage of Their Age Group . . . . . . . . . . . . . . . . 306

68. U.S. Degrees Awarded by Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306

69. Enrollments in Japanese Colleges and Universities . . . . . . . . . . . . . . . . . . . . . . . . 315

70. Distribution by Size of Japanese Firms Providing In-House Training . . . . . . . . . 316

71. Labor Force Growth in Several Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

72. Work Stoppages Due to Labor Disputes in Several Countries.. . . . . . . . . . . . . . . 328

73. Rankings by American Managers of Factors Contributing to Productivity.. . . . 335

8A-1. Responses of Middle and Upper Managers to Questions Dealing

With Communications and Decisionmaking Styles . . . . . . . . . . . . . . . . . . . . . . . 337

8A-2. Data Related to Employee Satisfaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338

List of Figures

Figure No. Page

53. R&D Engineers and Scientists in the Labor Force . . . . . . . . . . . . . . . . . . . . . . . . . 305

54. Engineering Graduates of American Universities . . . . . . . . . . . . . . . . . . . . . . . . . . 306
CHAPTER 8

Human Resources: Education,

Training, Management

Overview

Among the questions this chapter addresses

are: How good are the people an industry depends on? Is the pool from which they are

drawn big enough? How do they get their training? And, the mirror image of these: Does industry use their abilities wisely?

Countries without adequate human resources

cannot hope to design and manufacture products like computers; even televisions are beyond the capabilities of many developing economies. In the United States, people—unskilled

or skilled workers, engineers and technicians,

managers—are a vital resource for electronics

firms; thriving semiconductor companies have

been built around the talents of three or four

engineers.

But people are only the starting point. How

talents are developed, skills utilized, depends

largely on management: managers shape the

organization, decide on policies, set the style

and tone. The sections that follow examine

human resources as a factor in competitiveness, primarily from the standpoint of electronics in the United States. Matters of education and training are followed by an examination of management practices. One of the questions addressed is: To what extent does the

vogue for Japanese management represent anything new and different in the American context, as opposed to a reemphasis of themes that

have always been present? The comparisons

on education also focus on Japan, in part because of the recent publicity given to that country’s lead over the United States in numbers

of engineers graduated.

Such topics are particularly appropriate at

a time when rates of productivity growth have

slowed in the United States. Is the education

and training of American workers appropriate

for technology-intensive industries like electronics? Do managements make the best use

of the talents and abilities of the labor force?

Are countries like Japan doing anything that

is really different—or better? In the early part

of the century, these questions were already

being asked, as part of the “scientific” study

of management. It is no coincidence that

American management experts schooled Japanese executives now known for their dedication to quality (ch. 6).

The popular press tends to oversimplify the

set of issues covered by “human resources, ”

Some commentators define human resources

narrowly, as encompassing the skills and attitudes of the work force; this approach often

leads to stereotyping of employees in countries

like Japan or West Germany. Seeing the Japanese worker as the product of a culture that

rewards hard work and diligence captures part

of the truth but obscures the larger institutional

and economic context. Others stress management techniques, often narrowly defined, as a

key to labor productivity, Quality control circles are the best-publicized current example.

While certainly critical in the utilization of a

firm’s human resources, management should

also be viewed as part of a broader picture.

Management practices themselves reflect a

mix of schooling and experience shaped by the

structure of work and organization within a

society.

This chapter views the American labor force

—and the electronics industry—from two fundamental perspectives. First, workers bring

with them a set of skills largely acquired prior

to joining a company. The question then is to

compare education and training in the United

States—particularly of white-collar personnel,

301
302 ● International Competitiveness in Electronics

—.——

but also blue-collar employees–with that of the

men and women who staff foreign electronics

firms, Second: Will there be enough appropriately trained people to meet the needs of a rapidly expanding U.S. electronics industry?

Labor mobility is a separate but related issue. A growing industry, such as semiconductor manufacturing, may be able to meet its

manpower needs by attracting workers from

other parts of the economy, Within the industry, one semiconductor firm may be able

to lure employees from its competitors, Mobility has traditionally been high in the United

States for those with knowledge and experience.

But what of those left behind by technological change? To a considerable extent, other nations have used retraining programs as instruments of public policy for enhancing employee

mobility and aiding those whose skills are outof-date. This has been less common in the

United States, where mobility and continuing

education depend on individual initiative.

Leaving aside questions of remedial education

and the training necessary for entry level jobs,

with which the United States has experimented

largely for reasons of social welfare, a strong

case can be made for an enhanced Federal role

in training and retraining programs to support

the competitiveness of growing high-technology industries like electronics.

The other perspective on human resources

in this chapter relates to corporate management. Contrasting the practices of Japanese

and American managers shows many of the

lessons of effective management to be universal, the unique character of Japanese management something of a myth. Nonetheless, there

are lessons to be learned from firms in Japan,

as well as from successful organizations in the

United States. Competitive firms here and

abroad tend to share a common trait: management practices that give employees a say

in decisions affecting their work, along with

support for skill development. Emphasis on

employee participation and human relations

can contribute to productivity and worker satisfaction, but conclusive evidence linking particular management techniques (such as quality

control circles)—here or in any country—to

competitive success is conspicuously lacking.

Education and Training

The U.S. electronics industry is built on the

capabilities of production workers, skilled technicians, and white-collar managers and professionals. On the shop floor, blue-collar employees operate semiconductor fabrication equipment, assemble computers or TV sets. Much

of this work is essentially unskilled, meaning

that a typical job can be learned in a few hours.

Technicians—grey-collar employees—often

with vocational school training, play an important role both on the factory floor and in research and development (R&D) laboratories.

They maintain, troubleshoot, and repair sophisticated equipment—and sometimes fabricate

it—as well as testing and inspecting components and systems. Technicians also build

and help develop prototypes of new products.

Other employees with specialized skills include

draftsmen and nondegree designers, production foremen, field service installers and repairmen, computer system operators, and technical writers. White-collar workers—many with

college degrees—perform functions ranging

from plant management to accounting and financial control, business planning, and legal

advising. Engineers and scientists—some with

advanced degrees—design and develop products, plan manufacturing processes, specify

production equipment, and carry out R&D projects in fields ranging from solid-state physics

to computer architectures, All of these skills

are essential to a competitive industry, not just

those of the well-educated and well-paid professionals; grey-collar technical workers, in

particular, have a critical place in technology-based organizations. Some jobs depend
Ch. 8—Human Resources: Education, Training, Management ● 303 —— —.

much more heavily on formal education and

training than others, but it is fair to say that

better skills and abilities at all levels will add

to the competitive ability of an enterprise, as

well as adding to peoples’ upward mobility.

The United States has maintained a lead in

many fields of technology and science since

World War II, in large part because of the

excellence of the educational system here.

Nonetheless, other advanced industrial nations

provide their work forces with training in technology, mathematics, and science that on the

average is probably more intensive. It is easy

to forget, in the publicity that surrounds Nobel

Prizes, the Apollo program, or the nascent biotechnology industry, that competitiveness rests

on the skills and abilities of great numbers of

people whose contributions will never be publicized or even acknowledged. At a time when

literacy levels in the United States decline as

those elsewhere rise, and the Soviet Union

graduates five times as many engineers, it

makes sense to look at the foundations for the

Nation’s human resources as well as the pinnacles of its achievements.

In fact, the evidence of U.S. weakness in

technical education and training is strong and

continuing to mount.1 The best people and best

educational institutions in the United States are

probably as good as ever, maybe better. But the

breadth of capability that once distinguished

the U.S. labor force may be diminishing, The

National Science Foundation/Department of

Education (NSF/DOE) report cited above concludes that American achievements in basic research remain unchallenged, but that the average high school or college graduate in this

country has only the most rudimentary knowledge of mathematics or science. The trends are

I“Science and Engineering Education for the 1980’s and Beyond, ” National Science Foundation and Department of Education, Cktoher 1980. See also Tocla.vr Problems, Tomorrow

L’rises: ~1 Report of the National Science Board Commission on

Prt?cc)llege Edclcation in hfathematics, Science and Technolog~

(Washington, I) C,: National Science Foundation, Oct. 18, 1!382):

.’+. iencc and Engineering Education: Data and information, NSF

82-30 (Washington, DC.: National Science Foundation, 1982),

and Science Indicators- I $?80 (Wash ington, DC.: National

Science Board, National Science Foundation, 1981), chs. 1 and

5. The L’, S.-[ “.S. S R. comparison in engineering graduates comes

from p. 209 of the Iast-mentloneci report.

clear, beginning at secondary levels where

students avoid courses in these subjects. Only

one-sixth of U.S. secondary school students, for

example, take courses in science or mathematics past the 10th grade. Technology, as opposed

to science, is totally lacking in secondary

schools, despite the abundant evidence of public fascination with technological achievements. Indeed, few people seem to distinguish

technology from science, hence misnomers

such as science fiction.

The NSF/DOE report, along with many

others, also points to apparent shortages of

entry-level computer professionals and several

types of engineers, and the difficulties of secondary schools, vocational institutes, community colleges, and universities in finding and

retaining qualified teachers in the physical sciences, mathematics, engineering and computer

science, and in vocational programs, Moreover, equipment used for teaching laboratory

courses in engineering and the sciences is

years out of date and in short supply. In the

future, American industry, particularly hightechnology sectors like electronics, may simply not have an adequate supply of employees

with the kinds of skills needed to maintain U.S.

competitiveness.

U.S. Secondary School Education

in Science and Mathematics

Falling mathematics and science enrollments

in American high schools indicate that, while

there is a small group of students who want

and get advanced courses, the great majority

avoid these subjects when they can. Average

scores on national tests of achievement in

mathematics and the sciences are lower than

a decade ago. Students who elect to take Advanced Placement Tests in science or mathematics make about the same scores as in the

past, indicating that the core of serious students gets good preparation; but overall, Scholastic Aptitude Test (SAT) scores fell for 18 consecutive years until holding steady in 1981. *

*According to the Educational Testing %x-vice, Princeton, N.]..

mean scores in 1981 for college-bound high school seniors

424 for the ~rerba] portion of the SAT and 466 for the mathematics
304 ● International Competitiveness in Electronics

—. —.

Some of the decline can be attributed to the

greater percentage of students who now attend

college and thus take the tests, but an advisory

panel convened to examine the SAT concluded

that, since 1970, other factors—including lower

educational standards and diminishing motivation on the part of students—have been much

more important. 2

Fewer American high school students are

electing mathematics and science courses, particularly the two fundamental physical sciences, chemistry and physics; of those who do

elect science, more chose the life sciences.

While the majority of U.S. high school graduates have taken biology, only about a third

have had chemistry; the fraction drops to about

one-tenth for physics.3 The situation is replicated in high school mathematics, where only

one-third of U.S. graduates take 3 years of

coursework. Regardless of how good their

grades may be, three-quarters of American

high school graduates do not have the prerequisite courses to enter a college engineering

program. 4 What this means for industries like

electronics is not only that the average high

school graduate is unprepared to study engineering or one of the physical sciences in college, but may be unable to enter a career calling for middle-level technical skills without a

good deal of additional training.

Secondary Schooling Abroad,

Especially in Japan

U.S. enrollments in science and mathematics

contrast starkly with the picture in Japan. Not

only do about 90 percent of Japanese high

school students graduate—compared with 75

to 80 percent in this country—but all are re-

(footnote continued from p. 303)

portion, identical to 1980 scores, In 1966, the means were 466

for verbal and 492 for mathematics. While testing criteria may

not have remained precisely the same over this period, the downward trend is unambiguous.

“’Science and Engineering Education for the 1980’s and Beyond,” op. cit., pp. 107-108.

3P. D. Hurd, ‘‘Falling Behind in Math and Science, Washington Post, May 16, 1982, p. C7. See a]so Science and Engineering Education: Data and Information, op. cit., pp. 57, 59.

4“Engineering: Education, Supply/Demand and Job Opportunities,” Electronic Industries Association, Washington, D. C., October 1982.

quired to complete 2 years of mathematics plus

2 years of science. Competition for entry into

the best colleges is intense; Japanese students

choose rigorous electives and spend much

more time on homework than their American

counterparts. Those who wish to attend college

study mathematics each year, moving beyond

trigonometry—the point where many U.S. high

school curricula still stop, s The stress in Japanese secondary schools on science and mathematics for all students is far from unique. The

Soviet equivalent of the American high school

curriculum includes a heavy dose of coursework in these areas—for instance, 2 years of

calculus. West German secondary school students, even those who wish to specialize in

fields such as the classics or modern languages,

get extensive training in mathematics and science; by the same token, those planning technical careers receive their liberal arts education in high school. Neither curricula nor academic standards vary as widely among West

German schools as in the United States. 6

In Japan, large numbers of students who do

not go to college get technical, vocational, or

semiprofessional schooling as preparation for

jobs in industry where they will work with and

provide support for engineers and scientists.

The result is a large pool of well-prepared candidates for entry-level grey-collar jobs.7

The investments that students in Japan make

in science and mathematics yield measurable

benefits. On a number of international achievement tests, Japanese students score consistently above their counterparts in other industrial

nations, a Nonetheless, secondary education in

‘M. W. Kirst, “Japanese Education: Its Implications for Economic Competition in the Kappan, June 1981,

p. 707. Only about 30 percent of U.S. high schools offer calculus,

and fewer than 10 percent of American high school students

take the subject; see Hurd, op. cit., and Science and Engineering Education: Data and Information, op. cit., p. 59.

nEngineering Our Future: Report of the Committee of Inquiry

into the Engineering Profession [London: Her Majesty’s Stationery Office, January 1980), p. 219. Also, D. W, Sallet, “Education

of the Diplom Ingenieur, ” journal of Engineering Education,

vol. 59, June 1969, p. 1105.

7

S. B, Levine and H. Kawada, Human Resources in Japanese

Industrial Development (Princeton, N. J.: Princeton University

Press, 1980), pp. 74, 80. Engineers in Japan are evidently supported by many more technicians than in the United States.

‘R. S. Anderson, Education in Japan (Washington, D. C.: U.S.

Government Printing Office, 1975), p, 130.
Ch.

Japan has major weaknesses. The most obvious

is the strong traditional emphasis on rote learning and imitation, coupled with a dependence

on textbooks and lectures rather than demonstration and learning-by-doing (in reality, U.S.

education is probably no better in this regard).

Critics of the system argue that this stunts the

development of creative abilities. 9 Academic

competition in Japan is, furthermore, so intense that the Japanese Ministry of Education

has expressed concern that other aspects of

child development are being neglected. Despite

the undoubted validity of some of these criticisms, the fact remains that high school students in Japan receive training in science and

mathematics that is, on average, more extensive than in the United States. Even for students who do not go on to technical or professional jobs, such training contributes to quantitative skills, precision in thinking, and to an

understanding of the physical world. Such a

background helps people to comprehend the

technologies that their daily lives depend on.

In the future, their employment opportunities

may depend on this as well.

University and Continuing Education

in the United States

In some respects, the Japanese and American

educational systems are opposites. The Japanese concentrate their efforts on precollege

training where the United States is weak. On

the other hand, the quality of university education in Japan is much inferior. In a very real

sense, the American system of higher education must compensate for secondary schooling

that is generally poor.

Although this comparison may be qualitatively valid, it begins to break down in terms of

numbers. While the United States continues to

produce more Ph.D.s in science and mathe-

—.—

matics than Japan, Japanese undergraduate

‘See, for example, the assessment of M. Nagai, former Japanese

Minister for Eflucation: “Higher Education in Japan, ” ~ai~an

Quarter/jr, vol. 24, 1977, p 3(M. While many Japanese are quite

self-conscious about their country’s supposed lack of innovation and originality in engineering and the sciences, the product developments flowing In recent years from Japan’s industries

show great creativity in the application of technolog~’.

8—Human Resources: Education, Training, Management ● 305

programs have been turning out greater numbers of engineers since 1967. In 1981, Japan graduated 75,000 engineers compared to

63,000 here, despite a population half that of

the United States. The margin is a little greater

for electrical engineering graduates—25 percent. 10

As figure 53 shows, the United States once

held a commanding lead in the proportion of

engineers and scientists in the work force,

While the advantage over other Western nations probably still exists (various countries categorize scientists, engineers, and technicians

differently, making comparisons ambiguous),

it has narrowed greatly, And, as table 67

demonstrates, engineering graduates are now

a smaller proportion of their age group in the

United States than in Japan or West Germany—countries where a far greater fraction

of engineers in any case devote their efforts to

commercial rather than defense industries.

1OThe 1981 breakdown by d iscip]incs is not a~ra ilable for Japan,

but in 1980, 19,355 13, S.-level degrees were awarded in electrical

and computer engineering, compared to 15,410 in the LJnited

States. Figures for Japan are from the Ministrj of Education,

those for the United States from P. Doigan, “Engineering and

Technology Degrees, 1981 ,“ Engineering Education, April 1982,

p. 704, and P. Sheridan, “Engineering and Technology Degrees,

1980, ” Engineering Education, April 1981, p. 713

Figure 53.— R&D Engineers and Scientists

in the Labor Force

L.?

07 —

06 — United States

... ””

-. ● “

Year

a Lo wer bound est mat e

SOURCE Na//ona/ Patterns of Sc/ence and Technology Resources T982

(Washington DC Nallonal Science Foundation 19821 p 33
306 . International Competitiveness in Electronics —

Table 67.— Engineering Graduates as a Percentage

of Their Age Groupa

United States . . . . . . . . . . . . . . . . . . . . . . 1.6°/0

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7

aFlrst degree graduates, lncludlng foreign nationals, In 1978, except for West

Germany and France, where the percentages refer to1977 lnthe Unifed States

aslgnificant fraction of engineering graduates are from overseas” in 1982, 8percent ofBS degrees lneng!neenngwent to foreign students,29 percent ofMS

degrees, and40 percent ofPh D degrees SeeP.J Sheridan, ”Engineering and

Technology Degrees, 1982:’ Engineering Educatiorr, Aprd 1983, p 715

SOURCE Eng/rreer/rrg Our future Reporl of the Cornrmttee of lrrqu~ry Into the

Engineenng ProfessIon (London Her Majesty’s Stationery Office,

January 1980), p 83

Engineering Education

As table 68 indicates, graduates in engineering, the physical sciences, and mathematics in

the United States accounted for steadily falling proportions of new degrees at both undergraduate and graduate levels during the 1970’s.

The number of degrees in the mathematical sciences, including statistics and computer science, actually fell between 1970 and 1980.

In engineering, undergraduate enrollments

have jumped since the mid-1970’s–and the

number of graduates has followed, as shown

in figure 54—leading to overcrowded classes,

overloaded faculty, and severe pressures on the

quality of education. The number of full-time

undergraduates enrolled in U.S. engineering

schools went from about 20,000 in the early

1970’s to an all-time high of more than 400,000

1965 1970 1975 1980 1982

Year

SOURCES f965-79-’(Data Related to the Cris!s In Engineering Education, ”

American Assoclatlon of Englneenng Societies, March 1981, p

17

I!X30-P J. Shertdan, “Engineering and Technology Degrees, 1980, ”

Engineerirrg Education, April 1981, p. 713

1981-P Dolgan, “Engineering and Technology Degrees, 1981 ,“

Erigirreering Educatiorr, April 1982, p 704

1982-P J Sheridan, “Engineerlng and Technology Degrees, 1982, ”

Engirreer/rrg Education, April 1983, p 715.

in 1982.11 At the graduate level, the trends are

quite different—but not encouraging. The number of master’s degrees in engineering has increased slightly over the past decade, but the

number of Ph.D.s has declined—one reason

for faculty shortages in engineering schools.

Figure 54 illustrates the trends at both B.S. and

“1’. Doigan, “Engineering Enrollments, Fall 1982, ” Engineering Education, October 1983, p. 18. At the bottom of the most

recent trough, in 1973, 187,000 students were enrolled in engineering; by 1982, the total was 403,000.

Table 68.—U.S. Degrees Awarded by Field

Total as percentage

Physical of degrees awarded

Engineering sciences Mathematics a

in all fields

1980: B.S. . . . . . . . . . . . . . . 37,808 16,057 11,437 17%

M.S. . . . . . . . . . . . . . . 6,989 3,387 1,765 17

Ph. D. . . . . . . . . . . . . 786 NA NA NA

1970: B.S. . . . . . . . . . . . . . . 42,966 21,551 29,109 12%

M.S. . . . . . . . . . . . . . . 15,548 5,948 7,107 13

Ph. D. . . . . . . . . . . . . 3,620 4,400 1,222 31

1980: B.S. . . . . . . . . . . . . . . 58.742 23,661 22,686 10%

M.S. . . . . . . . . . . . . . . 17,243 5,233 6,515 10

Ph. D. . . . . . . . . . . . . 2,751 3,151 963 21

NA = Not Available

a lncluding statistics and computer science.

SOURCE” Engineering—’’Data Related to the Crisis in Engineering Education, ” American Association of Engineering Socletles,

March 1981, p 17, Phys!cal Sciences and Mathematics—National Patterns of Science and Technology Resources

1981, NSF 81-311 (Washington, D. C.. National Science Foundation, 1981), pp. 78-80
Ch. 8—Human —

Resources: Education, Training, Management ● 307

Ph. D. levels. Not only have doctoral enrollments failed to keep up, but about half of all

Ph.D. engineering candidates are now foreign

nationals; many of them leave the United States

after graduation. *

An important cause of declining enrollments

of Ph. D. candidates in engineering has been

the high starting salaries that holders of new

bachelor’s degrees command–in 1982, about

$26,000. Swelling demand by industry for engineers has attracted undergraduates to the field,

at the same time siphoning many off from the

pool of prospective graduate students. To

someone who might otherwise consider a

Ph. D. followed by a teaching career, the rewards of immediate employment can seem

much more attractive than several years of lowpaying stipends or graduate assistantships,

then the salary of a junior faculty member.

While pay for college teachers has always been

well below that in industry, the other attractions of an academic career have diminished

in these days of overcrowded classrooms, outdated equipment, and limited research funding.

Poor facilities and an escalating student-tofaculty ratio are leading to declines in the quality of education provided in American engineering schools. For many years, the proportion of programs in engineering and computer

science that were unconditionally reaccredited

during periodic reviews held steady at about

70 percent, but in 1981 only 50 percent of the

programs examined received full accreditation. 12 This sudden change indicates the gravity

of the problems facing engineering education

in the United States.

The most common and most serious causes

of declining educational quality are faculty

shortages and obsolete laboratory equipment.

*See note to table 67. In 1982, 1,167 of 2,887 engineering

Ph. D.s went to foreign nationals; both industry and universities

have become heavily dependent on foreign-born engineers, especially at tbe doctoral level. Figures on graciuates reflect earlier

enrollments; currently, nearly 50 percent of Ph. f). candidates

in [J ,S, engin[?ering schools are foreign nationals.

1“’Adequacy of U.S. Engineering Education, ” E’merging Issues

in Scien[:e and Te(:hno][jg~, I<M I (W:IS]I ingttjn, DC.: National

Science Foundation, June 1982], p. 60. l)rograrns with deficienc ies may be reexamined after a shorter th;i n 1~ormal inter~”al or

placed on probation

Photo credit General Motors

Engineer holding bracket designed with

computer assistance

Even when funds have been available to hire

new faculty, good candidates are rare because

of the low numbers of new Ph.D.s and the uncompetitive salaries offered by universities.

Estimates of the number of unfilled faculty

positions in U.S. engineering schools have been

in the range of 1,400 to 2,000--about 10 percent of the total number of faculty positions in

engineering. 13 Furthermore, universities can no

longer depend on graduate students to relieve

some of the load on regular faculty by assisting

in classroom teaching and laboratory instruction.

The equipment problem is equally serious.

While faculties do their best with the resources

available, it is difficult to teach a digital design

laboratory with equipment from the analog era.

And laboratories, as well as classrooms, have

become overcrowded as undergraduate enrollments have climbed. Quality suffers when students have less contact with faculty, as well as

less exposure to up-to-date laboratory equipment and computing facilities. Many univerI ?As ~, f the fal 1 of 1982, a su ney ” ( )f( 1. S t’ [) ~ 111 t ‘t? I’ i llg s~ I) 001

reported 1,400 authorized and bu(igeted fatult? l)t~~lt IC)IIS \ a(:al~t,

of a t (lt al of about 18,000. The number SI1OU Id IJC [ cg,I rdf:(l ,~.s

a lo~i’er bound because few, uni~’erslties ha~’e Increased the nunlt)er (If authorized faculty. pos]tions at rates c;orlllrlerlsur;~t(: I\itll

gro~lth in undergraduate enrollments. The most se~’ere probl~~nl+

are in computer specialties. See J. it’. Gils, ‘‘rI-he Facult}r Shortage: The 1982 Sur\ey, ” Engincwrlng I;du[ dtion, october 1983,

]), 47.
308 . International Competitiveness in Electronics

—

sities, hurt by past slumps in engineering enrollments, are reluctant to put scarce funds into

expansion to meet what may be a transient demand, More fundamentally, universities have

had great difficulty in adjusting to shifting student choices at a time when total enrollments

have stopped rising. Tight budgets have caused

programs in the sciences as well as engineering to fall behind the times.14

The well-publicized situations at large, Statesupported schools such as Iowa State University and the University of Illinois, typical of the

institutions that form the core of the U.S. system of engineering education, are representative. 15 Iowa State simply ran out of facilities to

handle enrollment increases in computer engineering, despite operating on a 6-day schedule.

Because of overcrowding, students were

warned that they might not be able to complete

their programs in 4 years. Transfer students

at Illinois must have a grade-point average of

4.2 on a scale of 5 to enter engineering, while

the universitywide requirement is only 3.25.

Shortages of facilities and teaching faculty

forced 16 of 30 large American engineering

schools to adopt some form of restriction on

the number of students they admit. 16

Only the elite universities have been largely

spared such problems, and even these have had

trouble attracting enough good graduate students. But because the best schools have always

1

4

’’ Science and Engineering Education for the 1980’s and Beyond, ” op. cit., pp. 68-69. Courses in physics and chemistry also

depend on laboratory and computer facilities. For a discussion

of laboratory equipment shortages with the emphasis on research

needs, see “Obsolescence of Scientific Instrumentation in Research Universities,” Emerging Issues in Science and Technology, 1981, op. cit., p. 49.

The nine State-supported engineering schools in Texas have

reported equipment needs totaling $88 million, about 70 percent

of this for undergraduate teaching laboratories, The situation

in Texas is probably fairly typical; an extrapolation to the United

States as a whole results in an estimate of about $1 billion for

new laboratory equipment in engineering alone. See “$1 Billion

for Instructional Equipment, ” Engineering Education News,

June 1982, p. 1.

‘

s

’’ Engineering Education Under Stress, ” Science, Sept. 25,

1981, p. 1479; C. Phillips, “Universities in U.S. Are Losing

Ground in Computer Education, ” Wall Street journal, Jan. 14,

1983, p. 1.

‘@’’Universities Limiting Engineering Enrollments, ” Engineering Education News, March 1981. The limitations are based simply on numbers; as at Illinois, qualified students are being turned

away.

limited their enrollments, they have been able

to raise the average quality of incoming students while keeping expansion to manageable

rates, Engineering departments at schools like

Stanford or MIT have also been able to retain

their faculties. One of the dangers implicit in

responses by industry or the Federal Government to the problems afflicting engineering

education is that resources may flow disproportionately to the top-ranked, research-oriented universities. Of the nearly 300 colleges

and universities that offer engineering in the

United States, it is the middle tier—both public

and private—that turns out the vast majority

of graduates and faces the most serious problems,

Supply and Demand

Even though enrollments are still climbing,

and the number of B.S. graduates in engineering has been going up at about 10 percent per

year (fig. 54), it is not at all certain that the

number of engineering graduates in the United

States will meet future needs. As discussed in

more detail later in the chapter, there will almost certainly be entry-level shortages at some

times in some specialties—e.g., computer engineering—and the shortfall in Ph.D.s for teaching is bound to continue; according to one estimate, there is a current shortage of 3,500 doctoral-level engineers in industry beyond that of

Ph.D.s for university faculties. 17

While the rapid rise in engineering enrollments has led to fears by some that the United

States might be headed for an oversupply by

the 1990’s, such concerns seem overstated if

only because many graduates of engineering

programs move on to other fields. Competent

engineers have virtually always been employable in the United States, regardless of economic conditions. Nevertheless, the American labor

force contains nearly 11⁄2 million engineers,

and some portions of the engineering community deny the reality of the current “shortage,”

claiming that what industry really wants is a

large pool of entry-level people to help keep

‘

7

’’ National Engineering Action Conference, ” Engineering

Education News, April 1982, p. 1.
Ch. 8—Human Resources: Education, Training, Management ● 309

————

salaries of midcareer engineers low. There is

a good deal of truth to this. Entry-level shortages arise in part because employers prefer to

hire new engineers with fresh skills at lower

pay. This is an easier and perhaps cheaper way

of meeting their needs than coupling the

experience of midcareer engineers-many of

whom find themselves with increasingly obsolescent skills—with well-designed continuing

education programs.

Regardless, at least some specialties seem

bound to face continuing shortages by almost

any criterion. These specialties include a

number that are particularly relevant for the

future competitiveness of the U.S. electronics

industry; most notably, entry-level computer

professionals are expected to be in high demand well into the 1990’s, Programs of instruction in computer science and engineering still

tend to be small and underdeveloped. Some are

in engineering schools—often within electrical

engineering departments—others in schools of

arts and sciences, where computer science may

be associated with mathematics departments.

Many teaching departments lack the critical

mass that would help them thrive, not surprising in a field which did not exist 25 years ago.

In computer science, the United States graduates only 250 Ph.D.s each year, a number

which has been declining—one reason computer science and engineering faculties are suffering greater proportional shortages of faculty

than (other) engineering departments. 18 A t

present, qualified software engineers are in

short supply; although people with many types

of training can fill jobs as applications programers, there are far fewer candidates for jobs

in the design and development of computerbased systems themselves.

Other new and/or specialized fields suffer

similar problems. Perhaps half-a-dozen American universities have the facilities needed to

design and fabricate large-scale integrated circuits. Microprocessor applications courses

may require equipment that schools cannot afford, Few universities have adequate resources

for computer-aided design in any of the fields

of engineering. At the same time, such difficulties can be viewed as similar to those that

have always existed. It has never been easy to

give students a sense of the development effort

that goes into an airplane or a nuclear powerplant. In this sense, the adaptations required

by the emergence of large-scale integrated circuits or cheap computing power are nothing

new.

Industry Initiatives

To help meet the needs of their members, two

of the trade associations in electronics have

established programs to support engineering

education. The American Electronics Association has asked for money to augment faculty

salaries and establish chairs in electrical engineering, as well as to expand fellowship programs for students; the Semiconductor Industry Association is funding research, thus providing indirect support to both students and

faculty members through stipends and salaries,

as well as money for equipment.19

A different approach has been taken by

Wang Laboratories, which manufactures minicomputers and office automation equipment.

The Wang Institute, located near Boston, offers a master’s degree in software engineering

through its School of Information Technology.

Initially endowed by An Wang, the company’s

founder, the Institute is now an independent,

nonprofit organization. With a curriculum designed to give training both in the technical

aspects of computer software and in planning,

management, and human relations, the school

—which graduated its first students in 1982—

grew directly out of the inability of companies

like Wang to meet their personnel needs. Tuition is about $8,000 per year, less than half the

actual cost of the program; the difference is

lese~,ente[;n per[; (; n t of fac U] t}; positions i n co input er S{; ienc: f?

and engineering were vacant at the beginning of 1982, Ye rsus

about 9 percent for engineering as a whole. See ‘‘ LJ diversities 1a’’AEA, SIA to i’le in Fund-Raising Efforts, ” Electronic Nret%rs,

in U.S. Are Losing Ground in Computer Education, ” op. cit.: Nov. 16, 1981, p, 36, Companies in other industries have begun

‘

(

The Faculty Shortage: The 1982 Surve}, ” op. cit. parallel efforts.
310 ● International Competitiveness in Electronics

covered by endowments and contributions. 20

Because of the emphasis on job-related skills,

candidates for admission must have at least 2

years of professional experience, in addition

to a B.S. degree in an appropriate field. The

Wang Institute is one of a number of experiments presently underway in nontraditional

training in specialized technical fields.

University-Industry Relations

Despite these and other examples of new and

close relationships between business and educational institutions—for instance, the industry-supported Center for Integrated Systems at

Stanford—university-industry relations, in the

United States as in most countries, tend to be

uneasy. Tensions between the theoretical learnings of faculty members and the more practical

concerns of private firms, particularly smaller

companies that do not engage in much research, are common. This also holds for professions such as business administration; to

some extent it applies to the sciences as well.

In engineering, these tensions have deep historical roots; by the first decade of the 20th century, the academic perspective had largely won

out over the shopfloor orientation that many

in industry had advocated.21 Later, between the

wars, U.S. engineering education began to stagnate, During World War II, numerous R&D efforts—including many in electronics—were

spearheaded by scientists (particularly physicists) with engineers filling subordinate roles.

This lesson was one of several pointing to the

need for reevaluations of engineering education.

The resulting turn toward theory led to “engineering science” as the core of undergraduate

curricula. In the post-Sputnik period beginning

in the late 1950’s, engineering schools emphasized quantitative, analytical skills even more.

Accompanied by a strengthening of mathemat-

 Wang 1 nstitute. See also M. A.

Bengs, “A [Jnique Institution for High-Tech Training, ” Boston

Globe, Mar, 2, 1980, and “Institutionalizing the Students of Software,” Computer Design, December 1982, p. 189.

ZIM, Ca}veN, The Mechanical Engineer in America, 183G191O:

Professional Cultures in Conflict (Baltimore, Md.: Johns Hopkins

University Press, 1967).

ics requirements, the focus on engineering science came at the expense of engineering design, as well as manufacturing and production

processes. This was also a time when the

spread of digital computers made numerical

solutions to many previously intractable problems a reality, further strengthening the movement toward analysis at the expense of synthesis. In recent years, there has been something

of a swing back.

Industry has always wanted graduates who

can go to work immediately, while acknowledging the virtues of theoretical preparation in

the engineering sciences as preparation for advancement and for continuing education. Demand for the “old-f ashioned,” practically oriented engineer has led to a proliferation of curricula in what is usually called engineering

technology.

Engineering Technology

Technology programs—some 2 years in

length and leading to an associate degree,

others full 4-year B.S. courses of study—represent an attempt by American colleges and universities to equip entry-level employees with

immediately applicable job skills. Graduates of

these programs—more than 26,000 at the associate and bachelor’s levels in 1981 (40 percent

of the total in engineering)—can be thought of

as paraengineers; they get less extensive and

less rigorous training in mathematics, the sciences, and in engineering science, but considerable exposure to routine technical problems. 22 While B.S. technology graduates are betzzln Igj16, 16,685 associate degrees and 5,721 B.S. degrees in

engineering technology were granted in the United States; in

1982, the figures were 17,198 for associate degrees, and 8,325

at the bachelor’s level. The 1976 data are from “Engineering and

Technology Degrees, 1976, ” the 1982 from “Engineering and

Technology Degrees, 1982, ” op. cit.

Well over 200 schools have technology programs, about the

same number as for engineering. Most of the associate degrees

are awarded by community college and vocational-technical

schools. In a university, B.S. programs in technology and engineering may be offered by different colleges, particularly where

the technology curriculum has grown out of an industrial arts

setting; alternatively, both programs may be found in a “College of Engineering and Technology, ” Many faculty members

in engineering have resisted the movement toward technology

education, feeling that it detracts from the profession and threatens their own image. Outside the community of educators, a good
Ch. 8—Human Resources: Education, Training, Management ● 311

ter prepared for advancement and for creative

work than technicians, their upward mobility

is considerably less than for engineers. In at

least one sense, the problems that have hit engineering education are more serious still for

technology: the practical, hands-on experience

that these programs seek to provide depends

heavily on equipment similar to that actually

used in industry.

Community Colleges and Local Initiatives

In recent years, community colleges have expanded more rapidly than any other segment

of higher education. Many offer engineering

technology, as well as preengineering programs that send students on to universities.

Moreover, community or junior colleges and

vocational-technical schools train many of the

technicians who take jobs in U.S. industries

like electronics. While the number of students

earning associate degrees in technical fields

has grown in the last decade, there is little information on the quality of these programs.

———

deal {1~ (c)n flitif)n pcrs ist~ [.on[. ern i ng the role and fu net ion of

te(, hnolog}’” [;(i[]c.:]tioIl-Ilot” surprising when asso(:iate programs

~raduatc men and [tomcn trained cssent iall} as te(:hni{ ian~,

w’h ile a B. S .-ltnel tech no] og i st is much c1 oscr t n a n engineer.

I)ifferen([:s in academic standards among technology pro-

~rams ma~ he e~en greater than in engineering. In contrast tu

(.o u nt r i~:s 1 lhe t$’est Ge rma n}’, where all technical u n it’ers it ics

are held to similar standards, qualitj’ in American engineering

and technology programs \’aries widely, e~ren among those that

arc fully accredited.

Photo credit Ted Spiegel 1983

Computer-assisted test to determine design data

on metal fatigue

Some offer up-to-date training in needed specialties, while others are accused of turning out

people for jobs that have already disappeared.

Public 2-year and community colleges face

chronic problems in funding their programs

and retaining faculty .23 Even in Silicon Valley

(the area near San Francisco where so many

electronics firms have located)—which is now

getting a great deal of attention as a model for

industrial development—these institutions

have never been well-integrated into the local

environment, and seem isolated from industry

as well as from the mainstream of universityoriented education.24 Despite the concentration

of electronics companies, the six community

colleges in the area have faced severe shortages

of equipment for student laboratories, and a

relationship with industry in which each group

seems generally supportive of the other but in

which the various parties do not always manage to communicate or cooperate effectively.

Only a few States or localities have thus far

attempted to meet needs for technology-based

23’’S(; ience and Engineering Educatluu for the 1980’s and Bw

yond, ” op. cit,, p. 93.

z4E, L, Uscern, “Education and High Technulog}r Industry: ‘1’hc

Case of Silicon Valley, ” Institute for th(: lrlt[)rdis(:i~)]iI~tirjr Studs

of Educ at ion, Northeastern U n ik’ers it j, II ost () n, h! ass., Sept c 

12-18. Usef:m’s stud~’, hascd on morf” thal] 100 intt:rviews, finds that neither educators nor companies ar(: rrspon(i -

ing very well to the regions educational n[!(’( ]s—l)a rt 1(. ula r] }’ at

the secondary level,
312 ● International Competitiveness in Electronics

——-——- - —— ——

education and training outside their college or

university systems. North Carolina has established a Microelectronics Center linking several universities and industry at Research Triangle Park near Raleigh; the State has also set

up the North Carolina School of Science and

Mathematics for high school students with unusual ability. But this is more the exception

than the rule, and budgetary constraints in

many localities may limit further development

of nontraditional alternatives.

Continuing Education

Ongoing education and training for engineers and other technical workers—including

those without degrees—is a vast and amorphous activity, Colleges and universities enroll

large numbers of students in graduate or continuing education programs, some of whom

take only a few courses while others actively

pursue degrees. Such programs, many of

which cater to part-time and evening students,

face problems paralleling those of undergraduate engineering and science curricula. The low

visibility and lack of prestige of continuing

education aggravates the difficulties; faculty

turnover is high, quality uncertain. For example, enrollments in New York University’s

adult education courses in computer programing have been increasing by 20 to 25 percent

per year, but budget limitations have made it

difficult to purchase needed equipment, as well

as to find and keep competent faculty.25 This

situation is replicated in private and public colleges and universities throughout the country.

Many professional societies are active in continuing education, principally through short

courses—sometimes offered in conjunction

with universities—on topics of interest to their

members, Current favorites in electronics include microprocessor-based systems, and programing in newer computer languages like Pascal. Colleges and universities offer their own

short courses, as do private, profit-seeking enterprises. Some companies have operated

educational arms—e.g., RCA Institute. Short

‘W. Anders, “Colleges Faltering in Effort to Ease Critical Shortage of Programmers, ” Wall Street Journal, Aug. 24, 1981, p. 15.

courses and related noncredit programs vary

widely in quality and rigor. Some hold to high

standards, others offer little more than can be

gleaned from trade magazines.

Although many firms offer on-the-job training and continuing education for their engineers, scientists, and technicians, it is impossible to generalize concerning the extent and effectiveness of such efforts. Some companies

allow employees to spend several hours per

week taking college courses on company time;

others will pay tuition provided the student

gets a good grade. Some develop in-house programs. Others refuse any assistance, relying entirely on individual initiative. Some organizations have a companywide policy covering continuing education; in other cases, decisions are

left with lower level supervisors. In many companies, internal training programs are intended

primarily for new employees; in other instances, firms organize or support programs

aimed at a broader slice of their work force.

While extensive in-house training is most common in large corporations, smaller electronics

firms have also been turning to such efforts to

help meet their manpower needs,

Beyond case-by-case insights, the overall dimensions of company-run training programs

in the United States are largely unexplored; the

American Society for Training and Development estimates that business and industry allocate some $30 billion to $40 billion a year to

education and training, but little information

is available on how such moneys are spent, and

by whom, or just what is counted in arriving

at the total.26

Looking more narrowly at engineers and scientists, perhaps 10 to 15 percent of those with

at least a bachelor’s degree are taking further

Z81nformation from the American Society for Training and Development. Also “Addition to the Record: Statement of Anthony

P. Carnevale, for the American Society for Training and Developmerit, ” Projected Changes in the Economy, Population, Labor

Market, and Work Force, and Their Implications for Economic

Development Policy, hearings, Subcommittee on Economic Development, Committee on Public Works and Transportation,

House of Representatives, Nov. 18-19, 1981, p. 233. Carnevale

notes that 35 percent of firms surveyed by the Conference Board

offer remedial programs in reading, writing, and arithmetic for

their employees.
Ch. 8—Human Resources: Education, Training, Management ● 313

— —

academic coursework at any given time.27 The

great majority are probably recent graduates,

with many of these pursuing advanced degrees

on a part-time basis.

In electronics, a number of larger U. S. semiconductor firms—for example, Intel, which has

also been a leader in the Semiconductor Industry Association’s research cooperative—have

instituted programs of on-the-job training for

personnel at a variety of levels. Almost all

semiconductor manufacturers evidently provide some training, but the intensity and length

of the programs vary from company to company. Continuing education for electronics and

computer engineers in Silicon Valley is readily

available for students who can meet the entrance requirements of schools like Stanford

or the University of California at Berkeley;

Stanford has also pioneered interactive television links enabling it to offer in-plant courses

throughout the area. However, local electronics

companies—with a few notable exceptions like

Hewlett-Packard—have had little involvement

with secondary-level public education in Silicon Valley, and most of the interactions with

universities seem to center on the elite institutions where faculty consulting strengthens ties

with industry. 28

Semiconductor firms are not alone in offering in-house training to their employees. Some

electronics manufacturers report that, during

their initial year on the job, new employees

spend up to 7 hours per week in formal coursework. 29 Hughes Aircraft’s training program for

new graduates in electrical engineering is especially comprehensive. so Bell Laboratories and

IBM are also well-known for continuing education and training; low employee turnover at

large companies like Hughes or IBM favors investment in human resources just as it does in

—

z~’he figure was 13 percent for 1978. A somewhat larger nun]-

ber took non-credit courses of various kinds, See “13a ttelle Studj

Shows 80 Percent of Organizations Support Continuing Edu(;ation for S(:ienti9ts, Engineers, ” Information From Battelle, Mar,

5, 1980.

ze[Jseern, op. c lt., pp. ~-12

‘Q’’ Employment in the [J, S E]ectroni(;s In{justry, Volume I,”

prepared for OTA by Sterling Hohe (;orp. under contract No,

033-1210, p. 234.

30 See R. Connoll}, “(companies Still Short of EES, ” L’lectr(jni[;.s,

hlay 19, 1982, p. 105.

Japanese electronics firms. In contrast, smaller

U.S. semiconductor manufacturers may have

annual personnel turnovers of 35 percent or

more; such companies are understandably reluctant to devote resources to training men and

women who may then jump to competing

firms. High turnover rates in electronics hold

for grey-collar technicians as well as engineers.

31

In contrast, organizations like Bell Laboratories can finance continuing education for employees—even send them back to school full

time—with less fear that people will quit once

they have a new M.S. or Ph.D. in hand. In part,

this is simply because many engineers and scientists view Bell Labs as an exciting and prestigious place to work; for some, it is more a goal

than a stepping stone, Bell supports part-time

graduate study at local universities, as well as

full-time, on-campus programs at a number of

leading engineering schools; the company also

offers a variety of in-house training activities,

plus a tuition reimbursement plan for employees pursuing undergraduate or vocational

training. 32

While it is thus true that a considerable number of American engineers and scientists elect

to take additional academic coursework, many

individuals make such commitments independently, often with little or no encouragement

from their employers. Smaller companies, and

some large ones, often feel that they cannot afford to support such efforts–i.e., that the payback would be insufficient. As the NSF/DOE

study notes:33

At present, continuing education is a fractionated, uncoordinated set of operations in

which academia, industry, professional societies, and individual entrepreneurs pursue

their own individual paths in response to what

they perceive as their individual needs. There

has been virtually no Federal support for con3] See R. W. C~nl~rf~rd, “Automation i]r[)mis[~s T() tighten the

Fie]d-Service I,oad, ” Electronics, Apr. 7, ]982, p. 110, “i”hese turr~-

o~er rates are good eviden[:e that personnel sbortages ha~’e heen

real an[i ac ut [!.

32’’ Educational opportunities at Bell I,ahs, ” Education Center,

He]] I,aboratories, Holmdel, NJ,, 1981 .

33’’ Science and Engineering Education for the 1980’s and Ilw

yond, ” op. cit,, J). !I[i.
314 ● International Competitiveness in Electronics

—

tinuing education, in part because the costs of

industrial programs have been regarded as

business expenses.

Because retraining for midcareer engineers

and skilled workers will be increasingly important in the years ahead, particularly in view of

the aging of the American labor force, the Federal Government may need to reconsider its involvement.

The Government already plays an important

role as direct employer. In 1978, nearly 90,000

engineers worked for the Federal Government,

about 6 percent of the country’s total engineering labor force. Many are employed by the Departments of Defense and Energy, and the National Aeronautics and Space Administration.

The Air Force alone faces a shortage of over

1,000 engineers; if the Nation’s defense budget

is to increase during the 1980’s as planned, demand for engineers—both within the Government and among defense contractors—will

swell even further. Some have argued that engineering manpower shortages could jeopardize

the country’s security. 34 As one response, the

Defense Communications Agency is planning

a National Science Center for Communications

and Electronics, intended to help cope with the

shortfall in the defense community. Funded

with the aid of corporate contributions, the

Center, to open in 1983, will develop education and training courses for participating secondary schools and universities. as

Over the past several decades, nearly half o f

all U.S. engineering students have received

financial assistance of one sort or another from

the Federal Government. Funds for laboratory

equipment intended for teaching and research,

as well as for curriculum development, hav e

come from Washington—for science and engineering, principally through the National

Science Foundation. Tight Federal budgets for

education may have the unfortunate consequence of shrinking the pool of graduates in

s4’’Testimony of Gen. R. T. Marsh, Commander of Air Force

Systems Command,” Engineering Manpower Concerns, hearing,

Committee on Science and Technology, House of Representatives, Oct. 6, 1981, p, 11. Perhaps one-quarter of the country’s

engineers work in defense-related fields.

‘s’’ The NSCCE: A New National Program, ” Electronics, Dec.

29, 1981.

engineering and science, and their quality, at

a time when the United States already finds

that it does not have enough skilled professionals to staff its commercial industries or

meet its military needs,

University and Continuing

Education In Japan

If Japanese secondary school students study

mathematics and the sciences more extensively

than their counterparts in the United States,

at the university level Japan’s educational system is inferior. Postsecondary education expanded rapidly over the postwar period; many

private colleges were founded, some with low

standards. While the small group of elite universities provides more rigorous training, they

have faced the same criticisms as Japanese secondary schools—excessive reliance on rote

learning and the acquisition of facts, rather

than more general skills in analysis and synthesis. In neither science and mathematics, nor

in engineering, does the quality of universitylevel education in Japan match that in the

United States.

Engineering

Electrical engineering students in Japan

spend many hours in the classroom and laboratory, and take a series of courses rather like that

of Americans, but Japanese companies continue to find graduates unprepared to go to work,

while faculty members point to major weaknesses in curricula. 36 Programs in engineering

and computer science leave little room for unstructured or independent learning. Electives

are limited. Students tend to work in groups;

according to critics, this fosters conformity at

the expense of creativity and individual initiative. The education that Japanese college students receive outside their technical fields,

moreover, is less demanding than here. Deficiencies in higher education are among the reasons that Japanese companies place great stress

S6S. Tubbs, “E]ectrica] Engineering at Kyoto University, ” ~n~fneering Education, May 1982, p. 812; T. Sugano, ‘‘Preparation

of New Electronics Professionals in Japan: Note for Presentations Given at the Japan Society Meetings of May 1, 1981, in

Palo Alto, Calif., and of May 4, 1981, in New York. ”

.
.-

on internal training—they

new employees up to a

competence .

Ch. 8—Human Resources: Education, Training, Management ● 315

——. . --

must, simply to bring

satisfactory level of

Far fewer engineering students in Japan go

on to the graduate level—either M.S. or Ph.D.

—than in the United States. Table 69 illustrates

the stress on undergraduate training and the

comparatively small numbers in graduat e

school. In 1980, undergraduate enrollments in

Japanese engineering programs were almost

the same as those in the United States, but the

number of graduate students was about four

times less. 37 Those students who do choose to

attend graduate school find that—as in undergraduate programs-course work and research

are less rigorous than in American universities.

As the figures in table 69 suggest, while academic competition is keen at secondary levels,

with Japanese students vying for places in the

most prestigious universities, postgraduate

training brings few rewards. Because corporations in Japan rely heavily on in-house training

to impart job-related skills, and because research does not have the prestige that it carries in the United States or Europe, Japanese

engineers have little incentive to go on to graduate school. Patterns are similar in other professions. Graduate work in business or law is

a popular road to career advancement in the

’37A m~rl(:~ I] en~l n~erl n~ SC}1OO1S enrolled 72,600 NI .S. and

Ph. I). students in IWO, about 40 percent on a part-time basis–

“En~ln~erin~ Enrollments, Fall 1982, ” op. cit. Although onl}f

337,800 under~raduates were enrolled in Japanese en~ineerin~

s(:ho{)l\ compared to nearl~’ 400,000 in the Uniteri States, the

r~ten t ion rate is much higher in Japan. Once admitted, Japanese

students face far fewer hurdles than Americans, and a higher

[Jer{ f~ntage Rraduate.

Table 69. —Enrollments in Japanese

Colleges and Universities

Number of students, 198 0

Junior Technical ‘-

colleg e college University M.A./M.S Ph.D

Engineering 20,100 46,300 337,800 14,900 2,400

Physical

scienc e

. 54,600 3,740 2,590

All other

programs 346,100 — 1,349,100 17,160 13,210

Total 366,200 46,300 1,747,500 35,800 18,200

SOURCE ‘Kagaku GIIutsu Benran ~lndlcators of Science and Technology

Kagaku G!jutsucho Kelkakukyoku (Science and Technology Agency,

Planwng Bureau 1981 pp 100103

United States, but not in Japan, where business

schools are virtually nonexistent and lawyers

form a miniscule part of the labor force.

Continuing Education and Training

Despite the self-criticism that Japanese level

at their institutions of higher education, the

performance of the country’s engineers and

scientists across many fields, along with the

demonstrated competitiveness of Japanese corporations in high-technology industries like

electronics, demonstrates that the system, taken as a whole, functions well. Indeed, some of

the self-criticism appears to be no more than

a mechanism for urging people and organizations to greater efforts.

Deficiencies in universities are at least partially offset by informal mechanisms for selfeducation, as well as company-run training

programs. western observers repeatedly note

that men and women in Japan are voracious

readers with a strong penchant for self-study,

The average Japanese not only spends more

time reading than the average American, but

more of what he reads is job-related. The spread

of quality control methodologies throug h

Japanese industry, outlined in chapter 6, depended heavily on self-study through books,

magazines, and radio and TV broadcasting.

The national broadcasting company, NHK,

transmits nearly a hundred educational programs to attentive audiences each week, including the popular “science classroom”

series.

Japan’s Government also provides free training for recent high school graduates, as well

as for workers who need improved skills before

they can join or rejoin the labor force, Over the

years, courses taken by those in the second category—adults already in the job market—have

expanded greatly. They fill many of the same

functions for smaller companies as the inhouse training programs conducted by large

corporations. Data collected by the Ministry of

Labor indicate that more than 200,000 trainees

were enrolled in publicly supported vocational

programs in 1977, although the content of these
316 ● International Competitiveness in Electronics

programs has been criticized for not keeping

up with the needs of industry. 38 

Company-Run Training Programs

Internal training and continuing education

comprise an integral part of organization and

management in larger Japanese companies.

This is perhaps the most fundamental difference between the Japanese and American approaches to technical education. While many

American corporations engage in such activities, Japanese programs are much more comprehensive, Developed in part to compensate

for deficiencies in formal education, training

has evolved to complement employment patterns in which many employees spend their entire careers within a single organization.

Of course, not all Japanese firms or workers

fit this pattern. Table 70 shows that big companies provide much more training than small.

One reason is that managers are generally rotated within large organizations, a practice

often accompanied by study programs. More

important, long-term employment within a single firm—sometimes called “lifetime” employment—is the rule only in the major corporations (and then only among male employees).

While training programs within Japanese

companies generally impart specialized skills—

e.g., computer programing—they serve other

purposes as well, purposes that may seem

paternalistic or coercive to Western observers.

S8H. Shimada, “The Japanese Employment System, ” Japan Institute of Labor, Industrial Relations Series, Tokyo, 1980, p. 21.

Table 70.—Distribution by Size of Japanese Firms

Providing In-House Training

Size of company by Proportion of companies with

number of employees training programs (as of 1974)

1,000 or more employees . . 95.1 0/0

500-999 . . . . . . . . . . . . . . . . . 85.3

300-499 . . . . . . . . . . . . . . . . . 75,9

100-299 . . . . . . . . . . . . . . . . . 58.8

30-99 . . . . . . . . . . . . . . . . . . . 26.3

5-29 . . . . . . . . . . . . . . . . . . . . 10.1

All firms . . . . . . . . . . . . . . . . 41 .3 ”/0

SOURCE’ H. Shlmada, ~fre Japanese Ernployrner?f System, Japan Institute of

Labor, Industrial Relations Series, Tokyo, 1980. Based on data from

Ministry of Labor, J)gyonai Kyoikukunren JisshI Jokyo Chosa (Survey

of lntra-F!rm Vocational Tra!ning and Education), 1974

For example, corporations rely on in-house

training to help build a sense of loyalty to the

group and to the organization.

39 The widely

remarked cooperative spirit of Japanese employees is no accident.

well-known features of Japanese organizational structures such as quality control circles

also serve a training function, one in which the

informal elements—and the stress on intergroup cooperation—are at least as important

as any knowledge imparted. In an unusually

comprehensive program in a Japanese automobile plant, engineers teach other employees in

a “workshop university.” 40 After completing an

extensive program of after-hours study—2

years or more, with no special remuneration—

the workshop university graduate is rewarded

with a certificate from his section chief. The

aim is not only to improve individual skills, but

to keep employees intimately involved in dayto-day matters that affect productivity and

manufacturing efficiency—ranging from workplace organization, job flows, and task descriptions to interpersonal relations.

Among the most systematic of the industrial

training programs in Japan have been those developed by leading manufacturers of electronics and electrical equipment, Since the 1920’s,

firms such as Mitsubishi Electric and Matsushita have been known for recruiting promising young employees directly from high school,

and giving them extensive and formalized inhouse training.” Such programs emerged in

response to shortages of qualified workers in

the aftermath of World War I. Japan’s Government fostered universal primary education, but

soFor a detailed analysis of training within a Japanese bank,

see T. P. Rohlen, For Harmony and Strength: ]apanese WhiteCollar Organization in Anthropological Perspective (Berkeley,

Calif.: University of California Press, 1974). In the bank studied

by Rohlen, some of the training programs emphasized technical

skills while others were directed at “character building. ” Both

varieties were designed to help integrate workers into the corporate community. Over the course of a year, about one-third

of the staff went through one or more programs at the bank’s

own training institute,

For a comprehensive treatment of training practices at Toyota,

see R. E. Cole, Work A40biiity, and Participation (Berkeley, Calif.:

University of California Press, 1979).

m Work Mobility, and Participation, op. cit., pp. 183-184.

A: Levine and Kawada, op. cit., p. 267.
Ch. 8—Human Resources: Education, Training, Management . 317

—. — — . .

during that period gave little attention to secondary schooling. Vocational training was left

to the private sector, where companies designed their own programs to train the workers

needed for expansion and industrialization. If

the government had pursued a more comprehensive manpower policy, including the support of secondary and vocational education,

Japanese firms probably would not have moved

so far in this direction.

Initially, then, internal training was a direct

response to shortages of skilled labor, and effort was directed at blue- and grey-collar workers rather than managers or engineers. Despite

vast improvements in Japanese secondary education since the 1920’s, most large companies

retain—indeed have continued to develop—

these programs. Many operate their own educational institutes; Hitachi, for instance, maintains two, sending graduates of technical high

schools for year-long courses of study. 42 T h e

company, which is not untypical, also offers

a large number of specialized training courses

on an ad hoc basis. Hitachi has given more

than 1,000 over the past two decades (some

many times); they include foreign languages

and topics in management, with specialized

subjects such as international business available for executives. As Students in a typical

course spend 30 hours in the classroom and

twice that on outside assignments; the average

skilled worker or technical professional at

Hitachi takes two such courses a year,

It is difficult to compare the direct costs of

such activities with the corresponding benefits

to the firm. But even in large organizations

with extensive training programs, such as Toyota, expenditures reportedly total less than 1

percent of salaries and wages. 44 The returns—

tangible and intangible—appear substantial.

4ZR, ~)ore, ~rjtj.$~ Fa(;torJ,—/apanese Factory (Berkeley, Calif.:

(Jnl\ersity of California Press, 1973), p. 65,

4shf. A. M agu i N;, “Personnel in the Electronics [ndustr~’:

United States and Japan,” ~)repared for OTA under contract No.

033-1360, pp. 54-56, (In training for managers in Japan, see T.

Amaya, “Human Resource De\’e]opment in Industry,)’ Japan Institute of Labor, I ndustrializerl Relations Series, Tokyo, 1983,

 21-24.

44 ~$’~r~, ,k~o~]jjj~~r, an f] IJarticjpafjon, Op. cit., p. 1 ~5.

International Differences in

Education and Training

A principal conclusion from the preceding

sections is that, while American universities

continue to provide an excellent education for

this country’s engineers and scientists—as witnessed by the large numbers of foreign graduate students who come here to study—the average American high school or college graduate

is poorly prepared to function in a technologically based society. Compared to their counterparts in a number of other advanced industrial

nations, American students get less training in

mathematics and science, and even if they

study these subjects, learn virtually nothing

about technology.

Deficiencies in mathematics are particularly

serious. Mathematics acts as a filter at the entrance to many careers, Although the importance of mathematics to the practice of engineering is sometimes exaggerated, a high level

of competence relative to the average is needed

to complete a degree program. A student who

does not master algebra and trigonometry in

high school drops immediately into the class

of those needing remedial work; he or she will

not be admitted directly into a university program in engineering or science, Those with deficiencies who try to catch up often fail. Part

of the problem is simply that as many as onefourth of high school teaching posts in mathematics are currently vacant, and a comparable

fraction are filled by individuals only temporarily certified to teach, many of them marginally

qualified at best.45 Industry has hired away

many high school mathematics teachers at attractive salaries, in part to fill vacancies for

computer programmers and systems analysts.

The American educational system also does

a poor job of preparing those who do not go

to college. Even among high school graduates,

functional illiteracy is common (estimates for

the population as a whole range around 20 percent). Vocational education and training vary

4s” A Science Dean Describes Teaching as in Sorry State,” New

}’ork ‘~imes, hfar. 6, 1982, p. Cl, Shortages of teachers in science

as well as mathematics appear to be worsening; see Science and

Engineering Education: Ihta and Information, op. cit., p. 7.
318 ● International Competitiveness in Electronics — ——— — ——- —.—— — —.——

widely in quality; excellent programs and inadequate ones can be found virtually side-byside. 46 Other countries have developed more

coordinated and comprehensive approaches to

vocational training, with benefits both to individual workers and to industry. 47

Skilled technical workers are a vital resource

for the U.S. electronics industry, and deficiencies throughout the middle levels of the American labor force could constrain the future

growth and development of semiconductor and

computer firms, as well as companies in other

high-technology fields. Technicians, designers

and draftsmen, and field service personnel

must be literate, have basic quantitative and

technical skills, and, ideally, understand something of the logic of the systems they work with.

Without such abilities, they cannot use advanced production and R&D equipment to

greatest effect, nor exercise sound judgment

in the technical problems they face on a dayto-day basis. Individuals without these skills

have little upward mobility; an assembly line

worker needs at least some quantitative facility

to be able to move into jobs such as machine

repair, quality control and inspection, or shopfloor supervision.

%ee, for example, G. W. Wilbur, ‘‘Va. Vocational Education

Seen As Hindrance to Development,” Washington Post, Nov.

29, 1982.

t~he extensive system in West Germany is described in Vocational ‘f’raining in the Federal Republic of Germany (Brussels:

Commission of the European Communities, 1978). See also S.

Hutton and P. Lawrence, German Engineers: ‘I’he Anatomy of

a Profession (Oxford: Clarendon Press, 1981), pp. 94-95; and J.

M. Geddes, “Germany Profits by Apprentice System, ” Wall

Street Journal, Sept. 15, 1981, p. 33.

The demand for grey-collar technical employees in industries like electronics is high;

one study has estimated a growth rate in the

United States of nearly 18 percent per year,

faster than the projected growth in demand for

engineers.

48 But in pointed contrast to countries like Japan or West Germany, the American educational system has not responded in

any large-scale fashion to these needs, In Germany, fully 60 percent of the labor force has

specialized training in grey-collar technical

skills, while in the United States the figure may

be as low as 10 percent.49

A scarcity of adequately trained technical

workers could be just as serious a problem for

American industries like electronics as constraints on capital investment or a stagnating

overall economy. Labor mobility has traditionally been a mechanism for opening manpower

bottlenecks; indeed, the U.S. electronics industry already depends heavily on foreign-born—

though U.S.-educated—engineers. The next

section looks more closely at the structure of

the U.S. labor market, particularly mobility,

46’’ Technical Employment Projections of Professionals and

Paraprofessiona]s, 1981 -1983-1985,” American Electronics Association, May 1981; see also “Testimony of Robert P. Henderson, Chairman and C. E. O., Itek Corp., Lexington, Mass,, ” Forecasting Needs for the High Technology Industry, hearing, Subcommittee on Science, Research, and Technology, Committee

on Science and Technology, House of Representatives, Nov. 24,

1981, pp. 61-97.

4%. J. Prais, “Vocational Qualifications of the Labour Force

in Britain and Germany, ” National Institute Economic Review,

November 1981, p. 47; response of R. H. Hayes, Business A4anagement Practices and the Productivity of the American Economy, hearings, Joint Economic Committee, May 1 and 11, and

June 1 and 5, 1981, p. 46.

Supply and Mobility of Labor

Shortages of men and women with knowl- ployment” has been a policy goal for many

edge and skills at a time of high overall unem- years, the upward trend of the unemployment

ployment point to weaknesses in U.S. labor rate over the past decade has combined with

market policies, including manpower training

and adjustment assistance. so While “full em- tion and Training Policy, ” Projected Changes in the Economy,

Population, Labor Market, and Work Force, and Their Imwlica-

.

tions for Economic Development Policy, op. cit., p. 33. During

‘For a relatively comprehensive, and critical, analysis of labor 1981, perhaps I million U.S. jobs went unfilled, while 10 million

market policies in the United States, see R. J. Vaughn, “The Job people were without work, See K, Sawyer, “1.earning Jobs in

Development Administration: A National Employment, Educa- School, ” Washington Post, ]uly 28, 1982, p. 1,
-. —

Ch. 8—Human Resources: Education, Training, Management . 319

sporadic shortages of workers having specific

skills to create a new circumstance, one to

which the Federal Government has failed to

respond.

Over its history, the United States has seen

periodic labor shortages, for both skilled and

unskilled workers. More recently, it has begun

to seem that—even if the general quality of

American education were to remain high–the

labor market might simply not be able to supply

the right numbers of people, in the right places,

at the right time, There are a host of reasons

for such concerns, ranging from changing attitudes toward work, to the aging of the U.S.

population, to local constraints such as high

housing costs, * As the work force ages, and the

needs of the U.S. economy shift, retraining will

be the only way to utilize people’s talents fully.

This section asks whether the development

of the U.S. electronics industry will be constrained by limited supplies of engineers and

computer scientists (overall employment trends

are examined in the next chapter), together

with a related question: Are the high levels of

labor mobility that have characterized some

parts of the U.S. electronics industry essential

for continued growth and competitiveness?

The comparative neglect of training and retraining in the United States stems in part from

the ease with which companies have been able

to hire new employees with needed skills; this

in turn has reinforced tendencies for workers

to move from job to job in search of fresh opportunities or higher pay. The labor market in

Japan functions much differently, There, the

system emphasizes long-term employment (for

some) and loyalty to the firm; mobility is low.

Management practices in Japan have sought

to compensate for the weaknesses of such a

system, while taking advantage of the stability

it brings; rather than looking for new people

to revitalize faltering efforts, Japanese firms

redeploy those they have.

—.—

“In Silicon Valley, a housing shortage has cfri~en prices so high

that semiconductor firms have found it difficult to hire from outside the area: few candidates c a n afford to move.

— —

Overall Labor Market Trends

The labor forces of Japan and the United

States expanded swiftly during the 1960’s,

largely as a result of postwar baby booms.

Table 71 shows the rates of increase in both

countries to have been considerably greater

than in Western Europe. Japan’s labor force

grew from 49 million in 1966 to 56 million in

1979, while that in the United States went from

79 million to 105 million over the same period.

51 Although Japan has experienced some

labor shortages, the relative abundance of

working-age men and women in both Japan

and the United States contributed to economic

expansion during the postwar period. Younger

workers made up an especially large proportion of Japan’s labor force during the 1950’s.

During the 1970-80 period, both countries continued to experience rapid increases in their

working-age populations (table 71); growth in

their labor forces will slow during the 1980’s.

Rising employment levels in industrialized

economies over the past two decades have been

accompanied by shifts toward the service sector; agricultural employment has declined,

with manufacturing roughly stable or declining slowly (see ch. 5, fig. 32). Japan has been

something of an exception, with a rise in industrial employment coupled with a sharp

drop in agriculture; both the industrial and the

service sector grew as a result of migrations

from the farm. Such trends will continue as inslLabour Force ~’f~fjs~jcs 1968-1979 (Paris: Clrga 1llzatiOn fOr

Economic Cooperation and Development, 1981), pp. 18-19.

Table 71 .—Labor Force Growth in Several Countries

Average annual increase

in labor force

1960-70 1970-80

United States . . . . . . . . 1,80/0 1.5 %

Japan . . . . . . . . . . . . . . . 1.3 1,3

West Germany ... . . . 0,3 0.7

France . . . . . . . . . . . . . . 0.8 1.1

United Kingdom. . . . . . 0.2 0.3

SOURCE 196070—W Galenson and K Odaka, “The Japanese Labor Market ,“

As/a’s New G~an(, H Patrick and H Rosovsky (eds ) (Washington,

D C Brookings Institution, 1976) p 590

197060— Wor/d Development Report 1980 (Washington, D C The

World Bank, August 1980), p 147
320 ● International Competitiveness in Electronics

——. .———— — -—

dustrial employment in the advanced countries

slowly shrinks relative to services.

It is perhaps understandable that, during a

period of rapid overall labor force expansion

and continuing movement into services, the

U.S. Government paid little attention to manpower policies: the economy was growing rapidly; periods of high unemployment were

viewed as transient; people could take advantage of a relatively broad range of opportunities. The situation today is much different:

aggregate expansion has slowed; the skills

needed by industry are more specialized; unemployment has become persistent. Current

unemployment is especially troubling because

it is caused in part by mismatches between the

capabilities of people looking for work and the

jobs available; in such circumstances, more

rapid aggregate expansion may do little good,

and may even be impossible if growth industries cannot hire the people they need.

Personnel Supplies for the

U.S. Electronics Industry

In the United States, shortages of software

engineers and semiconductor designers have

been heavily publicized over the past few years.

Not only has demand been high—even through

the deep recession of 1982—but warnings of

longer term shortfalls have been common. One

educator predicted that American schools will

graduate a cumulative total of 70,000 new B.S.

degree-holders in electrical engineering and

computer science over the period 1982-85,

while nearly 200,000 will be needed.52 As discussed in the next chapter, demand for computer service technicians is expected to double during the current decade, with job openings for programmers and systems analysts going up almost as fast.

A number of job-market surveys and estimates of aggregate demand for engineers have

been conducted in the recent past. The Labor

Department estimated that in 1980 there were

—.——

17,000 unfilled entry-level engineering posi5“’Congress Warned of Shortages in Electric], Computer Engineers, ” Electronic News, Nov. 23, 1981, p, N. The rather alarmist estimates were those of K. Willenbrock, Southern Methodist

University.

tions throughout the Nation. Other estimates

have ranged up to 25,000.53 NSF’s projections

for engineers together with scientists indicate

that the total supply of new graduates should

meet the demand by the end of the decade.

However, NSF may be overestimating the extent to which scientists can function in engineering jobs; in any case, shortages are anticipated even by NSF in the computer field,

for statisticians, and in several engineering

specialties. About one-third of the 1.4 million

job openings in science and engineering over

the 1978-90 period are expected to be computer

related (including programmers). Despite NSF’s

relative optimism, other forecasts—admittedly

often conducted by or for industry, and thus

perhaps skewed by the preference of companies to be able to pick and choose when hiring new employees—have projected massive

shortages of engineers, perhaps as many as

300,000 by 1990.54 All such forecasts should be

approached with considerable skepticism.

None of the methodologies—whether based on

simple trend analysis, on survey techniques (as

for many of the engineering manpower studies), or on econometric models (as used by the

Bureau of Labor Statistics)—has a good record

for projecting employment; there are too many

imponderable.

While forecasts and projections can warn of

possible future shortages, insight also comes

from current levels of unemployment in some

occupations. Unemployment rates have been

remarkably low in technical fields. During

1980, when overall U.S. unemployment averaged about 7 percent, only 0.6 percent of computer specialists found themselves out of

work. 55 The unemployment rate for engineers

5sHenderSon, op. cit., p. 63.

5tHenderson, Op. cit., p. 66; “Science and Engineering Education for the 1980’s and Beyond, ” op. cit., pp. 48-50, 60; M. A.

Harris, “Manpower Surveys Continue to Disagree,” Electronics,

July 28, 1983, p. 108. NSF concludes that interfield mobility–

particularly influxes of those trained in mathematics—will mitigate but not eliminate the shortage of computer specialists. One

potential problem is that, even if the total supply of engineers

roughly meets the demand, small firms with limited resources

may still be unable to hire new people.

65NatiOnal patterns of Science and Technology Resources 1982,

NSF 82-319 [Washington, D. C.: National Science Foundation,

March 1982), p. 68. This amounts to only 2,000 people. While

unemployment rates for professionals of all types are normally

well below the overall unemployment rate, the 0.6 percent figure

for computer specialists is unusually low.
Ch. 8—Human Resources: Education, Training, Management ● 321

—. -— ———

(as a group) in 1980 was less than 1 percent;

engineering unemployment averaged 1.8 percent over the decade of the 1970’s, a period that

included the aerospace “collapse, ” when the

unemployment rate for engineers reached 2.9

percent. 56 Aggregate unemployment levels during the decade averaged 6.2 percent, more than

three times as high.

The persistence of unemployment rates far

below the national average indicates that an

“oversupply” of new graduates in engineering

is unlikely. And, while mathematicians and

physical scientists, as well as engineers, may

sometimes have trouble finding the jobs they

consider most desirable, men and women with

training in such fields can move into a wide

variety of occupations; many scientists eventually find themselves practicing engineering.

It is hard to argue that the United States could

have too many graduates of science, mathematics, or engineering curricula.

Data on salaries and job offers for new engineering graduates provide additional evidence

of high demand. In 1981, engineers made up

only 8 percent of new college graduates, but

received more than 65 percent of all job offers—and at starting salaries twice as high as

for those in the humanities.57 Salary offers to

engineers and scientists rose at higher rates

than for other categories of graduates throughout the 1970’s, Demand remained high even

during the recession of 1981-82.

58

Another indicator of personnel shortages is

mobility across disciplines—the number of people who switch to fields other than those in

which they got their formal education. Much

of the demand for computer specialists has

been filled by men and women with training

——

‘Science Indicators— 1980, op. cit., p, 320. The peak year for

unemployment among engineers was 1971.

57P, Abelson, “Industrial Recruiting on Campus, ” Science,

Sept. 25, 1981, p. 1445. The data comes from a survey by the

College Placement Council covering more than 60,000 offers to

new recipients of bachelor’s degrees. The salary data also points

out the big differences between industrial and academic starting salaries,

SaI n 19Fj2, two.th irds of computer and office equipment fi rnls

surveyed b}’ NSF reported difficulty in hiring electrical and computer engineering graduates, as opposed to 95 percent in 1981,

See “EEs Still Needed, Though Shortage Has Eased, Says NSF,”

Electronics, Jan, 13, 1983, p. 69.

in mathematics, engineering, and the physical

sciences; fewer than one-third of those working as computer professionals have degrees in

computer fields. 59 High turnover rates are part

of the same picture; as noted earlier, turnover

has been rapid among both engineers and technicians in the U.S. electronics industry.

Regardless of uncertainties in the projections, then, few people are worrying that the

United States will have too many engineers in

the years ahead; capable individuals with training in engineering comprise one of the most

employable parts of the labor force. The prospects of shortage are real in the sense that various projections differ mostly in the magnitudes of the shortfalls predicted.

In contrast to the wide public awareness of

potential shortages of engineers and computer

scientists, supplies of grey-collar manpower

have received remarkably little attention. Thus,

it is impossible to discuss needs for technicians, service personnel, and other skilled

workers in quantitative detail. But the situation

for machinists illustrates the kinds of problems

to be expected. The Bureau of Labor Statistics

estimates that annual job openings will average

22,000 over the near future; meanwhile, in 1978

only 2,300 machinists completed registered

programs of apprentice training. 60 

The Question of Mobility

Lateral mobility helps moderate sporadic

shortages of workers with particular sets of

skills. Just as clearly, individuals can only move

within a limited realm; a surplus of physicists

might help compensate for a scarcity of computer engineers, but few biologists would be

able to function in such jobs.

‘9’’ Science and Engineering Education for the 1980’s and Beyond, ” op. cit., p. 39. This reflects in part the slow development

of academic programs in computer science and engineering.

‘%. Qualtrough and J. Jablonowski, “Filling the Need for Skilled

Workers, ” American Machinist, June 1979, p, 131. But see also

N. H. Rosenthal, “Shortages of Machinists: An Evaluation of

the Information, ” ltlonth)~r labor Retiew, ]uly 1962, p. s r. Aithough the electronics industry employs machinists, far greater

numbers work in heavier manufacturing industries, Regardless

of the statistics, a good deal of anecdotal evidence bears out the

difficulty that manufacturing firms of all types have had in finding journeyman machinists, tool and die makers, and other

skilled craftsmen.
322 ● International Competitiveness in Electronics

American workers move within and across

technical fields further and more frequently

than their counterparts in other industrial nations. Managers and technical professionals

change jobs much more often in the United

States than in Japan; mobility is greater in

Europe than in Japan, but still considerably less

than here.

61 In the U.S. electronics industry,

turnover has been high among unskilled workers, where unions have been weak, as well as

among those whose abilities have been in high

demand .

The effects of labor mobility cut several

ways. It is little solace to a firm losing key people if they start a new enterprise that contributes to U.S. competitiveness. At the same

time, organizations with low rates of personnel turnover—in any country—must guar d

against stagnation, find ways to generate new

ideas; this is one of the reasons for internal

training and job rotation programs in Japan,

The pluses and minuses of high or low rates

of labor mobility depend on factors such as

rates of technological change, current economic conditions, and corporate strategies.

Patterns of mobility across industries and

countries depend, among other things, on incentives such as promotion policies and wage/

benefit packages; managements have considerable latitude in tailoring these to enhance or

discourage turnover. Government programs

dealing with adjustment—e.g., training and

retraining, unemployment assistance—also act

as incentives or disincentives. While generalizations emphasizing cultural differences are

sometimes advanced to explain mobility patterns in the United States as compared to Japan, examining incentives—and the ways in

which public policies affect them—provides a

sounder basis for understanding. Although

Japan’s labor force tends to be less mobile than

that of the United States, a good deal of variation exists across industries and firms in bot h

countries.

~lon West Germany, see German Engineers: The Anatomy of

a Profession, op. cit., p. 48ff.

Labor Force Mobility in the United States

The United States draws strength from the

mobility of its labor force, not only in moderating skill shortages, but as a stimulus to innovation, technology diffusion, and entrepreneurship. New firms in rapidly growing segments of electronics—semiconductors, computer software and peripherals—are often built

around engineers and managers who leave one

company to start another. On the other hand,

rapid staff turnover, as pointed out above,

works against company-run programs of education and training. In part to counteract the

attractions of entrepreneurial ventures, a

number of large and successful American electronics firms—including Hewlett-Packard,

Texas Instruments, and IBM—have adopted

personnel policies aimed at retaining their

employees. Likewise, merchant manufacturers

such as National Semiconductor and Intel attempted to maintain staffs and avoid layoffs

during the semiconductor sales slump of 1981-

82. In this regard, American electronics manufacturers are quite consciously emulating

their Japanese competitors.

Still, white-collar mobility has been a sine

qua non of the more dynamic merchant semiconductor firms, which have competed aggressively for both technical and managerial talent,

Silicon Valley manufacturers have offered a

wide range of benefits, including extensive

recreational facilities, to recruit white-collar

professionals. Some have even paid bounties

to employees who bring in new people, prospects for rapid advancement—and the lure of

someday getting in on the ground floor of a

new organization—have helped attract managers and engineers, as has the California setting, The mobility of talented people has helped

diffuse electronics technology, contributing to

rapid commercialization of new developments

—which in turn has helped build an internationally competitive industry.

The lawsuits occasionally filed against exemployees by firms seeking to prevent leakage

of their technology are among the more strik-
Ch. 8—Human Resources: Education, Training, Management ● 323

———.— —.. ——— —— -——

Photo credit Ted Spiegel, 1983

Many electronics technicians get their original training

in the military

ing illustrations of the relation between personnel mobility and technology diffusion, Motorola’s unsuccessful 1968 case against executives who went over to Fairchild was an

early example. In 1980, Intel sued a group of

former employees who left to start a company

named Seeq; the basis of Intel’s suit, which

ended in a negotiated settlement, was that the

ex-employees intended to base part of their

business on trade secrets dealing with the

design and manufacture of large-scale programmable ROMs (read only memories).

6 2

Legal action to prevent technology outflows is

6ZS, R1lss~]l, ‘‘s~(;q Loses B 1[~ for R~h~arin~,” Electronic !we~i’s,

Jan. ’25, 1982, se{ 1, p 50

an extreme case; more commonly, firms adopt

positive programs of rewards and incentives

to keep valuable employees, Again, the semiconductor industry has been a leader—helped

by a working environment that many employees find stimulating. Of course, features that

help retain people also serve a company well

in attracting new employees,

Turnover has also been high among unskilled

blue-collar workers in many parts of the U.S.

electronics industry. In domestic semiconductor plants, production employees tend to be

female and ethnic. According to one estimate,

women make up 40 percent of the Silicon

Valley work force, and are heavily concentrated in lower paying jobs; three-quarters of

assemblers are women .

63 In contrast to the

mobility of top-echelon managers and technical

professionals, turnover among unskilled production workers is associated with a lack of

skills; they can be laid off during business

slumps and replaced later.

Mobility in Japan

The stereotype of Japan’s “lifetime” employment system contrasts sharply with patterns

in the U.S. electronics industry. According to

the popular view, the Japanese system ensures

job security until retirement. Also part of the

stereotype is a sequence of promotions based

largely on seniority rather than merit, with

employees waiting patiently to move up the pay

scale, assured of their ultimate reward. These

aspects of the Japanese system have been

viewed as integral parts of a company-as-family

model, making unions in the American or

European style superfluous. “Enterprise unions , organized on a company basis rather

than by trade or occupation, have been seen

as part-and-parcel of a socioeconomic milieu

characterized by harmony among workers and

managers—this in turn leading to low interfirm

mobility coupled with high employee motivation and productivity. While pieces of this

model are visible within Japan’s economy, it

83R. Ho\t’~r[l, “Se(:on~ Class in Silicon Vane\,” Lt’orking

Papers, September-octoher 1981, p. 25, See also M. Chase,

4’S[;mi~;[~lld~](:tor Firms Get Lllxccl Review on Safety in Stud!”

by (California Agenc\, ” 11’all Street )ourna], Jan. 1, 1982, p. 6.
324 ● International Competitiveness in Electronics — ——

applies to only a minority of the labor force;

moreover, the stereotype obscures crucial details that affect the working lives of all Japanese.

To begin with, labor relations were far from

smooth in Japan as recently as the 1950’s. Furthermore, lifetime employment is typical only

of large Japanese companies, and many of

these encourage their employees to retire at a

relatively early age—commonly around 55 or

60. Afterward, many “retirees” must find new

work—which may turn out to be a part-time or

lower paying job with a subsidiary of their

former employer—because retirement benefits

are low.

64 Moreover, in small firms especially, but also in large enterprises, Japanese workers do leave their jobs, Horizontal mobility—

i.e., movement from one firm to another without advancement—is fairly common among

younger Japanese workers, particularly those

with low skills, Women seldom have much job

security or upward mobility, much less the

many temporary employees that are another

feature of Japan’s labor market. 65 Women ar e

generally encouraged to resign upon marriage—certainly at childbirth—and if they

return have no seniority. The 3.4 million temporary and day workers, men and women—accounting for about 6 percent of the wor k

force–are the first to be let go in the event of

recession. Temporary employees provide flexibility to cope with economic slumps without

laying off regular workers, The proportion of

temporary employees in Japanese manufacturing firms has increased markedly since the recession of the mid-1970's.

66 Furthermore ,

— . .

6aJapaneSe electronics firms, along with the rest Of Japanese

industry, have been under some pressure to extend retirement

ages. In the mid-1960’s, retirement in the major electronics firms

was generally compulsory at 55 to 57 for men, perhaps 50 for

women. By the mid-1970’s, many companies had extended these

ages by about 5 years. See S. Takezawa, et al., Improvements

in the Quality of Working Life in Three Japanese Industries

(Geneva: International Labour Office, 1982), pp. 66-67, 95.

IMA. H, Cook and H, Hayashi, Working Women in Japan

(Ithaca, NY.: Cornell University Press, 1980). See also F.

Ginsbourger, “Japan’s Dark Side,” WorM Press Review, July

1981, p. 32.

%.-y. Lin, “Wage-Price Behavior Under External Price Shocks

and Productivity Slowdown: A U.S.-Japan Comparison, ” Discussion Paper No. 402, Economic Growth Center, Yale University,

April 1982, p. 22a.

although corporations in Japan attempt to adjust to business downturns by reducing working hours before laying off regular employees,

when recessions deepen—as in 1974-75—they

reduce employment levels at rates quite comparable to those in Europe, if not the United

States. Smaller Japanese companies have seldom been reluctant to cut back their labor

forces.

Nor does the stereotyped picture of senioritybased wages in Japanese corporations (the

nenko system) hold up under scrutiny. One

study finds that promotion is based on a “compromise” between seniority and ability, the particulars varying considerably across firms.

6 7

Smaller, more rapidly growing organizations

tend to emphasize meritocratic promotion,

while older, established firms remain less willing to single out talented individuals from

others of their age group. Age and ability are,

furthermore, weighted differently depending

on level, with progress in the upper ranks a

stronger function of ability. Clark concludes

that the ambiguity built into Japanese promotion practices encourages people to do their

best: while promotion has generally been automatic after a certain period of service, there

is also the possibility that outstanding performance will be rewarded with rapid advance.

And, although the nenko system may appear

to underpay well-trained and able young workers, over the longer term they can expect to attain salary levels well above those in their age

bracket who have lower skills or less education;

salary profiles for older male workers in Japan

show considerable spread.

Finally, as the Japanese labor force has aged,

employment practices have begun to change.

With the fraction of older workers increasing,

salary competition for the best qualified recent

graduates will intensify; recent surveys of hiring suggest that, in certain fields, including

electronics, shortages of younger employees

are likely. Data compiled by the Ministry of

8TR. Clark, The ]apanese Company (New Haven: Ya]e university Press, 1979), pp. 115-116. On the development of the rrenko

system, see T, Inagami, “Labor-Management Communication

at the Workshop Level, ” Japan Institute of Labor, Industrial Relations Series, Tokyo, 1983. Inagami also includes data on promotion patterns (pp. 10-14).
Ch. 8—Human Resources: Education, Training, Management 325

Labor indicate that younger Japanese workers

can choose between two or three entry-level

jobs, but those aged 55 and over must win out

over 5 to 10 other jobseekers to find a position.

68 As a result of such trends, wage compression for older employees seems likely to

intensify, retirement ages may be extended further, and the role of seniority in promotion

decisions will diminish. Generational conflict

between younger employees, for whom high

demand will push up salaries, and older workers who stand to lose by comparison, may follow. 69 If and when such events come to pass,

the features that now make the Japanese employment system seem unique will stand out

less.

The United States and Japan Compared

While the contrasts are often exaggerated,

Japanese and American employment practices

do lead to quite different patterns of mobility.

HOW do these interact with the structures of

the electronics industries in the two countries

to affect international competitiveness? Firms

in each nation have alternatives in seeking the

people they need. One option is to hire employees away from other companies, an approach

more likely to be successful in the United

States. An alternative is internal recruitment—

intrafirm mobility—in conjunction with retraining, an avenue particularly appropriate in

a system such as Japan’s, where people tend

to identify more strongly with the corporation

than with a vocation or profession. Still another

method of coping with shifting occupational

needs is to alter or expand the potential pool

of new entrants. Despite the vitality that the

U.S. electronics industry has drawn from employee mobility, there is no need to associate

either high mobility or a lack of mobility—in

tm(;]~rk, (jp,

 Force Characteristics and Their

Impact on Japanese Industrial Relations, ” The Paradox of Progress, 1,. F,, Austin (e(i.) (New Haven, Corm,: Yale University Press,

1976], p. 194.

and of themselves—with enhanced competitiveness; nor should high mobility be considered more “modern” than low (or vice versa).

High mobility in the United States goes with

other aspects of the U.S. economy, just as low

mobility is consistent with Japan’s socioeconomic environment.

Public policies influence the choices made

by corporations among the options outlined

above. Government support for training technicians can enlarge the talent pool. Vigorous

manpower policies, designed to support expanding sectors of an economy, will stimulate

interfirm and interindustry mobility, Tax

writeoffs for company-run programs of education and training would encourage intrafirm

mobility, High turnover rates have made American corporations wary of investments in training or retraining that may pay off to their competitors. “Talent raiding’’—so characteristic of

American semiconductor firms—often becomes the alternative.

Employment practices in the United States

may change as a result of the demographics of

aging, just as the aging of the Japanese labor

force is altering patterns in that country. As

the U.S. population grows older, continuing

education for those in midcareer—blue- and

grey-collar workers, as well as white-collar

professionals—will become a necessity, When

the labor force was expanding rapidly, employers could count on new graduates to fill many

of their needs; this is less true today, particularly in light of current inadequacies in technical

education, American firms may find themselves emulating the internal training efforts

of their Japanese competitors, with management practices designed to enhance a company’s human resources becoming critical

elements of corporate strategy. The remainder

of this chapter turns to questions of management and the organization of the workplace,

asking—among other things—whether there

really is a uniquely Japanese approach to

management.
326 International Competitiveness in Electronics

Organization and Management

As the end of the 19th century brought rapid

economic growth and technological change to

American industry, new management techniques arose to deal with shopfloor organization. The old ways, developed during the days

of hand work, proved a poor guide to factory

production using mechanized equipment, particularly in the emerging mass production industries

Frederick W. Taylor, founder of the scientific management school, is the best remembered of those who pioneered new methods.70

Taylor began as an engineer at an ironworks,

and his approach to management—including

plant layout and job flows, and the man/

machine interface—reflects the bent for rationalization associated with his profession. While

Taylor himself, and the techniques he developed and advocated around the turn of the century, showed considerable appreciation for the

human element in factory work, many of his

followers carried scientific management to the

extreme of treating people as another variety

of machine, Scientific management still bears

this stigma—and “Taylorism” is a dirty word

for many who associate it with the Chaplin of

Modern Times.

Taylor believed that, for every task i n

manufacturing, there was an optimum method

that could be “scientifically” discovered. By

reducing each job to its essential elements—

employing, for instance, the techniques of what

has come to be known as time-and-motion

study—the workplace was to be rationalized

and productivity maximized. Although Taylor

thought that this approach should also increase

cooperation among workers, one of the chief

criticisms of scientific management has always

been its rather mechanistic conception of the

individual, leading to an emphasis on simple,

repetitive tasks,

70F. w. TaY]Or, Tbe PrinciP~es of Scientific Management (New

York: Norton & Co., 191 1). N. P. Mouzelis, organization and

Bureaucracy: An Analysis of Modern Theories (Chicago: Aldine

Publishing Co., 1967), gives a useful historical overview of various approaches to organizational management.

Photo credit: kVest/nghouse

Integration of programmable robots into the

factory environment poses a new set of problems

for manufacturing industries

The idea of a scientific means for organizing factory work attracted American businessmen. New machine tools, the assembly line,

mass production of durable goods like bicycles,

home appliances, and automobiles, presented

a rapid succession of new problems; industrialists eagerly embraced Taylorism as a

means of dealing with them. The management

science movement springing from Taylor’s

early work has continued to thrive and to

spread internationally; it still shapes curricula

and textbooks in American business schools

and industrial engineering programs.

The human relations approach to management was developed primarily by industrial

psychologists, beginning a decade or two later,
Ch. 8—Human Resources: Education, Training, Management ● 327

—.—

In contrast to the engineers who espoused Taylorism, the human relations school stressed

peoples’ attitudes and motivation as keys to

productivity and manufacturing efficiency.

Studies in the human relations vein explored

the workplace as a social organization and the

individual employee as a member of the group;

practitioners saw their goal as fostering an amicable working environment, one built around

the existing shopfloor culture. While advocates

of scientific management tended to be antiunion, the human relations school accepted

unions as an integral part of the social system

of the factory,

Just as the reductionist tendencies of scientific management have been criticized, so the

human relations approach has been faulted for

its stress on harmony to the neglect of the real

conflicts of interest characteristic of work life,

and for overemphasizing small group behavior

while failing to deal with the organization as

a whole.

Variants of these two attitudes toward management—which reflect contrasting theories of

organization—continue to proliferate. The two

are based on fundamentally different notions

of what makes organizations—whether factory,

store, or office—function, and hence on methods for improving their operation. At present,

the human relations approach has become

identified with the popular view of Japanese

management, but both schools have American

origins. This is not, of course, to say that

Americans cannot learn from foreign experience. Organizations in other countries have

adapted management practices originating in

the United States to their own needs, and it

may be time for a reverse flow into American

corporations.

Organizational Types and

Management Styles

The Manager as Professional

In the United States, management is a discipline with its own graduate schools and advanced degrees; M.B.A. programs increased by

an order of magnitude over the past two decades, and now graduate more than 50,000 men

and women each year. In contrast to Japan and

Western Europe, where top managers tend to

move up from the ranks—and a few individuals

still reach high levels having started on the

shop floor-American firms, especially the

larger, publicly held corporations, have tended

to bring new employees directly into management-track jobs. Typically graduates of academic programs in business administration,

some of them fill staff positions, others move

quickly into middle management, Thus the

management profession—with its extensive

network of specialized academic programs—

has become a principal vehicle for transmitting

and validating the techniques used in American business.

Management training in this country prepares people for work in hierarchical organizations. Distinctions between those who plan and

those who do the work are more sharply drawn

in American corporations than elsewhere; this

division—and the equally sharp distinctions between those responsible for production, or

“operations, ” and the rest of management—

has increasingly come under scrutiny and criticism.

71 In contrast, Japanese and European

business practices are rooted in on-the-job experience and company-run training programs.

Management institutes exist, but are typically

oriented toward the needs of midcareer executives seeking fresh perspectives.

While the ideal types of “American” and

“Japanese” management are exaggerations that

fail to capture the variety existing within the

two countries, they nonetheless point to differing conceptions of the nature of modern organizations. The Japanese model is based on

authority stemming from tradition and socialization; the American approach is less personal

and more legalistic. Central to the Japanese

model are group decisionmaking, cooperation

between labor and management, and long-term

tenure in an organization viewed as analogous

TISee ch, 6. The following pair of articles in the JUIY-AUgUSt

1981 issue of the Harvard 13wsiness Review are typical examples

of this criticism: R, H. Hayes, “Why Japanese Factories Work, ”

p, 56, and S. C. Wheelwright, “Japan-Where Operations Really Are Strategic, ” p. 67.
328 ● International Competitiveness in Electronics

— — ———— -.

to a family. Ideally, these result in a wellintegrated system, with human resources as the

firm’s most important long-term asset. 72

Decisionmaking in Japan

Symbolic of the Japanese approach is the

ringi seido (approval system), through which

middle-level personnel obtain sanction and approval from the top echelons by circulating a

document to which each person affixes his seal

or signature.73 The process yields systematic

but slow “bottom-up” decisionmaking. A decision is final once the company president adds

his seal; since many individuals participate,

there is considerable communication—if not

always true consensus—and, once the outcome

has become apparent, little uncertainty. Contrasts are frequently drawn between the

tendency of “individualistic” Americans to

continue pushing their own views, even after

contrary decisions by upper management, and

the Japanese case—where, as the saying goes,

“when the train leaves the station, everyone is

on board. ” The point is that whatever disagreements precede the ringi decision, they are supposedly buried afterwards, the policy fully supported by all.

While authority in a Japanese company is

vested in the president, employees at many

levels participate in the consensus-building

process. Not all of them have the precise and

well-defined responsibilities that characterize

job descriptions in an American corporation.

Ambiguity attaches to organizational structure

in Japan, rather than to people as in the United

States. The Japanese system does not involve

much bargaining among managers and subordinates, nor is it participative in the sense often

used in the West. In contrast to U.S. practice,

where management decisions and business

planning get detailed attention, the ringi system

allows people throughout the firm to agree on

generalities, with the specifics to be worked out

later.

Group decisionmaking as embodied in the

traditional Japanese approach is a good fit with

corporate organizations that offer individual

employees considerable security and involve

them with the company outside their immediate duties and working hours, Company

housing and recreational facilities, group

outings and even vacations, along with internal training programs, can all be viewed as incentives for building loyalty among a fairly immobile labor force. In best light, the system is

“wholistic” in orientation; in worst light, it is

a sophisticated brand of industrial paternalism. 74 The widespread acceptance of company

rather than craft or trade unions and the comparatively few days lost to strikes in Japan

(table 72) indicate that this labor-management

system—oriented toward consultation and conformity—has worked to the benefit of the corporations that have designed and implemented

it. As table 72 illustrates, large numbers of

workers participate in strikes even in Japan,

but little time is lost because work stoppages

are short, often serving functions that are at

least partially symbolic.

Contrasts With the United States

Extensive involvement with the company

outside normal working hours and group decisionmaking diverge markedly from patterns in

the United States, where—rather than spreading responsibility for decisions through the

organization—top management is expected to

T4AS ]ate as Ig76, more than one-quarter of Hitachi’s ma]e employees still lived in company housing; the figure had been nearly

40 percent in 1967, See Improvements in the Quality of Working Life in Three Japanese Industries, op. cit., p. 69.

Table 72.—Work Stoppages Due to Labor Disputes

in Several Countries (1978)

Total number of Total number of

participants in employee work-days

work stoppages lost

United States . . . 1,600,000 39,000,000

72N. Hatvany and V. Pucik, “Japanese Management and pro- Japan . . . . . . . . . . 660,000 1,360,000

ductility,” Organizationa] Dynamics, spring 1981, p. 8. West Germany . . 490,000 4,280,000

psFOr a detai]ed description of the ringi seido, see M. y. France . . . . . . . . . 1,920,000 2,200,000

Yoshino, Japan Managerial System: Tradition and Innovation United Kingdom . 1,040,000 9,400,000

[Cambridge, Mass.: MIT Press, 1968), pp. 254ff. SOURCE “Japan, An International Comparison -19!30, ” Keizai Koho Center, p. 49,
—.

Ch. 8—Human Resources: Education, Training, Management ● 329

provide leadership. Corporate cultures in the

United States give pride of place to strongwilled executives who leave their mark on an

organization. Power, status, and privilege also

attach to Japanese executives, but with real differences. The ability of managers to show immediate results—profitability over the next

quarter being the current target of critics—is

central to the American model, group effort to

the Japanese. Well-defined and often narrow

responsibilities, centralized authority, rigidly

hierarchical organization charts—plus the possibility of swift promotion and high rewards—

characterize the “results-oriented” management styles of American firms. Ambiguity is

viewed as undesirable, expertise cultivated;

men and women enter the firm as specialists

in accounting or finance, marketing or strategic planning. Individualism is tolerated,

but within well-defined bounds–witness the

“white-shirt syndrome” still hanging over companies like IBM. 75 The comparatively high

levels of personnel mobility in the United

States, and the tradition of adversarial relations

between unions and management, are part of

this picture.

A further difference between Japanese and

American management practices—discussed

in more detail in chapter 6—is the emphasis

companies in Japan place on manufacturing

and its integration with the rest of the firm.

Toyota’s much-noted system of just-in-time

(kanban) production and inventory control is

only one example. Since Japanese managers

tend to rise relatively slowly through the ranks,

with periodic lateral moves, stress on manufacturing is perhaps natural. In contrast to the

situation in the United States, where production—more especially quality control—has little prestige, is even viewed as a dead-end job,

a number of Japan’s top corporate executives

began their careers as quality control or

manufacturing engineers.

Both Japanese and American approaches to

management have their strengths and weaknesses. Few corporations exhibit management

7“’I.If’e at III M-Rules and Discipline, Goals and Praise Shape

1 BMer\’ Taut World, ” W’ali Street Journal, Apr. 8, 1982, p. 1,

styles as clear-cut as the stereotypes suggest;

in both countries, firms have identities that

may vary from division to division as well as

changing over time. The wholistic orientation

of the Japanese style carries strong paternalistic overtones, with discrimination against

women and minority groups a fundamental

part of the system.76 And, although Japanese

management is sometimes viewed as peopleoriented, personal interactions are marked by

pervasive if subtle status distinctions. Paternalism does lead to job security for some fraction

of the labor force in Japan, security which is

less common in the United States, The American approach, while often assumed to maximize opportunity, does so in part by encouraging competition—some would say to excess—

among individuals seeking advancement and

personal gain.

Comparisons of American and Japanese

management often focus on particular techniques—e.g., quality control circles in Japan,

management by objectives in the United

States—rather than the schools of thought, such

as scientific management or human relations,

from which these techniques derive. But improvements in management seldom result from

the isolated adoption of some technique. This

quotation from a Japanese engineer points out

the difference between technique and underlying attitude:77

One difference I find hard to explain to my

Western colleagues is that we do exactly the

same things that the industrial engineer does

in Detroit or Pittsburgh; but it means something different. The American industrial engineer lays out the work for the worker. Our industrial engineers are teachers rather than

masters. We try to teach how one improves

one’s own productivity and the process. What

we set up is the foundation; the edifice the

worker builds. Scientific management, time

and motion studies, materials flow-we do all

ToE\~~n the more b~rnus~d commentators on the Japanese fnodel, such as ouchi, note its racism and sexism, See W. G. Ouch 1,

Theorsr Z: HoI~ American Business Can Afeet the ]apanew Challenge (Reading, Mass,: Addison-Wesley, 1981), p. 91.

77Quoted in P. F. Drucker, “What We Can Learn From Japanese

Management, ” Har~ard Business Re\iet\’, March-April 197], I).

117.

()9 -1 1 1 0 – 83 – ? )
330 ● International Competitiveness in Electronics — —

that, and no differently from the way you do

it in the States. But you in the States think that

this is the end of the job; we here in Japan

believe it is the beginning. The worker’s job

begins when we have finished engineering the

job itself.

It is too easy to write off such statements as

empty philosophizing.

Worker Participation

The past decade has seen continuing interest

in industrial democracy, more so in Western

Europe than in the United States.78 Stemming

at least in part from persistent economic problems, some companies and some governments

have experimented with methods for increasing the involvement of the labor force—particularly blue-collar employees—in decisionmaking and work design. One aim has been to

moderate wage demands. This section outlines

several of the modes of employee participation

that have evolved in Europe, as well as the

quality control circles originating in Japan. The

purpose is to capture some of the variety of

foreign approaches, and ask how such mechanisms might help the productivity and competitiveness of American industry. A large

number of specialized techniques for redesign

of the working environment and employee involvement have been developed, both here and

overseas; no attempt has been made to describe

any except quality circles, which are covered

because they have attracted so much attention.

79

ToMuch of the materia] on European countries in this section

is based on A. L. Ahmuty, “Worker Participation in Management Decision-Making in Western Europe: Implications for the

United States,” Congressional Research Service Report No.

79-136E, Apr. 23, 1979. See also B. C. Roberts, H. Okamoto, and

G. C. Lodge, “Collective Bargaining and Employee Participation in Western Europe, North America and Japan, ” The Trilateral Commission, 1979.

TgFOr an overview of a number of these, see R. M. Kanter,

“Dilemmas of Participation: Issues in Implementing Participatory Quality-of-Work-Life Programs, ” National Forum,

spring 1982, p. 16. Several case studies can be found in J. A.

Fadem, “Automation and Work Design in the United States, ”

Working Paper Series No. 43, Center for Quality of Working Life,

Institute of Industrial Relations, University of California, Los

Angeles, 1982.

Participative Mechanisms

In the United States, industrial democracy

has been associated with collective bargaining

by labor unions—an interpretation of worker

participation neither so encompassing as in

Western Europe nor quite so narrow as in

Japan. While American unions have continued

to bargain over wage-benefit packages, European workers have succeeded in extending

their influence over workplace and organizational decisions. In some contrast, quality control (QC) circles were developed by managers

in Japan as tools for improving labor productivity and product quality. Most of the interest

in QC circles among Americans has also originated with management. If American workers, particularly in companies with strong

unions, have sometimes been reluctant to embrace QC circles, quality-of-work-life programs

have found a better reception with labor.

The worker participation movement in Western Europe is based on two presumptions: first,

that labor is just as important to production as

capital; second, that blue-collar employees have

the right to be represented in corporate decisionmaking. Participatory mechanisms include

work groups at the shopfloor level, work councils at the plant or enterprise level, collective

bargaining, labor representation on boards of

directors, employee-owned enterprises, and

worker representation on socioeconomic advisory bodies to governments, Beyond these

direct involvements, publicly owned companies are a longstanding fixture on the European

scene, with governments paying more or less

attention to their management depending on

political pressures and economic conditions.

At the shopfloor level, work-life programs

give employees a voice in determining how individual tasks should be performed, with the

aim of increasing job satisfaction as well as improving productivity. Employee involvement

in work methods can be viewed as a reaction

against the scientific management tradition, in

which an expert—typically an industrial engineer—has full responsibility for task design.

Sometimes, work-life programs reduce produc-
Ch. 8—Human Resources: Education, Training, Management ● 331

—.. —-— — .— —. . . —— .-

tivity (as traditionally measured), a sacrific e

that firms like the automobile manufacturer

Volvo appear to have accepted in the interests

of employee satisfaction, (Volvo replaced a

number of assembly lines with batch assembly

operations, giving workers more variety.)

At the enterprise or plant level in Europe,

work councils—independent of unions—give

employees a voice in codetermining a firm’s

future, Labor representatives on these councils

participate in financial and other business decisions, although at the head of the agenda tend

to be matters like personnel policy, health and

safety, and shopfloor organizational practices.

American-owned companies in West Germany

have seldom been comfortable with codetermination; in the United States, the few labormanagement committees that have been established tend to have a much narrower focus, and

to be viewed primarily as vehicles for enhanced

communication. One of the best known is the

National Committee to Improve the Quality of

Work Life, established by the United Auto

Workers and General Motors in 1973. Current

economic conditions may motivate more such

experiments.

One of the most far-reaching experiments in

employee participation has been instituted in

West Germany. In the early 1970’s, the Ministry of Research and Technology, in cooperation with the Ministry of Labour and Social Affairs, began a program aimed at the “humanization of work, ” Based on the Work Councils

Act passed by the German parliament in 1972,

the premise is that government should not only

safeguard employee health and safety, but undertake to improve opportunities for individual

development and participation in decisionmaking.

80 In general, the response of workers to

these initiatives seems to have been less positive than for earlier programs of codetermination, particularly in industries like electronics where the workplace is already relatively

———

~’*Research on the Humanization of Work, ” Action Programme of the F’ederal Minister for Labour and Social Affairs

and the Federal Minister for Research and Tech nology, Dec.

No, 2181/74e. See also Prograrnrn Forschung zur Homanisierung

des Arbeifslebens, I)er Bundesminister fur F’orschung un d

Technologies, 1979.

benign. West German workers have remained

more interested in power over matters such as

hiring and firing practices,

Blue-collar employees in the United States

have restricted their attempts to influence company policies and decisions to the traditional

concerns of labor-management relations. Union officials have been ambivalent about moving beyond questions of wages, benefits, and

working conditions—probably for fear of losing

some of the bargaining power that comes with

an adversarial stance, al In contrast to Western

Europe, participation by American workers on

boards of directors has been rare—mostly

brought on by circumstances such as Chrysler’s recent financial plight. Although the many

plant closings in industries like steel have led

to proposals that employees purchase facilities

scheduled to be shut down, few such plans

have gone forward,

While collective bargaining is virtually universal in advanced market economies, there are

man y differences of form and substance, In

Japan, about 95 percent of all unions are organized on an enterprise basis. 82 In addition to

collective bargaining between unions and management, negotiations take place each spring

between groups of firms and unions, The

“spring offensive “ is most visible in the steel,

electrical machinery, shipbuilding, heavy machinery, and automobile industries, as well as

public corporations (where a special mediation

committee decides on the settlement). Wage

decisions during the spring offensive help set

patterns for smaller firms. Still, compared with

the United States or many European nations,

labor in Japan has little real power.

Quality Control Circles

QC circles have been heavily publicized as

mechanisms for worker participation. Quality circles are relatively autonomous, composed

81 FOr an eva]~]at ion of labor-manag~m~:nt LOm m it tees 1 n tht~

United States, see K. Frieden, “Workplace Democracy and Pr(lductility, ” National Center for Economic Alternatit’es, Washington, DC., 1980, p. 31.

““1. abor Unions and I.abor-Management Relations, ” Japan institute of I,abour, Japanese Industrial Relations Series, Tok\ro,

1979.
332 International Competitiveness in Electronics

—

of a small group of workers—perhaps a dozen—

typically led by a foreman or senior employee.83

In Japan, financial incentives play a relatively

minor role, without the emphasis on prizes for

suggestions or improved performance that

some American firms have adopted. QC meetings in Japanese companies are often held outside normal working hours, and workers may

not be paid for their time. Although the circles

now work on job-related problems beyond

quality control per se—e,g., production methods, worker training—they grew out of the

postwar stress on quality inspired by Americans such as Deming (ch. 6). The contribution

made by Japan’s business leaders was the expansion of quality control to involve participation by virtually everyone in the firm. Employee training via circles, for example, is intended

to reduce the need for specialists in quality assurance and production engineering. As discussed in chapter 6, the quality and reliability

of electronic products depends on factors ranging from engineering design to relationships

with suppliers; while the quality of many Japanese goods is now excellent, it would be a mistake to attribute this to any one technique such

as the QC circle.

Cole notes that even in Japan enthusiasm

within a QC group tends to wane, and circles

need to be periodically revitalized. It would be

no surprise to find a Hawthorne effect at work

in many of the success stories involving QC

circles (i. e., a situation in which any of a wide

variety of changes in the workplace environment would improve employee motivation and

productivity, at least temporarily). The effectiveness of QC circles also depends on the extent of employee identification with the company; members participate more fully if they

feel that their work is recognized and appreciated within the organization. A grouporiented Japanese corporation is more likely to

foster such attitudes than many of the American firms now experimenting with QC circles.

osco]e ha~carri~d out the most systematic studies on quality

circles. The discussion below is based largely on Work+ Mobility, and Participation, op. cit., pp. 135ff. Also see R. E. Cole, “Will

QC Circles Work in the U.S.?” Quality Progress, July 1980, p.

30; Improvements in the Quality of Working Life in Three

Japanese lnrfustries, op. cit., pp. 76ff; and Inagami, op. cit., pp.

31-34.

But even in Japan, QC circles are sometimes

perceived as a coercive management tool.

Overenthusiastic accounts of quality control

circles in Japan sometimes give the impression

of a panacea; in reality, Japanese firms vary

widely in the extent to which they utilize QC

circles—regardless of commitment to circle activities, they are only one management technique among many.

Over a hundred American firms—including

General Motors, Ford, and General Electric—

have experimented with QC circles, but the

question of whether or not they will work as

well in the United States as in Japan has not

been answered. Certainly there are obstacles

here that do not exist in the typical Japanese

organization. In the U.S. context, for example,

monetary incentives may be essential; the

Lockheed program is typical in that employees

are not expected to meet after hours, or without

extra pay.84 Experience also shows that American middle managers must be persuaded to accept and support the QC approach, else they

may perceive the circles as challenges or as implicit criticisms of past performance.

Unionized firms add another dimension.

Where QC circles have been introduced into

American companies without the consultation

and support of union leaders, they have not

been successful. Organized labor remains ambivalent; AFL-CIO spokesmen have felt that QC

circles could be a tool for breaking up unions,

and the evolving attitude appears negative, as

Japanese firms with plants in the United

States have generally introduced circles gradually and with considerable care, if at all.

Quasar, owned by Matsushita since 1974, did

not install its first circles until 1982; the company plans to have 25 in operation by the end

of 1983.86 QC circles in Japan function in a cona4’’Quality Control Circles Save Lockheed Nearly $3 Million

in Two Years,” Quality, May 1977, p. 14.

8sR. S. Greenberger, “Quality Circles Grow, Stirring Union

Worries, ” Wa]] Street Journal, Sept. 22, 1981, p. 29.

~Information from Quasar. Thus far, the company views its

experience in the United States with QC circles as successful,

but perhaps not so successful as in Japan. For examples of other

experiences in electronics, see J. D, Couger, “Circular Solutions, ”

Datamation, January 1983, p, 135.
Ch. 8—Human Resources: Education, Training, Management ● 333 —. ——. . ..

text that includes enterprise unions, a relatively

immobile work force, and seniority-based wage

increases, Not all the elements in the Japanese

approach or in QC circles themselves are likely to prove attractive to workers and managers

in the United States.

Japanese and American Management

Styles: How Much Difference?

Do Japanese firms operating in the United

States exhibit a distinctive management style?

Or in adapting to the new setting do they act

more like American firms? Keeping in mind

the structural differences that have been outlined, how different are management styles

even within Japan from those in the United

States? By comparing a foreign subsidiary both

to its parent and to local competitors, variables

of ownership and geography can be separated.

This section presents the conclusions of a study

of managerial differences among U.S. and

Japanese firms, The survey sample included

upper and middle managers from: 1) Japanese

subsidiaries of American companies, 2) Japanese-owned subsidiaries in the United States,

and 3) both American and Japanese firms in

their home country. Appendix 8A, at the end

of this chapter, explores the data on national

differences in management style more systematically. 87

The survey results show that American- and

Japanese-owned electronics firms do not diverge greatly in management style. In many

respects, managerial practices were more

closely associated with geographical location

than with ownership; i.e., Japanese-owned

firms in the United States acted more like

American firms, U.S. subsidiaries in Japan

more like Japanese companies. In itself, this

should be no surprise, given that foreign subsidiaries everywhere are mostly staffed by local

people. Even if upper managers come from the

WAPP. 8A, together with the summary here, is based on a report

prepared for OTA by M. A. Maguire, It includes an independent analysis of data from a project directed by R, T, Pascale,

The subset dealing with electronics has been of primary interest

to OTA, For a discussion based on all the data, including other

Industries, see R, T, Pascale and A, G. Athos, 7“he Art of Jaijanese

Management (New York: Simon & Shuster, 1981).

—

parent, there is only so much they can import

and implement.

The one respect in which Japanese-owned

firms in both the United States and Japan stand

out is their emphasis on employee motivation

and participation, and on diffusion of responsibility through the ranks. The survey results

indicate that the anecdotal evidence on Japanese concern for employee motivation reflects

a genuine distinction: in terms of the models of

management style outlined earlier, the Japanese approach is closer to the human relations

pole. At the same time, the range in behavior

across both Japanese and American firms is

wide.

Japanese-owned firms stress communication

and personal interaction both horizontally and

vertically, At least some aspects of consensual

decisionmaking have been transported to the

United States, One can question the extent to

which Japanese managers accept and act on

the information received through these communication channels, as opposed to using them

to manipulate opinion and impose top management decisions. Nonetheless, in employee surveys, managers in Japanese-owned firms both

here and in Japan were more often described

as sensitive to others and accessible to subordinates than managers of American-owned

companies. This in itself contributes to employee motivation and satisfaction.

Such behavior patterns can be associated

with the human relations school of management. The principal contrast with Americanowned firms is along the informal dimensions

of organizational behavior; there was little difference between the U.S. and Japanese firms

surveyed in terms of organizational hierarchy

or formal lines of communication. The distinguishing features of Japanese management appear to be rather intangible, matters of attitude

more than method.

U.S. subsidiaries of Japanese companies have

generally found this emphasis on human relations and employee participation to work well.

Typically, the firms surveyed have modified

management techniques imported from Japan

to fit the American context without abandon-
334 . International Competitiveness in Electronics — ..—

ing the human relations thrust. Furthermore,

some of the best performing American firms

display a similar concern for employee participation, with the implicit goal of giving individual workers a stake in the success of the

enterprise. While it is impossible to determine

the precise degree to which human relationsoriented management contributes to the performance of particular companies, it does appear to be a common trait in well-managed and

competitive organizations in both countries.

Summary and Conclusions

Commitment to the development and utilization of human resources is closely associated

with corporate success, and, through this, with

industrial competitiveness. In electronics, U.S.

manufacturers have had difficulty filling critical positions in engineering; a concurrent

shortage of skilled technicians, while not so

well publicized, could prove as serious a bottleneck. At present, the United States seems in

danger of falling behind other countries at

training people in the skills needed for hightechnology industries like electronics; deficiencies exist in both public and private sectors.

Education, provided first and foremost by the

public schools, determines the skills and

capabilities that people bring with them to the

work force. The ability to continue learning—

on the job as well as off—also depends on the

quality of that formal education. While some

American firms provide or encourage continuing education and training for their employees, others do little or nothing.

Inadequacies in the education and training

of the American labor force are growing more

serious, Beginning at secondary levels, the

preparation of Americans in science and

mathematics is simply not on a par with other

industrialized nations—e.g., Japan. A smaller

fraction of U.S. college students major in

technical fields. While many American universities are, at the moment, limited in their ability

to handle greater numbers of engineering students, a more fundamental problem is the relatively small fraction of the college-age population qualified to enter such programs. The

typical U.S. high school graduate is not only

poorly prepared in mathematics and science,

but uninformed concerning technology. Deficiencies in mathematics are most serious; these

disqualify people at an early age from a broad

range of career opportunities, depriving the

Nation of a vast potential resource.

For those qualified for admittance, programs

in engineering, mathematics, and the sciences

offered by American colleges and universities

—both undergraduate and graduate—remain

unsurpassed. Nonetheless, they have slipped

relatively; engineering schools, in particular,

are suffering from a lack of qualified faculty

and from inadequate and obsolete equipment.

The pressures of expanding undergraduate enrollments have led to a deterioration in the

quality of education. Continued low enrollments of ph. D. students mean that the shortage of engineering teachers will continue; what

might have been a transient problem is rapidly turning into a serious long-term concern.

Moreover, the average American worker is

less prepared than his or her counterpart in a

number of other countries for productive employment in industries like electronics. As a

result, the United States is heading toward

more shortages of skilled blue- and grey-collar

workers—technicians, designers and draftsmen, engineering aides, field service personnel. Likewise, many white-collar jobs are filled

by people with little understanding of mathematics, science, or technology—and with little preparation for comprehending technical

subjects even on a lay basis. Meanwhile, unemployment in the United States has been rising—in part the result of a mismatch between

what people are able to do and what needs to

be done.
Ch. 8—Human Resources: Education, Training, Management ● 335

—— — — —

One way private firms can compensate for

deficiencies in formal education is to establish

in-house training and retraining programs; in

addition to such efforts, many American firms

support continuing education outside the company. The incentives for such efforts, however,

are lower here than in Western Europe or

Japan because of the mobility of the U.S. labor

force, The frequency with which Americans

take new jobs heightens the risk that the company will lose its investment. Nonetheless, a

number of U.S. electronics companies have developed ambitious employee training efforts,

and the semiconductor industry is developing

programs in conjunction with universities that

will help to educate new people, as well as supporting the R&D base. Despite their promise,

such initiatives will not by themselves be sufficient to meet the skill requirements of the

electronics industry in the years ahead, much

less the broader needs of the U.S. economy.

Government in the United States–Federal,

State, and local–has traditionally carried the

major responsibility for education and training; expanded public sector programs for training and retraining appear necessary for building the competitiveness of American industry,

As demographic forces tilt the labor force

toward greater proportions of older workers,

retraining will be essential if the talents of midcareer employees are to be effectively utilized.

As U.S. industry continues to advance technologically, workers who find themselves displaced by structural change will be dependent

on retraining to find productive employment

elsewhere. As job opportunities shrink for

those with limited skills, men and women with

poorer educations, and without the developed

ability to learn on the job, will more and more

find themselves unemployable. Given the competition and mobility characteristic of the

American economy, the private sector cannot

reasonably be expected to provide the needed

training and retraining; only government bodies—at all levels—can take on this responsibility.

The efforts of private industry begin with the

people available in the labor pool. In large

measure, the art of management lies in maximizing the contributions of existing and prospective employees—to which end a number

of the more successful electronics companies,

in the United States as well as Japan, have

developed management systems that emphasize employee participation. Giving individuals

a voice in decisions that affect them increases

motivation and commitment to the organization.

Despite the vogue for Japanese management

techniques, the human relations approach is

in no way unique to Japan or to Japanese corporations; the similarities among competitive

firms in Japan and the United States are more

striking than the differences. Specific mechanisms, such as quality control circles or labormanagement committees, appear of secondary

importance compared to less tangible signs of

attentiveness by management to the attitudes

and talents of employees.

While many U.S. corporations have developed their own brands of human resources-oriented management, others could profit by more

attention to worker participation; American

managers seem to be gradually realizing that

they may be underutilizing their employees.

Table 73 shows that executives of U.S. firms

rank employee participation as the most important single influence on productivity. Whether

they act on such beliefs is another matter; but,

of the forces that affect competitiveness, management is the most immediately amenable to

change by individual companies. A renewed

commitment by American companies to the development and utilization of human resources

could pay large dividends in international competition.

Table 73.— Rankings by American Managers of

Factors Contributing to Productivity

Factor ‘Average ranka

— . . . .

Employee participation program s 3.61

Better communications . . . . . . . . . . . . . . . ., 4.11

Better labor-management relations ., . . . . . 4,45

Increased training . . . . . ... , ., . . . . . . . . 4.46

Quality improvement . . . . . . . . . . . . . . . . 4.81

Increased automation . . . . . . . . . . . . . . . . . 5.02

Productivity incentive programs ., . . . . . . . 5.13

Cost reduction programs . . . . . . . . . . . . . . 6.01

Increased R&D ., . . ... . . ... . . . . . . . 6.28

a~a~ed on a ~Cal~ of I tO 10, ~lth I being the most ;ffectlve and 10 bel n9 the least

SOURCE ~echan/ca/ Eng/neer/ng, September 1981
336 ● International Competitiveness in Electronics

— ——- ——

Appendix 8A. —Japanese and American

Management Styles: A Comparison

Survey Results

A survey covering managers and other employees

in four electronics companies provides the basis for

this comparison:

●

●

●

company A 1, an American consumer electronics firm operating only in the United

States;

company J, a Japanese consumer electronics

firm with operations both in the United States

(J-A) and in Japan (J-J); and

companies A2-) and A3-J, the Japanese subsidiaries of two American firms, one a manufacturer of computers, the other of semiconductors (not necessarily in that order),

All the firms were high performers in their respective portions of the electronics industry,

The data can be grouped in several ways. For instance, a geographic grouping gives: first, the two

organizations in the United States—one Americanowned (Al), and one Japanese-owned (J-A]; and,

second, the three operations in Japan—one Japanese-owned (J-J] and two American-owned (Az-J,

A3-J). Alternatively, grouping the sample by ownership yields a set of three American-owned firms

(Al, A2-J, A3-J) which can be compared with the

Japanese-owned organizations [J-A and J-J). For

most purposes, the ownership distinction is more

illuminating, probably because top managers who

set the tone of an organization generally came from

the parent firm. In contrast, most of the middlelevel managers had been recruited locally; thus in

organization J-A they were largely Americans.

The survey covered both middle and upper managers, utilizing interviews as well as written

responses. Nonmanagerial employees were also

sampled via questionnaires to gather data on job

satisfaction. The data must be interpreted with caution because of the small number of organizations.

At the same time, the survey results for electronics

come from a much larger body of data covering 10

industries; differences across industries were few,

‘This appendix is based on “Personnel in the Electronics Industry: United States and Japan, ” prepared for OTA by M. A.

Maguire under contract No. 033-1360. The report includes an

independent analysis of data collected for a project directed by

R. T. Pascale, Pascale’s own treatment, including discussion of

companies in other industries, can be found in R. T. Pascale

and A. G. Athos, The Art of Japanese Management [New York:

Simon & Shuster, 1981),

A primary objective was to gather information on

communications and decisionmaking styles. Survey questions were designed to indicate whether

American firms differed from Japanese in the extent to which decisionmaking and communications

could be described as hierarchical and formal (the

hypothetical U.S. model) rather than informal and

cooperative (the hypothesis for Japan).

The results show that all the American-owned

firms—Al, A2-J, and A3-J—relied more heavily on

written communications, both here and abroad.

More surprisingly, firm J-A—the U.S. subsidiary of

a Japanese company—was in many respects more

“Japanese” in decisionmaking and communications than the parent organization (J-J); the data

show a greater proportion of upward communication and a lower proportion downward in the

United States than in the same firm’s home offices.

Overall, however, the survey results–table 8A-1–

showed much less variation in patterns of communication among these firms than the pure Japanese

and American models would predict. Additional

survey questions indicated that the subsidiary A2-J

is more “dependent” on its American parent, as

measured by written communications with headquarters, than the subsidiary J-A was on its Japanese parent.

The survey results also shed light on hierarchy

and formalization in the organizational structure

of each company in terms of the size/level ratio: the

total number of employees in the organization divided by the number of hierarchical levels. The

lower the size/level ratio, the more formal and hierarchical is the firm’s structure, Again, the results

may seem somewhat surprising: the Japanese company was the most hierarchical, with its domestic

and U.S. operations scoring the same—133 (J-J) and

134 (J-A). One of the American electronics firms

measured 150 in its Japanese organization (A3-J),

little different from the Japanese-owned company,

The other two American-owned organizations had

ratios of 284 (A2-J) and 533 (Al). In other words,

none of the American firms are particularly formalistic or hierarchical on this measure (which can

be rather sensitive to differences in the overall size

of the companies compared). Another indicator, the

extent to which they make use of written job descriptions, found the American-owned companies

ranked higher in formalization.
Ch. 8—Human Resources: Education, Training, Management ● 337 — —-—

Table 8A-1 .—Responses of MiddIe and Upper Managers to Questions Dealing With

Communications and Decisionmaking Styles

Companywide averages

Al J-A J-J A2-J A3-J

Questions dealing with manager’s own behavior:

Number of telephone calls and face-to-face contacts per day . . . . . . . . . . . . . . . . . 81 69 72 24 55

Number of written communications per day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4 3 8 7

Hours in meetings per day ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 3 2.3 3

Percentage of calIs to those higher in the organization . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 0

/0 25°/0 23°/0 14°/0 36°/0

Percentage of calls to those lower in the organization . . . . . . . . . . . . . . . 40% 31% 31 0

/0 56% 37°/0

Percentage of meetings with those higher in the organization . . . . . . . . . . . . . . . . . . . . 13% 16°/0 4 % 80/0 10O/o

Percentage of meetings with those lower in the organization . . . . . . . . . . . . . . . . . . . . . . . . . 640/o 56°/0 84°/0 88°/0 80°/0

Questions dealing with manager’s evaluations of their supervisors’ decisionmaking styles:

Percentage of decisions supervisor makes alone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36°/0 21 0/0 29°/0 23°/0 25°/0

Percentage of decisions supervisor makes after factual input from subordinates ., . . . . . . 20°/0 30% 20°0 40°/0 25°/0

Percentage of decisions supervisor makes with participation by subordinates . . . . . . . . . 43°/0 49°/0 51 0

/0 37% 50°/0

SOURCE M A Magu\re Personnel In the–Electronics Industry United States and Japan, ”

.

prepared for OTA under contract No 0331360 p 8

Responses to questions about characteristics

essential to managerial success revealed a greater

emphasis in the Japanese-owned firms on communication within the organization both vertically and

horizontally; this was true both in domestic (J-J) and

American (J-A) operations. Managers in the American company A1 would tend to “make as many decisions as possible at his/her level without bothering senior management, ” and “respect the chain

of command, discuss ideas with immediate superior before discussing them with members of other

departments. ” In contrast, managers in the American subsidiary of the Japanese company J-A

thought it important to “communicate extensively

with managers in other departments;” managers in

the parent firm (J-J) also stressed communication.

Within one of the American-owned subsidiaries in

Japan, A2-J, the responses indicated a feeling that

each manager should make as many decisions as

possible at his/her own level. Here the survey

results do confirm a difference in management attitudes between Japanese- and American-owned

companies, with the American-owned electronics

firms exhibiting a greater degree of independent

decisionmaking even within their overseas subsidiaries.

Questions calling for a composite picture of the

manager immediately above the respondent elicited

several distinctions among the five organizations.

On eight dimensions, those questioned were asked

to describe the actual characteristics of their

superiors (not the attributes they would like to see).

The managers in the U.S. subsidiary J-A were described as: “readily accessible to subordinates

several echelons below, “ “permits broad latitude

for subordinates to work out solutions to problems

in their own way, ” and “sensitive to others who

work for him, ” In the parent firm in Japan (J-J), the

typical manager “tries to achieve consensus” and

“permits broad latitude for subordinates, ” but is

also described as aggressive.

While a reasonably uniform picture emerges for

the subsidiary J-A and its parent J-J, there was much

greater diversity among the characteristics of

managers within the American-owned firms. This

was especially notable in company Al. Likewise in

company A2-J, respondents agreed on only one

thing: that their superiors were aggressive. Coupled

with the similar characterization in the Japanese

organization J-J, this suggests that, while aggressiveness has not always been viewed as central to Japanese management, it may in fact be

common in high-performing firms in both countries. The survey results do paint a more heterogeneous picture of the managers in Americanowned organizations. American companies operating in Japan exhibit some of the traits associated

with Japanese management, but it is the Japanese

company which, as expected, has managers who

most strongly emphasize consensual decisionmaking and human relations. On this dimension, the

composite managerial portraits indicate a clear difference in American and Japanese styles.

The human relations school stresses sensitivity

to subordinates. Table 8A-2 compares responses of

nonmanagerial employees to questions related to

job satisfaction, together with data on rates of absenteeism and expenditures on employee programs. The Japanese-owned firms might be expected to exhibit a greater degree of manageremployee interaction—presumably leading to

greater satisfaction among the labor force. The

results in table 8A-2 show that very few workers
338 International Competitiveness in Electronics

— —.. —

Table 8A-2.—Data Related to Employee Satisfaction

Location of organization

United States Japan

Al J-A J-J A2-J A3-J

Percentage of workers rating themselves “very satisfied” with their jobs . . . . . . . . . . . . . . . . 20°/0 28°/0 2°/0 O 0

Percentage of workers rating themselves “satisfied” or “very satisfied” with their jobs . . . . 74°/0 88°/0 58°/0 63°/0 95°/0

Daily absenteeism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3°/01% <10/0 <1 ”/0 1%

Social/recreational expenditures per worker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.40 $15 $33 $50 $38

SOURCE M A Maguire, “Personnel in the Electronics Industry United S~ates and Japan, ” prepared for OTA under contract No 033.1360, pp. 19, 20

in Japan are willing to describe themselves as

highly satisfied with their jobs, but the picture

changes considerably—with firms in Japan comparing more favorably—if “satisfied” responses are

included. z Japanese firms, known for their company-as-family approach, might also be expected to

spend more on social and recreational opportunities for employees, As table 8A-2 indicates, this is

indeed true for organizations within Japan, regardless of ownership. In any case, the results in table

8A-2 on job satisfaction should be interpreted with

caution, as such questions typically yield high proportions of positive responses. Moreover, clear-cut

relationships between expressions of job satisfaction and measured productivity levels are rarely

found, ’

The differences observed between subsidiaries

here and parent firms in Japan may result from conscious decisions to downplay Japanese management practices. The style that emerges is likely to

be a hybrid of American and Japanese practices,

In any event, this conclusion follows from the

survey data as a whole: there is no sharp contrast

between the management approaches of Americanand Japanese-owned companies. Many of the patterns observed are more closely associated with the

geographical location of the organization than with

ownership. Upper managers from the parent firm

tend to adopt many practices of the host country.

On some dimensions—e.g., accessibility of managers to lower level employees—the Japanese-owned

firms do stand out. But in other cases, there are no

clear distinctions; only on measures of sensitivity

to employee attitudes and participation are these

consistent.

‘Japanese workers also express relatively low rates of satisfaction with activities such as quality circles. See S. Takezawa, et

al., Improvements in the Quality of Working Life in Three

Japanese Industries, (Geneva: International Labour Office, 1982],

pp. 77, 98.

3S. E. Weed, T. R. Mitchell, and W. Moffitt, “Leadership Style,

Subordinates’ Personality and Task Type as Predictors of Performance and Satisfaction in Supervision, ” ]ourna~ of App~ied

Psychology, vol. 61, 1976.

Matsushita’s Purchase of Quasar

What happens when a Japanese corporation takes

over an American firm? Changes in management

practices might offer insight into the Japanese approach. The purchase in 1974 by Matsushita Electric of Motorola’s Quasar division—which produced televisions–provides a case in point. (Unfortunately, conspicuous examples of a U.S. firm

taking over a Japanese enterprise are lacking.)

After Matsushita took control of Quasar, the new

owners reorganized the factory operations, located

near Chicago, invested in new equipment, and

began redesigning the product line. At the center

of these efforts was the goal of improved product

quality. In contrast to the old production system,

which relied on as many as seven quality control

inspectors per assembly line, Matsushita adopted

a more integrated approach with responsibility for

quality spread broadly. By 1980, the defect rate on

Quasar’s assembly lines was about 2 defects per 100

sets, compared to I/Z defect per 100 sets for Matsushita’s factories in Japan. 4 These quality improvements were the result of system wide changes.

While resulting from a series of decisions made by

Matsushita’s management, they comprised far

more than just matters of style or technique. For

example, the company’s extensive modernization

of the capital plant entailed expenditures of about

$50 million for automated equipment, as well as an

entirely new chassis factory in Mexico. s Motorola

officials stress that they knew just as well what had

to be done to make the Quasar facility more efficient, but had decided to allocate available resources to other parts of the company’s business,

If Quasar’s gains in product quality and plant efficiency came at considerable cost in new equip-

‘J. Mihalasky and A. B. Mundel, “Quality and Reliability of

Semiconductors and CTVs: United States v. Japan, ” Report No.

C972 prepared for OTA by Consultant Services Institute, Inc.,

under contract No. 033-1170.0, p. 77.

‘T. C. Hayes, “The Japanese Way at Quasar,” New York Times,

oct. 16, 1981, p. D1.
Ch. 8—Human Resources: Education, Training,

ment investments, the emphasis on worker participation and responsibility for quality is also

significant. Quality control circles were not introduced until recently, but Quasar employees have

been encouraged to set their own production targets and to meet in informal weekly discussions

about plant operations with foremen. Such practices are hardly unique or exotic, but the attentiveness to all aspects of the manufacturing process

stands out. Still, none of this has helped Quasar expand its market share substantially.

Quasar, like other Japanese subsidiaries in the

United States, shows a flexible and adaptive management style, with manufacturing operations and

quality control having a central place. Nonetheless,

if and when Japanese companies hire still larger

proportions of American managers, and adapt further to the U.S. environment, they may become

more like wholly American organizations. O

—

6A recent study by the Japan E xte r n a I Trade Organ izat ion

(J F;’ I’R()) on Jill)ilIlf!Sf!-(j\\’nf!(] manufacturing operations in the

[ lnltfl(j st~ltf:s ln(jl(:[it[+s th{~t the numher of Jal)ane\c nation~ls

tra nsf’f:rrf; (] to Sre

“Japanese hlanufa{.t~lrin~ operation~ in the I T S., ” Japan E\terManagement ● 339

Conclusion

130th the survey results and the Matsushita example indicate that well-run organizations tend to be

open to new ideas and methods, including those

coming from the lower levels of the organization.

Distinctions between Japanese- and Americanowned firms are fewer and less clear-cut than

sometimes claimed. While American employees

might resist some of the techniques associated with

Japanese management, worker participation-even

loyalty to the firm—can be fostered in a variety of

ways, Some of these methods smack of paternalism,

but not all. As a number of American firms have

amply demonstrated, worker participation and attention to human relations can be a big help in

building competitive organizations.

nal Trade Organization, Septe mher 1981. l)a ta {)11 m,) n agt~ r ial

st~lcs col]ectwd for the JETRO stud}. confirm tll[: t r(>n[i~ dw.rihed

hero: Jiip;i IIcs(: subsidiaries evolkre st}les that rnl~ fcdtu res comm 011 to the Japanese model with other pra r t i{ c \ m ( I r(’ ( h d rat -

tf!ristlcall}” American.
CHAPTER 9

Employment Effects
Contents

Page

Overview .o*O**Oo e.oo*o* 000* *.. .*** .oo. *900 e*oo**. *Oo ************Q**. * 343

Impacts of Technical Change in Electronics on Employment ● * * . . . . . . . . . . . . . 344

The Automation Debate of the 1950’s and Since . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344

Factors Affecting Employment Levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347

Employment Trends in the U.S. Electronics Industry . . . . . . . . . . . . . . . . . . . . . . . 349

Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356

Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357

Effects of Import Penetration and Offshore Assembly . . . . . . . . . . . . . . . . . . . . . . 359

Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362

Foreign Investment in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363

Projections of Employment Within the Electronics Industry . . . . . . . . . . . . . . . . . 364

Future Employment Patterns in Other Industries. . . . . . . . . . . . . . . . . . . . . . . . . . . 366

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367

Services . . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370

Summary and Conclusions ....*OO ..0...0. ● 0.0.... ...0.00. . . . . . . . . ● .00.. . 372

List of Tables

Table No. Page

74. Employment in Selected Portions of the U.S. Electronics Industry . . . . . . . . . . . 350

75. Predicted Growth Rates by

76. Occupational Distributions

List of Figures

Figure No.

Occupational Category Over the 1980’s . . . . . . . . . . 365

in Electronics as of 1980 . . . . . . . . . . . . . . . . . . . . . . . 366

Page

55. Unemployment in Industrial Nations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

56. Labor Productivity and Employment by Sector of the U.S. Electronics Industry

(a) Consumer Electronics. . . . . . . . . . . . . . . . . . . . . . . . . + . . . . . . . . . . . . . . . . . . . . . 351

(b) Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352

(c)Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353

57. U.S. Employment in Television Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . 354

58. U.S. Employment in Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355

59. U.S. Employment in Semiconductors and Related Devices.. . . . . . . . . . . . . . . . . 356

60. Effort Levels Associated With Product and Process

Design for Integrated Circuits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357

61. U.S. Employment in Vacuum Tube Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . 358

62. U.S. Employment in Computer Manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
CHAPTER 9

Employment Effects

Overview

Shifts in the competitiveness of an industry

like electronics—or for that matter technical

change alone—have both direct and indirect

consequences for employment. In addition to

changes in the labor force requirements both

of firms within the industry and firms that supply it, the effects can spread broadly across the

economy. Job opportunities within the United

States appear or disappear with changes in demand for electronics products, with shifts in

international competitive position, and with increases in productivity. These forces interact

in complex fashion.

Will continuing developments in electronics

—computers, office and factory automation, information services—cause employment to increase or decrease? Such questions have been

debated for years, in the context of this and

other industries, The conventional response is

that technical change creates, in the aggregate,

more jobs than it destroys. While the kinds of

jobs available will change—as terminals appear

on more desks, opportunities for systems analysts (who plan and help operate data processing installations) replace those for keypunch

operators, for one instance—new technology

creates new demand fast enough that total employment goes up. The conventional response

assumes that such patterns will continue, But,

just because in the past technical change created more jobs than it destroyed does not mean

that this will be true in the future. Such questions are broader than can be addressed here,

Too many forces affect levels of employment,

not to mention skill requirements. Analysis on

a detailed, disaggregated basis sufficient to isolate the influences of electronics (and upon it)

would be extraordinarily difficult. This chapter

has more limited aims: to summarize what is

presently known about employment in electronics, both past trends and future prospects.

within the industry, changes in competitiveness have immediate consequences for employment, If the U.S. electronics industry declines

in competitiveness, and sales fall in domestic

and/or foreign markets, employment will follow, If rates of increase of sales drop, employment may also decline—depending on increases

in labor productivity. Similarly, if U.S. electronics firms expand their overseas production

activities—for re-import or for sales in foreign

markets—changes in domestic employment

normally follow, As competitive advantages

shift internationally, labor market dislocations

can occur even if the total number of jobs remains the same. Such dislocations can include

geographical shifts in demand for workers,

along with changes in educational and skill requirements; as computers and other electronic

systems have become more sophisticated,

white- and grey-collar jobs have expanded

much more rapidly than openings for unskilled

or semiskilled workers.

Shifts in the international competitiveness of

American electronics firms also affect other

parts of the economy. Moreover, structural unemployment can be created by changes in electronics technology that alter the ways goods

are designed and manufactured. Electronic

typesetting has reduced the need for skilled

workers in newspaper publishing. Technological change may create new jobs for supervisory

and maintenance workers, but it is hard to imagine that as many people will be employed in

designing, manufacturing, and maintaining industrial robots as are displaced by them. Still,

net effects—particularly over extended periods

of time—-can seldom be disentangled from the

other factors on which employment depends.

If aggregate economic growth is slow, and productivity rises—e.g., because of investments in

labor-saving equipment like robots, or com343
344 ● International Competitiveness in Electronics — —

puter-integrated manufacturing more generally

—jobs will be lost unless other sectors of the

economy, such as services, compensate.

The preceding chapter explored the education and training of American workers, as well

as management practices which determine

how effectively the talents of the labor force

are utilized and the possibility of shortages of

those with specialized skills. Chapter 8 included extensive comparisons between the

United States and Japan. Here, the focus is primarily on the United States, beginning with a

review of the automation debates of earlier

years. Next, data on employment trends in electronics are examined in the context of import

penetration, as well as offshore manufacturing

by American firms. The chapter surveys employment forecasts for electronics, along with

case studies of impacts on other manufacturing and service industries, While there is no

way of knowing how aggregate employment

will fare, technological change—together with

shifts in the competitive positions of American

electronics firms—will clearly have major impacts on some industries and some j o b

categories.

Impacts of Technical Change

Electronics on Employment

The Automation Debate of the

1950’s and Since

People have worried over technological

change because of its impacts on employment

—and sometimes actively resisted new technologies—at least since the beginnings of the industrial revolution. The automation scare of

the 1950’s focused on computers taking over

the workplace—a fear that has resurfaced,

more so in Europe than the United States.

Twenty-five years ago, some commentators

predicted steadily rising unemployment due to

automation; others were skeptical that computers alone would have such grave consequences.

Throughout the 1960’s, a number of international groups, including the Organization for

Economic Cooperation and Development

(OECD) and the International Labour Office,

continued to study the effects of computers and

automation on employment. As it happened,

the industrial nations experienced an upswing

in economic growth during the 1960’s that put

the automation debate temporarily to rest. Falling levels of unemployment were sufficient indication to many that overall demand was the

key to jobs, with structural aspects decidedly

secondary; so long as aggregate demand grew,

new jobs would be created to offset the losses

resulting from labor-saving technologies,

The 1970’s brought

in

renewed concern; economic growth slowed and unemployment rose,

The trend was sometimes masked by the ups

and downs of the business cycle, but by the end

of the decade, as figure 55 shows, it was clear

that unemployment had been steadily rising in

most of the industrialized West. Now the question has become: Will this trend persist?

Rather than mainframe computers as in the

1950’s, people now point to microprocessors

and microcomputers as the new technologies

with the greatest potential job-displacing

effects.1 As was the case 25 years ago, optimists

and pessimists view the consequences of such

developments quite differently. To the optimists, labor-saving technology is nothing new.

Many more jobs will be created than lost, they

say. Moreover, in the short term the impacts

of microelectronics will not be that dramatic

because most investments in automated equipment come during periods of economic

growth, when capital is available. As a result,

workers may be redeployed but only rarely will

lose their jobs. The optimists view structural

‘See, for example, C. Norman, Microelectronics a t Work; Productivity and Jobs in the World Economy, Worldwatch Paper

39 (Washington, D. C.: Worldwatch Institute, October 1980); Advances in Automation Prompt Concern Over Increased L? S.

Unemployment, GAO/AFMD-82-44 [Washington, D. C.: General

Accounting office, May 25, 1982).
Ch. 9—Employment Effects 345 —

Figure 55.— Unemployment in Industrial Nationsa

13

12

11

10

9

8

7

6

5

d

3

2

i

(-1

t

L-

/

I

1960 1965 1970 1975 1980 1982b

Year

:Ull$>(u! ,, [,,+ f j~:, .Ir]l(t lm,~ t Fit. US c,,l,~~,t Dat,+ fort bl,Ur It i,d K rIq[jI)InI)~ [:l~,,je Nor! hem Ireiarld

1 f,~? j , f , ~, , , ~ r It,,’, t, ~J t ‘ t {~ L I t~rj ‘>t ~t e \ anc I t.] I y ba~t j L ~rl f i r \t 9 I TIC f h \

SOURCE EcoromIc Report of the %esldent (Washington D C U S Government Printing Of f!ce, February 1983), p 287

transformation as a process that creates jobs

in newer sectors of the economy: employment

in manufacturing may shrink but opportunities

will increase in services; as the proportion of

manual workers declines, the number of whitecollar employees grows. Automation, furthermore, will free people from some of the wors t

jobs: dirty, boring, dangerous factory work;

sorting and filing; processing checks; perhaps

even delivering the mail. To the pessimists, o f

course, some of these jobs are not so bad – and

many of the least attractive will remain (custodial work, fast foods, selling insurance). Still,

from the optimist’s viewpoint, the expansio n

of high-technology industries means more opportunities for an educated labor force. Competition from low-wage, newly industrializing

countries (NICs) need not cause great concern;

so long as the world economy continues to

grow, industrialized nations can concentrat e

on advanced products made by better paid and

better training workers, leaving the lowe r

technology sectors to the NICs. Everybody

should benefit.

.,
346 ● International Competitiveness in Electronics — —.

Others are less sanguine, their skepticism

rooted in the belief that the world economy is

now fundamentally different than in the 1950’s

and 1960’s. “Structuralists” argue that permanent shifts spelling chronic unemployment and

underemployment have taken place, Fundamental to this view is the slow economic

growth of the 1970’s; to the pessimists, sudden

rises in energy prices and other shocks to the

international economy are not enough to explain the slowing pace of growth, They argue

that, at least in manufacturing, the expansion

in output needed to maintain current employment levels has been increasing—i.e., that output must grow more rapidly than in the past

in order to maintain a constant number of jobs.

If true, and if this trend persists, it will become

more and more difficult to expand employment

by stimulating demand.’ Since labor productivity in the manufacturing sectors of industrial

nations has risen consistently faster than gross

national product (GNP), the pessimists emphasize that compensating expansion in employment must come from sectors other than manufacturing. Many also argue that structural unemployment in advanced industrial nations

results from a permanent shift of labor-intensive production to lesser developed countries

and NICs, where wages are low. In the longer

term, this might be a positive force; if international specialization takes place, the more advanced nations should be able to concentrate

on capital- and knowledge-intensive industries,

and expand their employment in these sectors,

But in the short run it leads to severe dislocations, already evident, for example, in consumer electronics or steel.

The same causes and effects—technological

change, productivity growth, shifts in international comparative advantage, technology gaps

—are thus viewed differently by the optimists

and the pessimists. The latter see them as signals of persisting unemployment. Unlike the

optimists, they emphasize obstacles to adjustment such as mismatches between the skills

‘R. Rothwell and W. Zegveld, Industrial Innovation and Public

Policy: Preparing for the 1980’s and the 1990’s (Westport, Corm,:

Greenwood Press, 1981), p. 207, In Europe, the term “jobless

growth” has come to describe this phenomenon.

and capabilities of workers and the requirements of industry (ch. 8), They argue that employment statistics for the United States already underplay the extent of real unemployment, not to mention underemployment. a

The debate between the optimists and pessimists ranges far beyond the electronics industry. But electronics technology has been a natural locus of concern because it so clearly embodies labor-saving advances by which machines perform tasks that people did in the

past. No wonder labor unions—in the United

States but particularly in Western Europe—

have continued to raise questions about

automation and electronics, and sometimes actively resisted new production methods,

The question: “How will electronics technology affect employment?” is unanswerable, Posing the question more narrowly helps a little:

Will continued developments in electronics

drastically reduce the number of workers

needed in the manufacturing sectors of advanced economies? Will the effects be beneficial through elimination of burdensome tasks

while creating new and more interesting jobs?

These phrasings still cannot be treated with

any precision, but at least are more suggestive.

The problem is that no methods exist for determining employment shifts caused exclusively

by technical change. Too many other forces are

at work, A second analytical problem relates

to the type of employment impact. Advances

in electronics may eliminate a job in one

plant—but a similar job may open in a nearby

firm or in a distant city, Alternatively, a displaced worker might be able to find employment only after retraining, or even reeducation.

‘One study has claimed that 80 percent of American workers

are “misemploy ed’’-i.e., are doing jobs for which they are illsuited. See W, W. Harman, “Chronic Unemployment: An Emerging Problem of Postindustrial Society, ” The Futurist, August

1978, p. 213,

Leontief paints a grim picture of the effects of technological

change, mismatch, and misemployment:

To argue that workers displaced by machines should necessarily

be able to find employment in building these machines does not

make more sense than to expect that horses displaced by mechanical

vehicles could have been directly or indirectly employed in various

branches of the expanding automotive industry.

See W. Leontief, “Employment Policies in the Age of Automation,” Science and Public Policy, December 1978, p. 452.
Ch. 9—Employment Effects ● 347

From the perspective of the individual, geographical moves or retraining can aggravate

what is already a severe blow on psychological

as well as more tangible grounds.

Factors Affecting Employment Levels

Directly or indirectly, the ability of American

firms to compete internationally links many of

the forces that affect employment, Increasing

sales here and abroad provide the foundation

for a growing labor market, with aggregate expansion creating new job opportunities unless

labor productivity goes up even faster. Conventional methods of forecasting labor market demand begin with output projections, In a given

sector, output and employment will depend in

complex fashion on aggregate demand; in a period of economic downturn, job opportunities

can still increase in some industries. While this

has often been true in electronics, recessionary

pressures during 1981 and 1982, as in 1974 and

1975, show that the semiconductor industry is

far from immune from sales slumps and layoffs.

For years, the interrelation between employment and inflation was pictured in terms of the

well-known Phillips curve, which showed that

high rates of inflation tended to correspond to

low rates of unemployment, and vice versa. But

by the end of the 1970’s, the American economy seemed prone to simultaneous inflation

and unemployment—another gloomy portent

to those on the pessimistic side of the structural unemployment question. One reason is

wage and price rigidity. When demand falls,

companies are reluctant to cut prices as a

means of expanding output, workers reluctant

to accept pay cuts to reduce costs. Rather than

greater output and employment at lower wage

and price levels, prices stay high—aggravating

inflation-sales drop, output must be cut, and

workers are laid off. Nonetheless, recent wage

concessions in the steel and automobile industries show that adjustment is possible if the

slump is serious enough.

Photo credlt RCA

Final adjustments during color TV assembly

Employment is closely linked to labor

productivity—commonly measured in terms of

output per man-hour. If firms can produce

more with the same amount of labor, the

economy as a whole expands and so does individual purchasing power. Growth in purchasing power can create new demand which

will in turn create new jobs; thus increases in

productivity do not of themselves result in employment losses. But if the overall economy is

stagnant or growing only slowly, productivity

growth in a given industry can well lead, not

only to decreasing job opportunities in that industry, but to net job losses within the economy.

As this implies, sectoral shifts must be considered. A worker displaced by rising produc-
348 International Competitiveness in Electronics

———— —.— . . . . . —— — ——

tivity and foreign competition in consumer

electronics finds little solace in growth elsewhere in the economy. Similar patterns appear

at higher levels of aggregation. As pointed out

in chapter 5 (see fig. 32), employment in both

manufacturing and agriculture has shrunk relative to services in the OECD nations. The service sector makes an ever-growing contribution

to U.S. GNP, and the rate of job expansion

there has been high. What of productivity in

services? Since productivity has grown less

rapidly in services than in manufacturing [although productivity in many service sector categories is notoriously difficult to measure),

overall employment levels have been maintained in part by transfers of labor from manufacturing to lower productivity service sector

jobs. Of course, factory workers cannot always

quickly move to service jobs, nor may they

want to—particularly if the jobs available are

low-paying or menial. The point is that sectoral

shifts always imply some degree of dislocation.

The impacts of technological change take

several forms. Automation, interpreted broadly

as extending to jobs outside the traditional

manufacturing sector, cuts into the need for

labor. Computers eliminate jobs for file clerks;

banking machines displace tellers; instead of

three people in the cockpit, new commercial

aircraft need two. Great Britain’s telephone

system provides a quantitative example: when

electromechanical equipment was phased out

in favor of electronic switching during the

1970’s, employment dropped from over 90,000

to 65,000.4

The effects of new technology depend in

large measure on the motives for its introduction. Investments aimed at rationalizing the

production process by cutting costs, improving efficiency, or adjusting to new conditions

tend to cause net declines in job opportunities.

The British telephone system is a case in point.

On the other hand, technical change may expand output or create new markets, resulting

in many more jobs. Henry Ford’s moving assembly line is a classic historical example;

4~. Roth well and W. Zegveld, Technical Change and En~plo.}~-

ment (New York: St, Martin’s Press, 1979), p. 152.

labor productivity increased and costs were cut

to the point that vastly greater numbers of people could afford to buy cars. Likewise, the introduction of color television cut into sales of

black-and-white sets but expanded overall demand for TVs. Many examples could be drawn

from the computer industry.

The export competitiveness of domestic

firms, as well as market penetration by imports,

directly affect employment. Greater sales in export markets mean more jobs at home. On the

other hand, an influx of foreign goods may put

Americans out of work. In recent years, considerable attention has focused on jobs lost to

foreign low-wage industries making products

such as TVs or textiles and apparel. Nevertheless, competition with advanced nations can

be equally important—evident in products

ranging from automobiles and machine tools

to integrated circuits and aircraft, As industries

like electronics become more thoroughly international in character, it is seldom easy to disentangle the costs and benefits flowing from

shifts in competitive strength. Overseas production by American firms can be viewed as

a loss in domestic job opportunities; it can also

be seen, in at least some cases, as an entree into

new and expanding foreign markets (see app.

B on offshore manufacturing for an outline of

the complexities of such judgments).

Finally, employment levels always depend to

some extent on the fit between the demand for

manpower and the skills and capabilities of the

work force. Structural shifts affect not only the

employment levels in various economic sectors, but the kinds of people needed. In the

United States, the unemployed Youngstown

steelworker may neither be qualified nor desire

to move into a Silicon Valley electronics company, especially since the pay is unlikely to be

very high. In advanced economies, growth in

services has led to a variety of changes in labor

markets. In Sweden, for example, as the economy has grown and the service sector expanded, labor force participation among older

men has declined. One explanation is that this

group has become redundant—older men do

not bother to look for work because they be-
Ch. 9—Employment Effects ● 349

lieve that none is available. ’ At the same time,

women have joined the labor forces of the industrialized nations in greater numbers, taking many of the service sector jobs.

The match between supply and demand in

the labor market—never perfect—is thus an intrinsic part of the employment question, To

some extent, problems of skills and training are

those of response time; people’s choices may

lag new opportunities, as may programs of

study in educational institutions (ch. 8). Shortages of entry-level electrical engineers in the

United States have reflected, not only rapid

growth in demand for the products of the electronics industry, but slow response within the

educational system to new labor market demand. This is one way in which employment

is affected by public policies, at least to the extent that schools and universities depend on

governments (including State and local) for resources. Government programs can also help

men and women who find themselves unemployed or underemployed develop new skills

and find new jobs. Adjustment is but one of

several avenues; during the 1930’s, the Federal

Government instituted many programs to expand employment. These massive public works

efforts drew support from Keynesian theory,

which held that demand stimulation could help

ensure full employment.

Despite the experiences of the Depression,

and the many job programs since, the United

States does not have a comprehensive manpower policy at the national level. Although

some States have set up worker training pro5H. Berglind, “Unemployment and Redundancy in a ‘PostIndustrial’ Labor Market, ” Work and TechnologJr, M. R. Haug

an(l J. I)ofny (eds. ), Sage Studies in International Sociology 10

tllcvcrly HIIIs: Sage Publications, 1977), p. 201,

grams to help attract industry, retraining has

never been approached systematically, in striking contrast to nations such as West Germany;

in addition to the vocational programs mentioned in the preceding chapter, the German

Labor Market Office matches unemployed

workers with openings through a nationwide

computer survey.6 There are no parallels in the

United States.

This brief review illustrates the difficulty of

assessing the consequences of changes in technology 01 competitive position even in a single

industry like electronics. First, many of the factors are interrelated. How can shifts in competitiveness be isolated from the effects of aggregate economic growth, which determines demand for the industry’s products? How directly

must gains or losses of jobs elsewhere in the

economy be linked to changes within the electronics industry (e. g., new technologies] to

justify an attribution to electronics? Should virtual employment and unemployment—jobs that

would or would not exist in the absence o f

changes in electronics technology—be included? Finally, which impacts are most significant? Those on individuals? On companies?

On entire industries? Or are all three of comparable importance? What of regional dislocations? There can be no easy answers to the

general question of whether continuing developments in electronics will have positive or

negative consequences for employment in the

United States,

The following sections look in more detail

first at changes within the electronics industry,

then at effects on other sectors.

~L, Dobyns, “America 1$’orks It’hen Amerl[:a Jt’[)rhs, ” ,\”}I[,’

White Paper, June 25, 1981,

Employment Trends in the U.S. Electronics Industry

Changes in employment within any one industry take place in a larger context. Employment in U.S. manufacturing as a whole has

been essentially static since the late 1960’s.

Over the period 1972-82. manufacturing jobs

declined from 26.0 to 21,8 percent of the

nonagricultural work force.7 Of course, these

broad trends tell little about employment on a

‘F,’conomlc Report ~Jl the Pr(;,si~ient (i$’ashington, D.(; ,: [J, S

Ck)kernment l]rintin~ C) fficc, Fel)ruarv 19(33), I) 205.
350 International Competitiveness in Electronics

sectoral basis; the number of jobs in the U.S.

consumer electronics industry has declined,

while in computers and semiconductors expanding output has brought rising employment.

Analysis of such trends depends on how the

industry is defined and subdivided. For instance, data published by the Electronic Industries Association (EIA) show 1.6 million workers in the entire industry in 1982.8 EIA, however, bases its tabulation on very broad SIC

(Standard Industrial Classification) categories.

Among these is SIC 367, “electronic components and accessories, ” which has nine subdivisions. Only one–3674, “semiconductors

and related devices’’—is among the portions of

the electronics industry that OTA has focused

on, others—e.g., “electronic coils, resistors, and

capacitators” —being less illuminating in terms

of international competition. Therefore, discussion of employment in the rest of this chapter

is limited to the following four SIC categories?

● 3651—Radio and Television Receiving

Sets, Except Communication Types, (Despite the title, this SIC group includes more

than just radios and TVs, extending to

nearly all home entertainment or consumer electronic products; consumer audio

sElectronic Market Data Book 1983 (Washington, D. C.: Electronic Industries Association, 1983), p. 144. This is the total of

Labor Department employment figures for four Standard Industrial Classification categories: SIC 3651 (radio and TV receivers),

366 (communications equipment), 367 (components), and 3573

(computers). Communications, with more than 550,000 employees in 1982, makes up one-third of the total.

8Defined in Standard lncfustria] Classification Manual 1972

(Washington, D. C.: Office of Management and Budget, 1972),

pp. 190 (SIC 3651), 193 (SIC 3674), 192 (SIC 3671), and 180 (SIC

3573).

equipment, public address systems, and

amplifiers for musical instruments all fall

within SIC 3651.)

3674—Semiconductors and Related Devices. (This category includes virtually all

types of microelectronic components,

ranging to solar cells and bubble memories, those manufactured by captive plants

as well as merchant firms,)

3671—Radio and Television Receiving

Type Electron Tubes, Except Cathode Ray.

(Virtually all vacuum tubes are included

except for TV picture tubes and other cathode ray tubes, and special purpose devices

such as klystrons or X-ray tubes.)

3573—Electronic Computing Equipment.

(Processors and peripherals of all types fall

into SIC 3573.)

In referring below to these SIC categories,

more inclusive names—e.g., consumer electronics for SIC 3651—have been adopted. Both

semiconductors (3674) and the vacuum tubes

they have largely replaced (3671) are examined,

so that growth in the first category can be compared to contraction in the second.

During the 1970’s, employment grew in two

of these four SIC categories, as table 74—based

on data gathered by the Bureau of Labor Statistics (BLS)—shows. In microelectronics, employment has doubled, and in computers it has

gone up even faster, while the consumer electronics category has shrunk, (Most of the contraction in vacuum tube production predates

1972.) In 1982, the nearly 800,000 workers

covered by the SIC codes in table 74 totaled

slightly more than 4 percent of the 19 million

men and women in the U.S. manufacturing

Table 74.—Employment in Selected Portions of the U.S. Electronics Industry

Number of employees and percentage of

production workers (in parentheses)

SIC category 1972 1980 1982a

3651, consumer electronics. . . . . . . . . . . . . . . 114,500 (740/.) 85,900 (70°/0) 74,400 (670/o)

3674, microelectronics . . . . . . . . . . . . . . . . . . . 115,200 (51%) 226,900 (44°/0) 230,000 (40°/0)

3671, vacuum tubes . . . . . . . . . . . . . . . . . . . . . 46,400 (70°/0) 42,600 (620/o) 43,400 (61 ‘/0)

3573, computers and peripherals . . . . . . . . . . 182,300 (360/.) 350,200 (40°/0) 418,300 (380/. )

458,400 705,600 766,100

aFlrst 10 months.

SOURCE Bureau of Labor Statistics
Ch. 9—Employment Effects 351

.—

work force, making even this portion of the

electronics industry larger than, say, steelmaking—which employs half a million. *

Figure 56 compares trends in labor productivity and employment (for production workers

only) over the past decade for each of the categories except vacuum tubes, In all three charts,

productivity is given as value-added per

production-worker hour in real, inflation-adjusted terms. Productivity growth in consumer

electronics, figure 56(a)—where employment

declined—has paralleled the all-manufacturing

average, growing slightly faster in earlier years.

In contrast, computer manufacture–fig. 56(c)

—shows the most rapid rise in employment; the

——

*13LS figures for the first 10 months of 1982 show 18.9 million

workers in manufacturing—l 1.2 million in durable goods, 7.7

in nondurables.

20

15

10

5

0

number of jobs doubled, with productivity rising almost as fast until the mid-1970’s. Past this

point productivity growth has slowed—but, as

pointed out in chapter 5, productivity trends

in terms of value can be misleading when technical change is as rapid as it has been in the

data processing industry. Even so, value-added

productivity in computer manufacturing has

risen much more rapidly than for U.S. manufacturing as a whole. Many jobs have also been

created in semiconductors, fig. 56(b), where

productivity gains were again substantially

above the all-manufacturing average. The cyclical nature of employment in the semiconductor industry distinguishes it from both consumer electronics and computers; the sensitivity of semiconductor production to recession

is magnified by the tendency of purchasers to

quickly cut back on orders when their own outFigure 56.— Labor Productivity and Employment by Sector of the U.S. Electronics Industry

(a) Consumer Electronics (SIC 3651)

1965 1970 1975

Year
352 —..—

International Competitiveness in Electronics ——..—.—. —

30

L

:

c

20

(b) Semiconductors (SIC 3674)

0 I I

1965

put drops,

swings for

1970 1975

sometimes to double-order in upfear of shortages.

As the plots in figure 56 demonstrate, the portions of the electronics industry that showed the

highest rates of productivity growth also experienced the highest rates of employment

growth. Increases in productivity were associated with the creation of jobs, not their elimination. The reason is simple: output in computers

and semiconductors grew at very high rates,

spurred by exports as well as domestic sales.

The domestic market for radios and TVs grew

more slowly, exports were small, and import

penetration has been severe.

As the cases of computers and microelectronics illustrate, when rates of change in technology and productivity are high, employment

may rise. Similar correlations sometimes follow at the aggregate level; unemployment may

Year

drop while productivity climbs, particularly if

coupled with rapid technical change and high

investment. But as the examples from electronics in figure 56 illustrate, there can be a great

deal of variation across sectors: productivity

rises at different rates; sometimes employment

goes up, sometimes down. Still, over time, technologically progressive U.S. industries have

generally experienced—not only above-average

productivity gains, decreasing real prices, and

increases in sales—but relative increases in employment as well.10 While an increase in emIODenison and others have studied the contributions of

technological change to economic expansion—for example, E.

Denisen, Accounting for United States Economic Growth

(Washington, D. C.: Brookings Institution, 1974). For an analysis

of trends in electronics, see W. Kendrick, “Impacts of Rapid

Technological Change in the U.S. Business Economy and in the

Communications, Electronic Equipment and Semiconductor Industry Groups,” Microelectronics, Productivity and Empk]&Vment

(Paris: Organization for Economic Cooperation and llevelolJment, 1981], pp. 25ff.
Ch. 9—Ernployment Effects 353

—

40

35

30

25

20

15

10

(c) Computers (SIC 3573)

140,000

Productivity—

computers

—

/

70,000

60,000

50.000

1967 1970 1975 1980

Year

NOTE Census Bureau figures for employment may not agree exactly w(th BLS figures cl fed elsewhere In this chapter BLS figures are collected at the plant level and

may Include some workers from other SIC categories if a plant makes products that fall under several categories Census figures are used {n these charts for

consistency with productivity data from the Census Bureau Value-added figures have been converted to constant dollars us!ng the Impllc!t price deflator for

consumer durables

SOURCES 1965.77— 1977 Census of Manufactures 1978.80— 1980 Annual Survey of Manufactures

ployment is not inviolably associated with the

development of new technologies and productivity growth, the pattern is not an uncommon

one. That employment goes up does not, of

course, mean that adjustment problems disappear—but it can provide leeway to deal with

them. The next sections examine employment

by sector in more detail.

Consumer Electronics

Trends in Employment

Domestic employment levels in TV manufacturing have been falling rather steadily since

the mid-1960’s, despite a doubling of production volumes. Figure 57 illustrates the decline,

which was especially precipitous over the early

1970’s (as noted on the plot, the data cover TVs

only, not consumer electronics as a whole].

Jobs for production workers dropped by half

between 1971 and 1981. Over these years, a

number of U.S. manufacturers either merged

with Japanese or European producers or left

the business. On the other hand, the industry

now includes more than 10 foreign companies

with assembly operations in this country that

contribute to the employment totals in the

figure,

For reasons discussed in more detail below,

and ranging from automation to simpler chassis designs, labor productivity in U.S. TV manufacture is much greater now than a few years
354 ● International Competitiveness in Electronics —.—— —.

60,000

50,000

40,000

30,000

20,000

10,000

0

Figure 57.— U.S. Employment in Television Manufacturing

— All employees

‘ -- - Production workers

Color TV onlya

1966 1970 1975 1980

Year

a Monochrome the Umted States had dropped to low levels by 1975

SOURCES 1966-70— Teievls~orr . Receivers and Cerfa(n Parfs Thereof (Washington, D C U S Tar[ff Comm(ss[on Publication 436 November 1971) p A 70

1971 -75— Te/ev/s/on Rece/vers, Color and Monochrome, Assembled or Not Assembled, F/n/shed or Not F/n/shed and Subassemblies Thereof

(Washington, D C U S In fernatlonal Trade Comm[sslon Publlcatlon 808, March 1977), p A-117 1976, 1977– Color Te/ev/s/on F?ece(vers U S Production,

Sh{pments, /nvenfor/es Imports, Emp/oymenl, Man Hours, and Pr/ces, Fourth Ca/endar Quarfer 1977 (Washington D C U S I nternatlonal Trade Commls

slon Publ I cat Ion 866 March 1978), table 5 1978, 1979— Color Te/ev/s/on F?ece/vers U S P{oduct/on, Sh/pmen ts, /nven(or/es, /mporfs, Emp/oymen t, kfan -

lfours, and Pr/ces, Fourth Ca/endar Quaffer 7979 (Washington, D C U S Internatlona) Trade Commlsslon Publlcatlon 1036 February, 1980) p A 7 1980,

1981 —Color Te/evis/on Receivers” U.S. Production, Shipments, /nverrtor/es, Exports, Employment, ManHours, and F’rmes, Ffrst Ca/endar Quarter 1982

(Washington, D.C U.S International Trade Commission Publication 1245, May 1982), table 5

ago; the causes of the employment declines in

figure 57 extend well beyond import competition or offshore assembly, with technological

change a major force. Although the contributions of the various factors cannot be quantified

with any precision, the spread of solid-state

chassis designs and associated manufacturing

methods dramatically reduced employment requirements in the industry.

Figure 57 includes only those people involved in TV manufacturing. Television accounts for roughly half the U.S. consumer electronics market (ch. 4, table 8), and rather less

in terms of jobs. Total employment in SIC

3651—which covers many other consumer

electronics products—is considerably greater,

as shown in figure 58. Still, the number of

workers here has been in decline since 1973,

for similar reasons.

Productivity

As domestic output of TVs grew over the

years covered by figure 57 (see ch. 4, table 9),

apparent productivity—measured by annual
Ch. 9—Employment Effects 355 —. . . . . . .—

Figure 58.— U.S. Employment in Consumer Electronics (SIC 3651)

140,000

All employees

Production workers

o 1 I 1 1 1 1 I I 1 1 I

1960 1965 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Year

SOURCES 1960.1 965— 1977 Census of Manufactures 1972-82—Bureau of Labor Statlstlcs

output divided by the number of production

workers—jumped from 150 sets per worker in

1971 to 560 in 1981, In terms of value-added

per production worker, productivity was up by

about 40 percent during the decade—a trend

not far different from that for the broader consumer electronics category seen in figure

56(a). * During this period, the proportion of

domestic value-added dropped as American

manufacturers shifted labor-intensive operations to developing countries; whether made

by American- or foreign-owned companies,

TVs produced in the United States now include

more imported components and subassemblies. Because of these trends (table 13

*In terms of constant 1972 dollars, annual value-added per

production worker in TV manufacturing went from $22,2oo in

1971 to $31,600 in 1977, falling to $27,300 in 1981. See 1977 Census of Manufactures: Communication Equipmen t, Including

Radio and T\’, MC77-I-3611 (Washington, D. C.: Department of

(;ommerce, June 1980), p. 36 D-5 and 1982 U.S. lndustria] Out]ook

[Washington, DC.: Department of Commerce, January 1982), p.

343. Conversions to 1972 dol]ars were made using the implicit

price deflator for (:onsurner durables—Economic Report of the

Pres~d(’nt [tt’ashln~t[)n, 11 (;.: ( 1 S, (h]~ernment I)rint ing Office,

F’ebrLlar} 1 982), ~). 236.

in ch. 4 illustrates the rise in imports of incomplete sets and subassemblies over the latter part of the 1970’s) simply dividing the total

output of TVs by the number of employees considerably overstates productivity y gains.

However, the value-added productivity measures adjust for this.

Thus, there is no question that productivity

increased considerably during the 1970’s, the

result of design changes and automation driven

by competitive pressures (ch. 6). As manufacturers moved from monochrome to color production, they shifted to more highly automated

manufacturing facilities. Somewhat later, redesigned solid-state chassis cut the number of

parts, hence the labor content; only 6 percent

of the color TVs made in the United States

were solid-state models in 1970, but by 1976

essentially all had been redesigned around

transistors. 11 A good part of the productivity

growth over the 1970’s resulted from changes
356 ● International Competitiveness in Electronics — —. ----

in chassis design and associated manufacturing methods.

Although productivity gains in consumer

electronics have contributed to declining employment, the composition of the work force

has not changed greatly. As table 74 and figure

58 both illustrate, the ratio of production workers to nonproduction workers has decreased

relatively slowly. In TV manufacture rather

than consumer electronics as a whole, the shift

has been greater, mostly taking place by the

mid-1970’s (fig. 57). The semiconductor industry, for one example, has seen more rapid

changes in skill mix (table 74).

Imports and Offshore Manufacture

Earlier chapters described the inroads made

by imported TVs, both monochrome and color, Few black-and-white sets are now manufactured here. Orderly Marketing Agreements

(OMAs) restricted imports of color sets during

the period 1977 to mid-1982, but figure 57

shows that the quotas did not arrest employment declines. Still, jobs would have been lost

even faster without OMAs.

American consumer electronics firms relocated many of their manufacturing operations

to low-wage offshore locations during the

1970’s, While there are no precise figures on

foreign workers employed in these plants, the

Department of Labor believes that the number

may be over 30,()()&-more than employed in

domestic TV operations.12 These people substitute quite directly for American workers.

Semiconductors

Since the mid-1950’s, employment in semiconductor manufacture has grown rapidly,

from a few thousand when production of semiconductor devices was just getting underway,

to well over 200,000—figure 59. These totals include captive manufacturing. During two

periods—1969-72 and 1974-76—employment

dropped sharply as a result of recession.

As figure 59 also shows, the proportion of

production workers in the domestic industry

has declined–from 66 percent of the total work

force in 1963 to 40 percent in 1982. Major

causes include the transfer of production operations offshore and advancing technology.

More complex manufacturing methods—including automation—have increased the relative need for technicians and other nonproducIzInformation from Department of Labor.

Figure 59.— U.S. Employment in Semiconductors and Related Devices (SIC 3674)

250,000 [

J

1963 19701972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Year

SOURCES 1963, 1970— 1977 Cerrsus of ~anu~acfures 1972-82—Bureau of Labor Statistics
—

tion workers. High levels of research and development have contributed to expansion in nonproduction ranks; the number of man-hours

devoted to integrated circuit design has been

increasing exponentially—figure 60. Technological advance in microelectronics has thus

been paralleled by a decrease in semiskilled

and unskilled employees relative to skilled

workers and professionals in U.S.-based manufacturing. The result has been an “upskilling”

of the domestic labor force. Employment opportunities for technical personnel—engineers,

scientists, technicians—have grown rapidly. As

these trends continue, the proportion of production workers in domestic semiconductor

operations will fall even more,

American semiconductor firms transferred

“back-end” operations overseas at a rapid pace

during the 1960’s, with more than 50 foreign

manufacturing plants established during the

decade. l3 While point-of-sale plants have argu- — . . . -—

~fjl)or~()[] tfw[‘.S. ,$en]iconcktor)1] (fusf~J’ (Washi ngt On ,

DC; .: [)e[)artmcnt of Commerce, September 1979], p. 84.

Figure 60.— Effort Levels Associated With Product

- and Process Design for Integrated Circuits

0

1960 1965 197 0 1975 1980

Year

SOURCE VLSI Some Fundamental Challenges —Sc0Pln9 Its Future IEEE

Specfrum. April 1979 p 35

Ch. 9—Employment Effects 357 —

ably small impacts on domestic employment,

offshore investments driven by lower wages

directly displace American workers, just as in

consumer electronics. Offshore manufacturing

also contributes to the declining proportion of

production employees in the United States. Unskilled assembly labor accounts for most of the

jobs overseas; U.S. firms employ about threequarters as many people in their foreign plants

as they do here: around 180,000, of which more

than 80 percent—as many as 150,000—are production workers.14 Among U.S. merchant semiconductor firms, perhaps 90 percent of all

assembly work is performed overseas. 15

Many U.S. companies make semiconductors

solely for internal use, but no disaggregation

of employment data is available for these captive facilities. While most produce specialized

devices in relatively low volumes, with considerable variation in month-to-month levels,

IBM is a large producer and large employer.

Because some of the overhead and administrative tasks associated with captive manufacturing may be performed elsewhere in the firm,

the proportion of production workers is probably higher than in merchant manufacturing.

As semiconductor production grew, the vacuum tube industry (excluding cathode ray

tubes, hence TV picture tubes) declined—figure

61, While tubes still find specialty applications,

by the early 1970’s, substitution of semiconductors had caused domestic employment to drop

by one-third from the peak level of 1966.

Although jobs in tube manufacturing have been

lost to technical change, far more people are

now employed in making semiconductors than

were ever employed in making vacuum tubes.

Computers

Computer manufacturing, like microelectronics, has seen rapid employment growth

with simultaneous productivity improvement

—although, as emphasized in chapter 5, productivity measures can be misleading where

~ek~’[lm marj, ~ f ‘rra de an [] 7~7riff III formation ,5’ f’111 imn dll(’ tOr.5

([J.S. Intern; tiunal Trad(? (JIJn~nli\\l[ln Pll[)]icati{)n 841, Control”

No, 6-5-22, jU]}’ 1982], p. 8.

15J. R. l.incba[k, “Autonlati[Jn Nla}’ EI’ii\f’ of f\tlo[’[’” I{(ip,[’, ” F;lf’(

trc~nif.,~, AI)r, 21, 1982, p. 94,
358 International Competitiveness in Electronics

c

Figure 61 .—U.S. Employment in Vacuum Tube Manufacturing (SIC 3671)

.

\

— All employee s

----Production workers

SOURCE

1962 1964 1966 1968 1970

Bureau of Labor Statlstlcs

the product changes so much. Regardless, ad

vances in computer systems have created vast

numbers of jobs—not all in computer manufacturing. Many of these new jobs have originated

in the user community, and in software production. Figure 62 illustrates job growth in the

industry itself, including peripherals, Even

more so than in microelectronics, the trend has

been away from production employees and

toward skilled workers and white-collar professionals.

Unlike either semiconductors or consumer

electronics, employment in computers and peripherals has not been greatly affected by import penetration or offshore production. Many

American computer firms have invested overseas, but foreign manufacturing facilities have

1972 1974 1976 1978 1980 1982

Year

generally served foreign markets. As in semiconductors, some of this foreign production

may substitute for exports from the United

States, but overseas sales are often tied to local

production, limiting the extent to which pointof-sale plants displace domestic jobs.

The summary above of employment trends

by sector in the domestic electronics industry

shows that the number of jobs has increased,

but not everywhere or uniformly. Increases in

semiconductors and computers have more

than offset—in magnitude—the declines in consumer electronics and vacuum tubes. The composition of the work force has changed; employment gains have been greatest for nonproduction workers.
Ch. 9—Employment Effects ● 359 —— — —. — — — .—

1955 1960 1965 1967 1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCES 195545— 1977 Census of Manufactures 1988-82-Bureau of Labor Statistics

Effects of Import Penetration and Offshore Assembly

An increase in imports or a transfer of manufacturing operations offshore can cut into

domestic job opportunities. The United States

is importing more manufactured goods of all

types, not only consumer electronics and semiconductors, making the import penetration

question especially timely. Moreover, to labor

unions, offshore production amounts to the export of jobs. For policy makers, both phenomena—but especially imports—have been a

growing concern.

The employment consequences of import

penetration and offshore assembly are felt in

a context of global shifts in market structure,

implying long-term changes as well as immediate impacts on people, firms, and industries.

The dynamics are important on both time

scales. In expanding markets, firms that can

respond quickly to new opportunities anywhere in the world may be able to increase exports and consolidate their positions, aided by

products that take advantage of new technol-
360 ● International Competitiveness in Electronics

ogies. This happened during the 1970’s, when

American semiconductor firms capitalized on

the shift toward metal oxide semiconductor integrated circuits ahead of their overseas rivals.

Today, Japan’s avowed goal of capturing more

than 30 percent of the world computer market

by 1990 (along with 18 percent of the U.S. market) reflects a belief that longstanding patterns

can be disrupted when growth is rapid,

This section looks more closely at the effects

of imports and offshore production on employment in consumer electronics and semiconductors (neither is important at the moment in

computers). As pointed out in chapter 5, industries do not rise or decline in competitiveness

simultaneously; looking at employment on a

sectoral basis gives only part of the picture, and

then an equivocal one. Still, the sectoral approach is a valid starting point, for reasons that

are discussed in some detail in appendix B.

The first question is: What are the causes of

import penetration? Imports may rise because

demand exceeds domestic capacity or consumer preference shifts to foreign-made goods. Japanese penetration of U.S. markets for dynamic

random access memories (RAMs) is an example of the first case, TV imports at least in part

the second (imported automobiles are a more

obvious example). In the first case, jobs may

not be lost because of imports, but the rate of

increase in domestic job opportunities may

slow. In the second case, immediate decreases

in employment are likely.

The full consequences of import penetration

depend on the industry, Declining output in

some industries—a prominent recent instance

again being automobiles—can have major spillover effects elsewhere in the economy. As sales

of domestic cars lagged, jobs were lost in firms

making steel, tires, and components. Sometimes companies can limit impacts on individuals by allowing employment to decline

through attrition rather than layoffs; even so,

the overall pool of job opportunities shrinks.

The effects of offshore production are no

more straightforward. On the one hand, all

wages and salaries paid overseas could be

viewed as a loss to American labor and the U.S.

gross domestic product. But what if firms can

only lower their costs and maintain or expand

their markets by moving offshore—whether to

take advantage of low-cost labor and be better

able to compete with imports, or simply to

manufacture their products nearer the ultimate

market? Firms weigh a variety of such factors

in deciding whether to invest overseas, although ultimate decisions generally turn on

cost savings. From the standpoint of the Nation as a whole, rather than a particular company, the costs and benefits may be quite different. Appendix B discusses the impacts of

offshore manufacturing on the aggregate economy and outlines the range of effects compared

with alternatives available to the firm. This appendix includes a case study drawn from the

experience of an American company which invested in a subsidiary in Taiwan. Briefly, the

conclusion of the case illustration is that the

offshore plant—established to assemble automobile radios—helped maintain competitiveness vis a vis Japanese manufacturers and

prevented even more U.S. jobs from eventually being lost. As this suggests, in consumer

electronics the movement offshore by American producers can be viewed as a defensive

reaction to imports. In contrast, the motivation

for overseas manufacturing in the semiconductor industry has been cost reduction and market expansion driven by domestic competition.

The consequences for employment have been

much different.

Consumer Electronics

Almost half the consumer electronics market

in the United States has been taken by imports;

in addition, many products assembled here depend heavily on imported components and

subassemblies. Penetration of consumer electronics markets has coincided with employment decline, as shown in figures 57 and 58.

Imports of black-and-white TVs rose from onequarter to three-quarters of U.S. sales over the

period 1967-77. Color TV imports peaked in

1976 at a level nearly tenfold greater than in

1967, then dropped because of OMAs. A third

round of imports followed, the influx of video

cassette recorders from Japan.
Ch. 9—Employment Effects . 361

Today, all U.S. TV manufacturers operate

foreign production facilities. In addition to the

attraction of low-wage labor, Items 806.30 and

807,00 of the U.S. tariff schedules encourage

offshore assembly (ch. 11). During the last half

of the 1970’s, 30 to 45 percent of all color TV

imports entered under Item 807, although final

assembly remains concentrated hem-in part

because of foreign investments to avoid the

OMA-imposed quotas.

Despite limits on imports, employment in TV

manufacturing did not recover. In testimony

before the U.S. International Trade Commission, the International Brotherhood of Electrical Workers reported that 20,000 workers

had lost their jobs in the TV industry due to

imports. 16 To what extent are imports to blame,

given that domestic productivity improvements

a n d offshore investments by U.S. firms have

also contributed to employment decline?

It is oversimple to argue that the total number of foreign workers engaged in production

for shipment to the United States—whether employed by U.S. or foreign firms– represents domestic employment loss, In most cases, U.S.

consumer electronics firms had little choice

concerning offshore production. Movement

abroad was a defensive reaction, not a strategy

aimed a t expanding markets and i m proving

profitability. To assume that jobs overseas

substitute directly for U.S. employment is tantamount to assuming a stable competitive environment--which was not the case. Rather,

employment declines followed losses in competitiveness; American firms had higher costs

than their rivals, and little scope for developing strategies that would preserve domestic

jobs. They pursued the obvious route: increased automation to raise productivity at

home, combined with transfers of labor-intensive operations offshore, Only some companies

survived; the others were purchased by more

successful manufacturers or left the industry.

In this sense—as part of a more complex chain

—— .— —. -——

1“’ “1’[’>t] m{)rl~ l)~~ftjre the [ ‘ S, 1 ntt;rnat[ollal ‘1’r~c\[; ( ;I )n]l]ll~~[{)]l

t )n ‘l’\’ ft[x,ell ers [‘[’,4-201- 19), I ntcrnationa] H rotherhl I(N ] t }f f{ ]tw -

tr]f ,il Wrt)rk(~r~, I (IPT, Set; ~1~() “ ~~(;tltlfjr~ f[jr t})[: EXt CIIS]OIl ( )[ I 111-

[)( )rt R(’11(’t ,“ ~t] [ I r i I I t t ~:< 1 t~ I th t> 1“ S i n t(: r II ,i t I [ ) I I,] 1 T ra [ I t’ (; ~ ) r: I I I I Is-

~If ) n, I )f; ( Ill, 1 ‘t;’/

———

of events—import competition must indeed be

counted as the primary cause of job losses in

consumer electronics. 17

But this is not the whole story: Is it possible

that the ready availability of Item 807.00 reduced incentives for American managers to cut

costs and improve labor productivity at home?

Might U.S. firms have avoided offshore production by adopting more capital-intensive

automated manufacturing processes here? Jobs

still might have been lost, but the costs and

benefits would have shifted. The behavior of

American executives is often contrasted with

that of their Japanese counterparts, who recently have faced similar difficulties-i. e., competition from countries with much lower labor

costs. Some observers have claimed that

Japanese consumer electronics firms have invested more rapidly and more boldly in mechanized production technologies such as automatic component insertion (see ch. 6 for a further discussion of rates of adoption of automation).

As with many such questions, the truth probably lies somewhere between. The availability

of Item 807 reduces the pressure to find cheaper manufacturing methods at home. It is also

true that the Japanese, when themselves confronted with the rather sudden emergence of

competition from other Far Eastern countries,

transferred some of their production to lower

wage sites. In part, such transfers were also

caused by the 1977 OMA—which, by limiting

shipments from Japan, created incentives for

Japanese firms to move to export platforms--

but Japanese managers exhibit little reluctance

to take whatever steps seem necessary’ for

preserving hard-earned market positions.

Along with developing new production

methods-–an uncertain business —Japanese

firms would probably have shifted laborintensive production abroad i n a n y case, simply for insurance. In this respect, Japanese

managers have behaved much like Americans.

1 T~or a ~~ll~ra ]il. (,( J rl t r~ r~ ~ i(>~~, scc A, (). K ru e~e r, ‘‘ Rl~st ru(:-

t~lrlng for 1 nll)ort (;ompctitlon Frf)nl II(JI eloping C(JII nt IIIJC-, I

1, Eih(JI’ [)is~)ld[ t~rnent am~ FII (Jl]orIll( K(’tit’~~lO\r~l[;rlt III t I]t’ [ Inlt{,(f

Stat(:\, ” /{ JurrJdl c)f 1){~/i{-~ ,t(o(lf’)lrlg 101 2, 19f30, [). 165
362 ● International Competitiveness in Electronics —

Photo credlf Control Autornaf/on

Robot set up for assembling electronic components

While U.S. employment would have dropped

even faster without OMAs, the lesson—repeated in other industries—is that controlling

levels of imports to provide companies a respite during which they can take measures to

enhance their competitiveness is unlikely to improve employment prospects, Indeed, just the

opposite tends to be true, as manufacturers

strive to cut costs by improving labor productivity, To the extent that they succeed, employment probably will decline, even in situations

where modest growth in output takes place. As

a result, trade protection seldom functions as

a substitute for assistance to displaced workers.

Semiconductors

U.S. imports of semiconductor devices have

increased steadily, exceeding imports by 1982

(ch. 4, fig. 24); in earlier years, the United States

exported many more semiconductors than it

imported. Do such trends portend job losses?

More to the point, with Japanese manufacturers holding half or more of the burgeoning

64K RAM market, will employment in this portion of the electronics industry suffer as in consumer electronics? There is a major difference:

semiconductor production is still expanding

rapidly, Furthermore, American semiconductor manufacturers have exported much more

actively than consumer electronics firms.

Figure 59 showed the steadily growing employment in the U.S. semiconductor industry.

Domestic jobs more than doubled during the

1970’s; offshore employment probably expanded even faster. The question again is: Do

imports, or foreign workers employed in the

overseas operations of U.S. firms, stand for job

opportunities lost to Americans? Imports and

offshore manufacturing are more closely

coupled for semiconductors than for consumer

electronics. Nearly 40 percent of U.S. semiconductor sales are classed as imports, but

more than three-quarters of these are re-imports by American firms under Items 806 and

807 of the tariff schedules. Offshore production is central to the U.S. industry. Still,

shipments from Japan have also risen swiftly

over the last 5 years.

The offshore facilities of U.S. semiconductor

manufacturers concentrate on the labor-intensive steps in the production process—primarily

assembly. In the mid-1970’s, Finan estimated

that manufacturing costs for integrated circuits

could be cut in half through offshore assembly. 18 Cost/price competition has thus been the

primary motive for foreign investments; American semiconductor firms moved offshore to

reduce costs and expand markets. Moreover,

the competition has been largely among domestic firms; investments predate Japanese competition by a decade and more. If in the case

of consumer electronics, offshore manufacturing was a reaction to import competition, in

semiconductors the primary motivations were

offensive. Capital investment requirements

have been one of the forces at work. In order

to keep up with demand, semiconductor firms

have been under continual pressure to add new

capacity (ch. 7). Offshore assembly offered flex-

——

IBW. F. Finan, “The International Transfer of Semiconductor

Technology Through U.S.-Based Firms, ” Working Paper No. 118,

National Bureau of Economic Research, December 1975, p, 60.

The savings are greater for simpler integrated circuits and discrete devices than for complex circuits—as illustrated in app.

B—because the assembly cost is a larger fraction of the total cost

for simple devices.
Ch. 9—Employment Effects ● 363

——.— —

ibility; firms could avoid the risks of investments in automated equipment that might soon

be outdated, expanding capacity without taking funds from capital-intensive wafer fabrication and testing equipment.

What are the implications for job opportunities? As the case study in appendix B illustrates, these depend in part on the time horizons. Given rising foreign competitiveness in

microelectronics, offshore production now

helps meet international as well as intranational competition. If overseas manufacturing

helps U.S. firms maintain their competitiveness, the net impact on domestic employment

might be positive over the longer term. Furthermore, point-of-sale plants are sometimes able

to sell in markets to which the U.S. parent

would have difficulty in exporting because of

trade barriers. In some instances at least,

American firms may thus be able to strengthen

their long-term competitive position by investing overseas, enlarging domestic as well

as foreign employment. Still, in the short term,

offshore investments cut the number of job opportunities for Americans. In this respect,

questions of the impact of Items 806 and 807

of the tariff schedules are similar to the more

general problem—isolating the consequences

of foreign direct investment of any type on

employment. Such matters have been investigated extensively over the years. The most

common conclusion is that direct investment

by American corporations has increased net

employment in the United States; nevertheless,

the opposite result is sometimes reached, again

depending on the particulars. In the end, implications—both short and long term—can only

be evaluated on a case-by-case basis, and depend on assumptions concerning the future

competitive environment for American firms.

Foreign Investment in the United States

ment. Japanese investment in the United States

has grown rapidly, from a cumulative $152 million in 1973 to $4.2 billion by 1980. 19 The desire

to open new markets and to ease trade frictions

are among the forces behind this influx. Japanese-owned firms now assemble nearly 4 million color TVs here each year. North American

Philips adds well over a million.

As this suggests, most of the past investments

in electronics have been limited to consumer

products, Japanese interests seem bound to

widen, however, with plants for assembling integrated circuits the next step. In typical

foreign-owned manufacturing plants, only a

few upper management slots are reserved for

executives from headquarters. Viewed strictly from an employment perspective, therefore,

onshore manufacturing has positive consequences for the United States. Viewed more

broadly, the picture becomes mixed: many of

the skilled and professional jobs remain

overseas.

Generalizations about employment that

would apply to all parts of the electronics industry are impossible. In the case of consumer

electronics, import penetration is closely associated with job loss. In contrast, employment

has grown steadily in both domestic and foreign operations of U.S. semiconductor firms;

overseas investments have helped cut costs, expand markets, and increase competitiveness.

Simply in terms of numbers of jobs, expansion

in semiconductors and computers has more

than offset declines in consumer electronics.

This does not mean, of course, that such trends

will persist indefinitely. Nor is it any consolation to people who find themselves out of work.

The rest of the chapter looks to the future.

Foreign investments here bring yet another

dimension to questions of domestic employ-

‘

9

’’ Japanese Manufacturing operations lo the LJnited States,”

Japan External Trade organization, September 1981.
364 International Competitiveness in Electronics

—

Projections of Employment Within

the Electronics Industry

Before examining impacts on other parts of

the economy, this section treats the industry

itself, in the context of Bureau of Labor

Statistics (BLS) employment projections to

1990. The perspective is much broader than the

discussion of possible shortages of engineers

and skilled workers in the previous chapter.

Ideally, projections of future trends would

be based, not only on a model for aggregate

economic expansion, but also on sector-specific variables—growth in particular product

markets, demand for workers with certain

kinds of skills, levels of imports and exports.

Unfortunately, this much detail is seldom attempted. BLS projections, virtually the only

analyses available with industry-specific output, are based on an econometric model—a

limited tool, although representative of the state

of the art.20

BLS began making econometrically based

employment projections two decades ago, introducing a macroeconomic demand model in

1975. Their current procedure includes five

basic steps: 1) projections for the economy in

the aggregate; 2) disaggregation of GNP by demand categories; 3) distribution of demand by

categories to producing industries; 4] output

projections by industry sector based on an

input-output table; and 5) forecasts of labor productivity, total labor hours, and number of people employed at the sectoral or industry level.

A critical input in terms of employment is the

estimated gross demand for the products of an

industry, This gross output is divided by an

estimated productivity level (output per employee-hour) to yield the labor hour projection

for the industry, and thus employment. The

model as a whole is sensitive to a wide range

of assumptions, most fundamentally those for

GNP growth. BLS’s recent projections have

been based on GNP increases ranging from 2.4

—.. —.—

~11” Nletho(lology for Projections of Industry Emplo~ment to

1990, ” Ilulletin 2036, Department of Ijabor, Bureau of I.abor Statistics, February 1980.

percent annually (the “low trend”) to 3,8 percent (the “high trend”). These assumptions

compare with a 1973-79 average of 2.8 percent

per year. BLS has assumed growth in labor productivity to stabilize at the rather low levels of

recent years.21

On this basis, BLS predicts that aggregate

growth in U.S. employment will range from 1.6

to 2.0 percent annually over the decade of the

1980’s, considerably below the 2.7 percent

yearly rise for 1975-79. Women will get twothirds of the new jobs. The durable goods portion of manufacturing is expected to grow

faster than the all-industries average, nondurable slower.

Output increases in computers and related

equipment should lead all other manufacturing industries; employment in the computer industry will grow from about 420,000 in 1982

to perhaps 600,000 by the end of the decade.

If these projections prove realistic, employment in the computer and peripherals sector

will comprise as much as 3.1 percent of the

total manufacturing work force by 1990, compared to 1.6 percent at the end of the last

decade. Employment in the electronic components sector (SIC 367) is expected to grow at

about 2.2 percent per year in both low- and

high-growth scenarios, well above projections

for manufacturing as a whole. In the lowgrowth scenario, 33 of the 150 industries examined show employment drops, One of these

is radio and TV manufacturing, with an anticipated decline averaging 1.4 percent per year

over the period 1979-90. Thus, if BLS projections prove realistic, past employment trends

in electronics will persist: there will be continuing decline in consumer electronics, rapid

growth in computer manufacturing, and con-

——

21 For more; detail, see V. A. Person i(; k, ‘‘The outlook for Industry Output and Employment Through 1990, ” MonthJ}’ Labor

Kt?\ie~%r, August 1981, pp. 28ff. Also (kcujxjtional (Iutlook Handhf)okr 1982-83 Edition, Bulletin 2200” (Washington, 1), (;,: I)epartment of Labor, Bureau [Jf I,abor Statistics, April 1982),
—

Ch. 9—Employment Effects ● 365

—

siderable expansion in components. Together,

these three portions of electronics might, under

the most favorable circumstances, account for

more than 7 percent of U.S. manufacturing employment in 1990. The projections are all conditional, needless to say, and BLS’s approach

shares the principal limitation of virtually all

forecasting techniques: current trends are expected to continue, breaks with the past seldom

anticipated.

BLS also estimates employment by occupational category across industries; in all

scenarios, white-collar jobs grow faster than

total employment, blue-collar jobs slower.

White-collar workers will make up slightly

more than half the 1990 labor force—the fraction is slightly less now—with notable increases

in the professional and technical category. 22

Table 75 lists occupations in electronics for

which BLS predicts the greatest percentage increase during the 1980’s. All are grey- or whitecollar jobs. The nonelectronics categories are

included for comparison; 5 of the 10 fastest

growing occupations in the complete BLS

listing are electronics-related. Despite the high

growth rates, categories starting from a modest

base will not account for large numbers of new

jobs.

Table 75.— Predicted Growth Rates by

Occupational Category Over the 1980’s

—.

Predicted increase

in employment

Occupation a

———.

(1 980-90)

Paralegal -. . . . . . . . ~ . . . . ... . . . . . . . . . . . . 109°/0

Data processing machine mechanic ... ... , 93

Computer operator . . . . . . . . . . . . . . . . . . . . . . 72

Computer systems analyst . . . . . . . . . . . . . . . . 68

Business machine service technician . . . . . . . 60

Computer programer . . . . . . ... ... . . . . . . 49

Employment interviewer. . . . . . . ... ... . . . . 47

Computer peripheral operator . . . ... . . . . 44

Psychiatric aide . . . . ... . . . . . . . . . . . . . . . . . 40 ——..— — .

aNOrrl~CIUSjVe fastest growing occupations In electronics are Ilstecl together with

selected occupations outside of electronics (In ltaltcs) for comparison

SOURCE Testimony Before the Senate Subcommittee on Employment and Productlvlty, March 26 1982 by Ronald E Kutscher, Assistant Commlssloner, Off Ice of Economic Growth and Employment Pro)ectlons

Bureau of Labor Statmtlcs Product/v/ty In the Arner(can Economy

1982 hear~ngs Subcommltlee on Employment and Product lvlty Corn

mittee on Labor and Human Resources U S Senate, Mar 19 and 26

Apr 2 and 16 1982 p 327

Photo cred~ f Western E/cc (r(c Co

Semiconductor wafers being loaded into furnace

As shown earlier, the electronics industry experienced a more-or-less gradual shift toward

fewer production workers and more whitecollar workers during the 1970’s, with the biggest change in semiconductor manufacturing

(fig. 59). Table 76 gives occupational breakdowns in consumer electronics, components,

and computers according to BLS data for 1980.

While BLS expects some further upskilling during the 1980’s, the projections (not shown)--

which may or may not be well-founded-indicate these to be mostly matters of a percentage point or two. Note that the SIC categories

in table 76 are broader than used earlier; the

consumer electronics data cover SIC 365, rather than the “home entertainment” subdivision,

3651; electronic components, SIC 367, includes

all types of components, not just microelectronics; and the computer category referred to earlier, 3573, is a subdivision of SIC 357. Moving

the boundaries of these categories outward

probably makes little difference for consumer

electronics and computers, but components as

a whole are not nearly as skill-intensive as

microelectronics; thus the proportions of technical professionals in table 76 are considerable

underrepresentations for semiconductor firms

(compare table 74).

Table 76 points quite graphically to the high

skill requirements of the computer industry,

where about 60 percent of the work force falls
366 ● International Competitiveness in Electronics

—

Table 76.—Occupational Distributions in Electronics as of 1980

Consumer Electronic

electronics components Computers

(SIC 365) (SIC 367) (Sic 357)

White- and gray-collar workers . . . . . . . . . . . 27.90/. 32.00/. – - 59.00/0

Professional and technical:

Engineers (and scientists) . . . . . . . . . . . . 3.6 6.2 11.3

Engineering technicians . . . . . . . . . . . . . . 2.8 6.1 9.3

Computer specialists . . . . . . . . . . . . . . . . . 0.6 0.6 6.2

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 2.8 5.7

Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 5.4 9.4

Salesworkers . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.7 1.0

Clerical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 10,2 16.1

Blue-collar workers . . . . . . . . . . . . . . . . . . . . 62.1 0/0 63.60/o 38.20/o

Craft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.3 14.8 12.1

Assemblers and machine operators . . . . . . 44.8 48.8 26.1

Service workers and others. . . . . . . . . . . . . . 10,0 ”/0 4.3 ”/0 2.90/o

SOURCE: Bureau of Labor Statistics

in the ranks of white-collar workers (not all

with high levels of education or training) or

skilled, grey-collar technicians—in contrast to

consumer electronics and components, where

these jobs make up less than a third of the total.

Employment expansion in computers will continue to be most rapid in skilled categories

(table 75); numbers of service and repair technicians and systems operators will increase,

while jobs for keypunch operators—whose

skills are becoming obsolete—will dwindle, as

will work for those without special training.

Likewise, in components, BLS estimates that

the number of professional and technical

workers will grow from 87,700 in 1980 to over

117,000 in 1990. In the more mature consumer

electronics industry, the absolute number of

blue-collar workers is likely to decline, as well

as the proportion. Taken together, the trends

indicate a continued shift toward more highly

skilled jobs in electronics. Computer manufacturing, in particular, will be a leader in employment growth and in demand for new skills over

the next decade; the picture for this industry

foreshadows trends expected elsewhere in the

U.S. economy,

Future Employment Patterns in Other Industries

If analysis of past trends in electronics is

problematic, looking ahead to the impacts of

electronics on other industries is a still more

tenuous exercise. Yet it is a vital one, for future

developments in electronics have far-reaching

implications for the entire economy, Useful

policy guidance could flow from an understanding of how technological change affects

employment patterns. Public and private training and retraining programs would benefit i f

vulnerable job categories, as well as those fo r

which demand will rise, could be more reliabl y

identified, unfortunately, there are no substi -

tutes for painstaking case-by-case analysi s

based on disaggregated data and carefully de -

fined occupational categories, This is expensive and time-consuming, demanding a sophisticated appreciation of how industry uses technology; in consequence, such studies are seldom attempted.

Uncertainties abound. First, past trends—

including examples of technical change in industries other than electronics–can offer only

a general guide; there are no guarantees that

current employment patterns—outcomes of

large numbers of incremental and evolutionary

changes—will persist. Second, many impacts

will be several levels removed from the electronics industry itself. Computer-controlled

production of consumer goods such as cloth-
Ch. 9—Employment Effects . 367

ing—to take one example—may increase employment in firms designing and building the

equipment used, decrease employment in the

apparel industry, but perhaps have positive impacts on employment at the retail level (one

reason might be that custom design would become cheaper, with smaller runs of styles and

sizes sold in specialty shops). Attempting to

trace such second and third level effects involves the interplay of business decisions, economic and product cycles, imports and exports—not to mention the unpredictable nature

of consumer demand. The following sections

do not attempt to answer the question of

whether electronics technologies will have net

positive or negative impacts on U.S. job opportunities, but simply illustrate some of the forces

at work.

European governments, sensitive to the potentially negative employment consequences

of electronics and automation, have commissioned numerous reports on the subject, with

uniformly disappointing results, Micro-level

analyses exploring impacts on a particular craft

or industry are difficult to integrate with

macro-level studies and aggregate economic

forecasts. Yet this coupling–the complex and

evolving interplay among technical advance,

utilization within various economic sectors,

and the response of the labor market—is critical

on both supply and demand sides. For example, companies typically install labor-saving

equipment in periods of economic expansion,

when workers can be transferred to other jobs

rather than laid off. Over the longer term, then,

a given firm can often use normal attrition to

help manage the size of its work force. Where

this is the case, direct attribution of decreases

or increases in employment opportunities to

new technology can be difficult to defend. 23

While forecasting methods do a reasonable

job of predicting employment within either aggregate or disaggregate categories as long as

lsThe authors of a British study, write: ‘‘ Mic roe]ectronics technology will affect manufacturing industry in so many ways that

it is impossible to be exhaustive, and difficult even to find a coherent framework for analysis. ” See J. Sleigh, B. Wratwright, P.

Irwin, and R. Stanyon, The Manpowrer Implications of MicroElectronic Technology (I,ondon: Her Majesty’s Stationery office, 1979), p. 14,

change is slow and past trends supply precedents, the unexpected consequences of new

technologies escape forecasting methodologies

virtually by definition. Examples from the past

illustrate little beyond the seeming randomness

of the impacts of technological change. This

in itself is an important lesson, but means that

the state of the art is such that even welldocumented historical case studies can seldom

provide direct policy guidance.

The basic problem is that, even if it were

possible to predict how technical change in

electronics would affect some other industry,

there is no necessary relationship between

these findings and the consequences for the

economy as a whole. Building up the picture

on a detailed, sector-by-sector basis would be

a vast undertaking. Most of the past attempts—

whether dealing with manufacturing or services or both—have been more limited, falling

into one of two categories: 1) elaborate but

abstract analytical frameworks, typically

econometric; or 2) case studies outlining impacts on particular sectors. The first, exemplified by the BLS analyses discussed

earlier, have seldom been very illuminating in

terms of real-world experience. The second

often yield insights that are useful but limited

to relatively narrow segments of the labor

force–bank tellers, coal miners, postal workers—as illustrated by the case examples that

follow.

Manufacturing

Many of the studies addressing manufacturing begin by distinguishing between product

and process applications. These overlap in the

sense that computer-based process control systems, to take one example, can be viewed in

either light. As a “product, ” they are developed

and sold by firms in the capital goods industry.

In the alternate view, automated process control is one aspect of an ongoing transformation

of production in many industries. Employment

impacts follow in both views, although typically of very different magnitudes.

As a further organizing principle, it helps to

consider employment effects by product and
368 International Competitiveness in Electronics

——-——

by market.24 In theory, the greatest gains come equipment; within the system, fewer installers,

where new products are introduced into new service personnel, and operators were needed.

markets. Pocket calculators and video games Further reductions may be in store, with fully

are examples. While they may replace other electronic equipment—expected around 1990—

goods—electromechanical calculators, for ex- cutting the work force to as little as one-tenth

ample—to the extent that new products expand its former size.25

markets or create new ones, employment will

rise. Existing products introduced into new

markets have parallel effects. The “personal”

computer is not a new technology or a new

product so much as an adaption of microprocessor-based data processing systems to the

needs of individual households and small businesses. Low-end minicomputers of the early

1970’s, such as the PDP-8, were similar in many

respects to current personal computers, but the

PDP-8 was never marketed as such. In contrast,

the introduction of new or replacement technologies into old markets often cuts into job

opportunities. Recent and well-publicized illustrations include electronic switching in telecommunications—principally telephone systems—and electronic typesetting in the printing industry. In essence, these technologies

caused step changes in labor productivity, with

subsequent employment declines, In such

cases, output may expand, but not rapidly

enough to compensate, In between the extremes of the examples above fall many which

have more moderate impacts on employment.

Several case studies are outlined below, including those of telecommunications and typesetting, to illustrate typical impacts of electronics-related technologies on employment

patterns,

The British Telecommunications Industry

The introduction of electronic switching in

the British telephone system exemplifies the

replacement case. Employment dropped from

90,000 in 1973 to 65,000 by the end of the

decade, Jobs were lost both in manufacturing

and among those employed running the system. Declining export sales contributed to job

loss in the manufacture of telecommunications

14~’o]l(lw ing M, M~IJean and H. Rush, “The Impact of Microelectronics on the LJ. K.: A Suggested Classification and 11-

lustrative Case Studies,” Occasional Papers Series, No. 7, Science

Policy Research Unit, University of Sussex, June 1978.

Printing

Computerized typesetting provides a second

example of the introduction of new products

into old markets. High-speed photo-typesetting

equipment, along with typesetting computers,

have transformed the printing industry. The

equipment is much less labor-intensive than the

hot-metal typesetters that have been replaced,

and productivity has jumped. With electronic

typesetting, an operator selects type size and

style, column width, spacing, and other layout

specifications on a video screen, composing an

entire page at a time; the older linotype machines, stemming from the end of the 19th century, produced one line of type at a time. After

electronic photocomposition had been introduced at the New York Times, the Sunday

classified section could be completed in 20

minutes rather than 3 days, Over the mid1970’s, the staff in the composing room declined from 830 to 685 employees, and would

have dropped much further except for the ability of the printer’s union to maintain many jobs

that were in fact redundant.26 (Of course, if one

looks at media as a whole, electronics has

created vast numbers of jobs.)

Unfortunately, while productivity is now

much higher, demand for books and newspapers has not changed much, Between the

mid-1960’s—when only about 2 percent of all

typesetting in the United States was performed

25M. Wilkinson, “System X: The Need to Shake-up the ‘Phonemakers, “ Financial Times, oct. 18, 1978.

Z6The union at the 7’jmes was more successful than most at

holding on to jobs for its members. For a detailed treatment of

this case, see “The Impacts of Robotics on the Workplace and

Workforce, ” Carnegie-Mellon University, School of Urban and

Public Affairs, June 14, 1981, pp. 35ff. Other examples of applications of electronics technologies in printing can be found in J.

R. Werner, “The Role of Electronics in The Modern Newspaper, ” and J. L. Boyd, R, E. Robey, and J. S. Richards, “Automating Newspaper Production, ” sess. 21, The Role of Electronics

in the Graphic Arts, 1979 Electro Professional Program, New

York, Apr. 24-26, 1979.
Ch. 9–Employment Effects ● 3 6 9

— .——. — —. —

by the new machines—and the end of the

1970’s, penetration rose until about 90 percent

of all newspapers were composed using computerized equipment. The impacts on printers

as craft workers have been severe. Not only are

fewer people needed for photocomposition, but

they must have different skills, Few printers

have found jobs as computer programmers or

service personnel. Unions have been less concerned with the total number of job opportunities than with protecting individuals. Work

forces have been reduced through attrition; the

pension system created incentives for early

retirement. Printers, proud of their traditional

craft skills, were not very receptive to retraining, although this had always been a central

part of the union’s philosophy. While the strategies adopted by organized labor when confronted with such problems have varied, the

example of the printing industry is not untypical of instances where replacement technologies have been introduced into existing markets; labor-management relations tend to be

critical factors in coping with job-displacement

effects.

Electronic Watches

In the watchmaking industry, an example

from consumer goods manufacturing, electronically based products took more than half

the total market within the space of a decade.

In Switzerland alone, 20 to 30 percent of existing assembly labor was displaced. 27 Skill requirements for assembling electronic watches

are negligible. Along with deskilling of the production work force, international shifts occurred as firms in the Far East took over markets for lower priced watches; most of the relatively simple integrated circuits needed

are also made in Asia. Managements of Swiss

watchmakers reluctant to switch to the new

technology found their firms rapidly losing

ground, with effects on employment that were

even more devastating than among manufacturers choosing to embrace electronics.

Computer-Aided Manufacturing and Design

Continuing integration of computer technology into manufacturing operations—computeraided manufacturing (CAM)—will eventually

have major consequences for employment (ch.

6). Nonetheless, such developments--including

robots and software-programmable automated

equipment of many kinds—should generally be

viewed as evolutionary steps in the automation

of the workplace, continuing down paths originating many years ago. Much the same is true

of computer-aided engineering design (CAD),

which consists in part of automating tasks—

ranging from drafting to numerical analysisformerly done manually. In addition, both

CAM and CAD make possible work that could

not be performed at all in earlier years. Examples include machining parts without the

aid of drawings, continuous balancing of rotors

with material removed by lasers, or finite-element analyses of stresses and deflections.

As computers spread through manufacturing, impacts on employment will be, at least

at first, incremental and random-seeming. I n

the longer run, productivity will be greatly improved; labor-intensity will drop, and large

numbers of manufacturing jobs will disappear,

particularly those with lower skill levels. In this

sense, the long-term effects will in fact be revolutionary. The work force will face continuing

structural shifts, and labor-management relations will be under strain as accommodations

are sought. Changes in employment patterns

in a given industry will depend on the

characteristic production processes--how

susceptible they are to automation—as well as

growth in markets and shifts in competitiveness. Computers will have their greatest impacts when accompanied by large-scale reorganization of the work place, as happened in

continuous process industries with the introduction of computerized process control.

Numerically Controlled Machine Tools

The diffusion of numerically controlled (NC)

(ch. 6] machine tools illustrates the results of

incremental improvement in manufacturing
370 ● International Competitiveness in Electronics

technology. A survey of 24 American firms

revealed comparatively limited impacts on

employment.

28 NC machines were generally

purchased when business was good and output expanding; the new equipment helped

firms produce more without hiring extra

workers. Nor were many employees displaced;

most moved on to other production jobs,

although skilled craftsmen sometimes found

the transition to NC machines difficult. Management also had to learn to operate in a new

environment. Overall employment remained

more-or-less static, but the skill mix changed

and some individuals were faced with entirely new jobs. If the impacts of NC machine tools

have been mild, it would be misleading to

generalize this to future developments in

CAD/CAM. NC machining is a major step in

metal cutting, but a much more modest development from the viewpoint of manufacturing

technology as a whole; the next two or three

decades of advances in CAD/CAM will bring

more radical change to the factory floor.

Pet Foods

In an example of automated process control,

a British firm with a large share of the pet food

market invested in a computer-controlled production system.29 Instituted with the goal of rationalizing the production process, the system

was expected to cut employment by three-quarters over a 5-year period. The proportion of unskilled production workers dropped precipitously, while more management and engineering personnel were needed. An absence of

unions, combined with an extensive campaign

to convince workers that the new equipment

would eliminate the least desirable jobs, appear

to have been critical factors in the acceptance

of the new equipment. The small group of

workers selected by management to run this

equipment expressed considerable satisfaction

with their greater responsibilities, The rest of

the production work force lost their jobs.

‘28R. T. Lund, et al., “Numerically Controlled Machine Tools

and Group Technology: A Study of U.S. Experiences, ” Report

CPA 78-2, Center for Policy Alternatives, Massachusetts Institute

of Technology, jan. 13, 1978.

‘K. Dickson, “Petfoods by Computer: A Case Study of Automation, ” The Microelectronics Revolution, T. Forester (cd.) (Cambridge, Mass.: MIT Press, 1981).

Are the Case Studies Typical?

None of these examples can be taken as representative. They are anecdotal accounts of

events that have followed the introduction of

electronics-related technologies. Technical

change generally proceeds in piecemeal

fashion, with pace and impact that vary from

case to case; given hindsight, of course, such

seemingly random and incremental events may

show patterns invisible at the time.

In the examples recounted, the jobs created

generally called for different skills. Typical new

openings were for computer operators, or service and repair personnel trained to work on the

latest generation of equipment. While patterns

of job loss and job creation vary across industries, production jobs—unskilled, semiskilled,

or skilled—disappeared in all cases except NC

machining. Future employment impacts will

be influenced, not only by the technology itself,

but by the general state of the economy at the

time new technologies are introduced, by the

attitudes of workers and unions to automation,

and by the choices of corporate managers, In

some cases, job losses will be mitigated by expanding markets, particularly if workers are

retrained, Overall, however, a shrinking work

force in manufacturing points to continuing

displacement and adjustment problems.

Services

The service sector has been growing more

rapidly than manufacturing. Can the U.S.

economy continue to generate new jobs in services at a high rate? Office work has been a major source of past expansion. With the electronic office on the horizon, will this source

dry up? If office automation begins to cut deeply into employment opportunities, the ability

of the service sector to compensate for losses

in manufacturing will be seriously impaired.

Office Automation

Fortunately, this seems unlikely—at least in

the near term. Office work, breeding ground

for Parkinson’s Laws, will probably continue

to expand. At least some white-collar jobs seem
Ch. 9—Employment Effects ● 371

—.. .— —— — ——.—— ——.—

relatively impervious to automation in the

sense that people can find other things to occupy their time. This is partly a consequence

of the lack of output indicators or other measures of white-collar productivity. Nevertheless,

beyond office work, electronics may reduce job

opportunities (or the rate of job creation) in sectors like transportation, retailing, banking, and

the postal system.

Less is known about the effects of automation in services than in manufacturing. Over

the past two decades, the xerographic copier

has probably had greater impacts on office

work than any other piece of technology, yet

these seem hardly to have been studied. Has

the office copier created jobs? What have been

the effects on organizational efficiency? No one

seems to know. It has saved so much drudgery,

however, that few are likely to care.

More concretely, studies of the application

of electronics to services generally find—not

revolutionary change, but gradual evolution

best viewed as an extension of computer applications already in place. Such studies emphasize the extent to which workers such as

typists or clerks whose job skills may become

obsolete can be redeployed, seeing, for example, word processing as a straightforward extension of typing.

The central features of the electronic office—

expanded applications of data processing

equipment, including communications and

word processing—have thus far been introduced into existing or conventional office environments, In this respect, the analogy with

NC machines and industrial robots is close.

While office automation promises to reduce

staffing needs in conventional jobs, new tasks

are at the same time created in operating and

maintaining the systems, as well as using them.

Since office work is seldom very efficient or

well-organized, computerization is likely to

have its first effects at the margins of these

people-centered activities, rather than leading

to sudden and major shifts. Wholesale reorganizations of the workplace will be slower than

Photo credit Wang Laboratories

Word processing: one of the early steps

in office automation

Examining occupational categories makes it

clear that the mode of utilization of the new

technology is just as important as the speed of

adoption, again as in manufacturing. If new

technology is instituted primarily as a substitute for narrowly defined functions such as inventory recording, bank telling, or filing,

employment is likely to drop over the longer

term unless jobs expand in other areas (such

as sales). Where computers facilitate more effective and extensive information processing,

new jobs may be generated. Where demand for

new types of services is created, employment

will rise.

Consider the proliferation of word processing equipment, which affects the tasks now

performed by a well-defined group of employees. Based on the results of work-measurement

tests conducted in organizations that have

switched from typewriters to word processors,

productivity often more than doubles. While

this might suggest that half the typing work

force faces unemployment, in practice nothing

like this has happened, Indeed, some firms

have invested in word processors in response

to a shortage of typists. In other instances,

where typists have been made redundant they

have moved to other parts of the organization.

In many cases, people just write more words.

In fact, since word processors make it easier

in manufacturing. to produce multiple revisions of the same docu-
372 . International Competitiveness in Electronics

—- ——— — — —.

ment, productivity cannot be measured simply

in terms of words or drafts typed, The characteristics of the technology lead directly to an

increase in the number of slightly modified versions prior to a final copy, whether this is a

short letter or a report hundreds of pages in

length, While the benefits of this maybe questioned, the point is that oversimple estimates

of productivity gains—achieved or potential—

overstate the probable employment consequences.

Eventually, offices will be structured in substantially different ways, Some jobs will be

eliminated, others modified. Interactions

among people, individually and in groups, will

change. Matters of timing and approach to the

installation of new office equipment will, as in

the case of factory work, affect employee support or resistance, thus the effectiveness with

which the equipment is utilized, and people’s

satisfaction with their work.

Other Services

Service sector jobs outside the office include

health care, retailing and selling of all types,

banking, transportation, and postal services

(more broadly, communications). In principle,

electronics could alter many of these, but

where and when—or whether— is another matter.

In banking, computer processing of magnetically encoded checks has made it possible

for the same number of employees to handle

an ever-growing volume of transactions. Electronic funds transfer remains costly, and thus

far has seen only limited use in retail banking;

applications to interbank transactions have

been much more prominent, Such developments have not led to work force reductions;

during the 1970’s, the number of people employed in banking in the United States grew

by half, confounding predictions of employment losses.30 Two interpretations are possible: the first is that growth in job opportunities

slows under these circumstances; the second,

that electronics allows banks to expand their

functions in ways that would otherwise be precluded, These interpretations are not mutually exclusive; both have some validity. Clearly,

electronics technology has modified and extended banking functions—an obvious example is the automated 24-hour teller. Nonetheless, in Europe, employment growth in banking and insurance has already begun to slow;

a well-known report to the French Government

predicts that one-third of all jobs in banking

and insurance might be eliminated over the

decade ahead.

31 While perhaps overly dramatic, such predictions point to the concern

these issues have aroused, particularly in

Western Europe.

Like electronic funds transfer, electronic

mail has been viewed with some apprehension.

The U.S. Postal Service has made notable

strides in productivity over the past decade,

even reduced its labor force—but seldom as a

result of electronics. In the future, electronic

mail may cut deeply into job opportunities for

postal workers; employment could drop by 20

to 25 percent over the next 20 years. 32

30See J. Henize, “Evaluating the Employment Impact of Information Technology,” Technological Forecasting and Social

Change, vol. 20, August 1981, p. 41.

slMicroe]ectronics at Work: Productivity and Jobs in the World

Econom~?, op. cit., pp. 36-37. The French report is S. Nora and

A. Mine, The Computerization of Society (Cambridge, Mass:

MIT Press, 1980).

‘Zlmp]ications of Electronic Mail and Message Systems for the

U.S. Postal Service (Washington, D. C.: U.S. Congress, office of

Technology Assessment, OTA-CIT-183, August 1!382), ch. 6. The

postal service employed nearly 700,000 people in 1980.

Summary and Conclusions

Examples from both manufacturing and impacts resulting from technical change in

services can be interpreted either optimistically electronics on the economy as a whole cannot

or pessimistically; in the absence of more sys- be answered. But regardless of the view one

tematic studies, the question of employment takes, unprecedented adjustments lie ahead for
Ch. 9—Employment Effects ● 373

— . —-

both individual and firms. Should aggregate

employment increase, the introduction of ne w

technology will alter the jobs that people d o

and change their interactions with one another.

should total employment increase only slow -

ly compared to growth in the labor pool, o r

decrease, the adjustment problems will be ex -

traordinarily severe, more so in a country like

the United States which has little experience

with manpower policies, and where many people have come to view adjustment assistance

as a failure.

In recent years, the number of new job opportunities generated by the U. S. economy has

slowed, A good deal of the future expansion

will be in computer-related fields; only those

with appropriate training and skills will be in

a position to take advantage of these opportunities. Upskilling in the computer industry

has been going on for years, as indicated by

the increasing proportion of white-collar

employees compared to production workers.

In fact, the white collar-blue collar distinction

no longer carries much meaning; the labor

force is becoming increasingly stratified. Distinguishing those with specialized skills from

those without is only a starting place for examining the many new gradations.

A common notion, for example, is that computers will bring “user-friendliness” to many

jobs so that unskilled workers can perform

them, This is potentially misleading. Userfriendliness permits people with good skills to

work with complex and sophisticated systems

that otherwise would demand highly specialized expertise. User-friendliness also tends to

change the abilities required in the labor force.

Efficient utilization of a word processor depends on different skills than manual typing.

Mistake-free entry is not so important, but taking advantage of the full range of capabilities

of the system requires a certain grasp of its

logic and capabilities-mental skills, not manual (and different from the spelling and grammar now learned in school). Productivity i n

many types of jobs will increasingly depend on

such abilities; it would be doubly unfortunate

i f the U.S. electronics industry were to suffer

shortages of trained people at the same time

that large numbers of Americans find themselves without work because they lack the

capabilities that this and other industries depend on.

Like all technical change, advances in electronics will bring a mix of positive and negative

effects; at present, there is little factual basis

for either an optimistic or a pessimistic view

of the longer run impacts, Firms manufacturing electronics products will, for some years,

continue to create substantial numbers of new

jobs. In U.S. manufacturing as a whole, the rate

of growth of job opportunities has already

slowed, and jobs may go down in absolute

terms. A major source of declines will be computer-assisted automation. Will job growth elsewhere compensate? Anticipating events in the

service sector, where productivity growth has

been low, is more problematic than in manu -

facturing. While there may be only a few case s

of employment impacts as severe as in newspaper printing, there will be a multitude of ad -

justment problems for individuals; these ar e

likely to accelerate as electronics technolog y

continues to permeate both manufacturing an d

services. in the end, much will depend on overall rates of economic growth .

Job opportunities also depend on competitiveness. Employment typically falls when industries lose ground in either domestic or international markets. Even if aggregate economic growth brings greater demand, only the

more efficient companies can take full advantage. Generally speaking, firms and industries

that make effective use of new technologies

will generate new jobs, or if jobs are lost, this

will come more slowly; indeed, companies

seldom have any choice but to adopt new technologies i f they wish to remain competitive.

Those that move quickly (but not too quickly)

can often gain an edge over their competitors

via new products or productivity improvements in existing lines of business. Ultimately, the greatest numbers of jobs may disappear

where firms, industries, or nations do not keep

pace with technological advance.
374 ● International Competitiveness in Electronics ——— — —

and higher productivity simply to survive, In

some cases, then, declining employment is

associated with attempts to revive competitive

advantage, particularly when an industry or

firm is threatened with competition from lowwage countries. But it would be a mistake to

attribute the accompanying job losses solely to

imports. In consumer electronics, U.S. corporations have automated their production facilities and moved offshore; this costs U.S. jobs

in the short term, but may expand or help

maintain the total market for American products over the longer term. Moreover, as the

electronics industry becomes more and more

international—with American firms producing

goods overseas for foreign markets as well as

re-importation, and foreign firms setting up

assembly plants here—it becomes increasingly difficult to evaluate impacts on the American

labor force in isolation.

Most fundamentally, only by using labor efficiently—which often means investments in

automation—can U.S. firms maintain their international competitiveness. Improvements in

productivity-a path way to increased competitiveness—can have serious employment impacts on particular groups of workers, 

graphical regions, and industrial sectors. The

essential question is: How can the negative impacts on employment be minimized while capitalizing on the potentials of new technology?

Only where the market is expanding rapidly can employment growth parallel productivity advances. This has been the case in the

semiconductor and computer industries, but

not in consumer electronics. To the extent that

the American economy continues to grow only

slowly, many of the productivity gains flowing

from applications of electronics and computers

will have negative first-order effects on employment, Still, few practicable alternatives exist;

once robots or other automated technologies

become cost effective, the pressures to use

them become virtually irresistible. More jobs

could ultimately be lost through failure to adopt

such technologies than by pursuing them,

The implication is straightforward: som e

people, companies, industries, and regions will

lose competitiveness and lose jobs. The relationships between technical change, employment, and international competition may be

complex, but from the standpoint of public

policy, the negatives are wholly predictable.

They cannot be avoided, but the country could

prepare for them, both to ease the inevitable

adjustments and to help maintain U.S. competitiveness, Because changes in industrial

structure bring new job requirements, policy

measures aimed at encouraging both public

and privately funded education and training

are central to effective adjustment policy.
.

CHAPTER 10

National Industrial Policies
Contents

Page

Overview ... ... ... *.. *.. .0. **. *.. .**. *.. .*** .*** *0 *********"@~**""""" * 377

The Context for Industrial Policy ● o*o**. **. c*. *.. **e @ * . * . * $ * + + * . . . . . . . . . . 378

Policy Orientations. . . . . . . . . . . . . . . . . . . . . . .. .. ... ... ... ....O .. ... .OO. OO”OOS 380

The Tools of Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381

Industrial Policies Compared . . . . . . . . . . . . . ..=...... . . . . . . .....=-=. ● O.-to. 383

Developing Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383

United States.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..~........””””” -“. “S “ 394

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., .””..” 400

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405

The European Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... ~...... 412

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413

Summary and Conclusions . . . . . . . . . . . . . . ..***** . . . . . . . . .00.0.0. . . . . . . . . . 423

List of Tables

Table No. Page

77. Economic and Industrial Policy Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379

78. Korean Electronics Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384

79. Market Shares in Consumer Electronics for Japan and Other Asian Nations . . 385

80. Japanese Government Expenditures on Selected Projects

Related to Computer Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
CHAPTER 10

National Industrial Policies

Overview

Government policies directly and indirectly

affect the international competitiveness of industrial sectors. The impacts can be positive

or negative, tangible or intangible; they may

fall on domestic firms or foreign enterprises.

The American electronics industry has claimed

that the policies of the U.S. Government sometimes damage its competitiveness, while foreign industrial policies—particularly those of

Japan–also place it at a disadvantage. This is

a familiar argument: many U.S. business leaders assert, on the one hand, that U.S. policies

are counterproductive and that they would be

better off without Government interference,

and on the opposite hand, that in other countries government polices, far from being counterproductive, give their competitors powerful

advantages in international trade. Such questions turn on the general tenor of relations

among government, business, and other interest groups (consumers, organized labor) as

well as the details of policy.

As the importance of electronics became obvious and competition intensified, foreign governments sought policies that would promote

the growth and development of their own industries. These trends seem bound to continue,

not only in industrialized nations like Japan but

in developing economies. Questions of central

concern for American policy makers include:

How do industrial policies differ among nations? TO what extent can the effectiveness of

these policies be evaluated? Do actions taken

by foreign governments give the electronics industries of these countries significant competitive advantages? Can industrial policies

‘‘create’ comparative advantage? These are

hard questions. The monetary value of subsidies can seldom be approximated accurately.

Even where this is possible, it does not tell

whether the money was well spent or wasted.

More important, the industrial policies of countries like Japan work in large part through intangibles. When counting the yen does not suffice, how does the United States countervails

subsidies?

This chapter treats industrial policy in comparative fashion, with special attention to institutional context and the evolution of industrial policymaking, as well as the place of

electronics in strategies for economic development. Policies in the United States are covered

only briefly; the next chapter treats U.S. trade

policies in greater detail, while chapter 12 examines policy alternatives for this country.

Industrial policy means different things to

different people. To some, the term brings to

mind government programs for supporting and

promoting targeted industries, typified by the

French “plans” or Japan’s government-funded

research and development projects—sectorspecific attempts to assist industry. Beyond sectoral measures, a vast array of public policies—dealing with taxation, trade, human resources, science and technology, antitrust,

labor markets and economic adjustment, government procurement—also influence the development and viability of industries like electronics. OTA prefers to view industrial policy

broadly, as encompassing both sectoral targeting and the many policy measures with aggregate rather than sector-specific aims that

often have less direct effects on private firms. 1

International competitiveness, at root, depends on the efforts of private firms—this is

as true in countries like Japan with relatively

comprehensive and well-developed industrial

policies as in the United States—but public

policies help shape the environment within

which corporations operate and managers

I U,.S. industrial Competiti\reness: A Comparison of Steel, Automobiles, and Electronics (Washington, D, C.: U.S. Congress, Office of Technology Assessment, OTA-ISC-135, July 1981], p. 151.

377
378 ● International Competitiveness in Electronics

make decisions. The decisions of government

officials are important too. Nations have approached industrial policy differently; government intervention is more common and viewed

more positively in France or Japan than in

West Germany or the United States. Sometimes

public policies are clearly defined and consciously developed, sometimes they evolve in

ad hoc fashion—the traditional pattern here.

Still, such generalities can mislead: in all

major industrial nations, policies toward the

electronics industry have changed over time;

in several, debates over new approaches are

underway. Furthermore, policies often differ

across an industry. More than 20 years ago,

Japan began a series of programs intended to

foster the growth of an indigenous computer

industry—but the government did little by comparison to directly promote consumer electronics. In the United States, public policies

toward the automobile industry have centered

on regulations, while trade issues have been

stressed in the context of steel. U.S. agricultural policy has been much more highly developed than policies toward manufacturing.

Why then have some nations—France, Japan,

Taiwan, for examples—moved toward welldefined and rather comprehensive policies

directed at electronics, while countries like the

United States have not? There is no simple

answer, but historical and institutional factors

as well as stages of economic development and

the exigencies of day-to-day politics play a part,

Where government has for years promoted

industrial development—France rather than

Britain—public sector involvement in the economy is more widely accepted as legitimate. In

such countries, policies directed at a single industry such as electronics have usually reflected overall economic objectives. Institutional mechanisms that facilitate coordinated

policymaking—central banks or development

banks, respected planning councils, centralization of responsibility within one or a few

bureaucratic ministries–enhance the ability of

government officials to implement industrial

policies. These features are lacking in the

United States. During the greater part of the

postwar period—when American industries

such as electronics and aircraft were clear

leaders in world competition—public policies

here were directed, not at economic development, but at regulation.

As this chapter demonstrates, industrial

policies will be a prominent feature of the international competitive environment for the

foreseeable future. While other countries are

busy developing them, the United States is still

groping for a response.

The Context for Industrial Policy

Public policies directed at electronics should receded to less than 5 percent of GDP, From

be viewed in light of a nation’s overall eco- 1976 to 1980 alone, the share of Japan’s exports

nomic development strategy. Table 77 gives in accounted for by electronics went from 9 to 14

summary form a number of indicators of eco- percent. 2

nomic position and industrial policy for five Such shifts, the results of complex economic countries, Electronics and other high-technol- currents, form part of the policy context. Major ogy industries grow more important as manufacturing and services displace agriculture, In changes have also been occurring within elecJapan, agriculture accounted for more than 20 tronics. Continuing the example of Japan, conpercent of the gross domestic product (GDP)

in 1955, when the electronics industry was in-

“I’rends in the Electronics Industry in 1980 (Tokyo: Electronic

significant by international standards; by th e

Industries Association of Japan, 1981), p. 49; “Industrial Review

end of the 1970’s, the agricultural sector ha d of Japan—1981 ,“ Japan Economic Journal, p. 33.
I

Table 77.—Economic and Industrial Policy Indicators

1.

2.

3.

4.

5.

6A.

6B.

7.

8.

9.

10.

11.

12.

NA

—— United States

Services as a proportion of gross domestic product (GDP). . . . . . . . 63°/0 (1980)

R&D expenditures as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . 2.39°/0 (1981)

Government as a source of R&D funds . . . . . . . . . . . . . . . . . . . . 47.20/, (1982)

Civilian (rather than military) R&D as a percentage of total R&D 70.0% (1981)

Electronics R&D as a percentage of total R&D (1975) . . . . . . . . . . . . 22°/0

Government R&D spending on electronics as a percentage of

total government R&D spending (1975) . . . . . . . . . . . . . . . . . . . . 30°/0

Industry R&D spending on electronics as a percentage of

total industry R&D spending (1975). . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 0

/0

Percentage of 1978 government R&D funds going to:

Economic development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9°/0

Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49°/0

Organization of industrial policymaking system . . . . . . . . . . . . . . . . . . Fragmented

Government-business relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adversarial

Patents granted (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,770

Balance of trade in electronics with the United States (1981)

(millions of dollars) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +$4,235b

Overall policy and strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ad hoc

Japan

550/0 (1 979)

1 .970/0 (1 979)

27.40/o (1980)

97.40/0 (1977)

28.40/o (1979)

320/o

260/o

220/0

2%

Centralized

Cooperative

50,904

- $5,878’

Leapfrog:

West Germany — ——

49 ”/0 (1979)

2.320/o (1980)

49 ”/0 (1 979)

92.40/o (1979)

30 ”/0

31 %

30 %

15%

12 %

Decentralized

Structured

representation

business and

labor views

13,429

+ $1,592

Adaptive:

indigenous

technology

development

stresses

technology

development

of

not ava!lable

United Kingdom Taiwan

.—..

630/o (1980)

2.11 (1978)

550/0 (1979)

69.70/o (1978)

26 

340/0

2170

13 %

52 

Fragmented

Semi adversarial

22,924

+ $1,696

Adaptive:

stresses

commercial

applications

380/o (1979)

0.650/o (1981)

43%a (1980)

NA

NA

NA

NA

NA

NA

Centralized

Cooperative

NA

-$1 ,635’

Catch-up

aExcludes expenditures for m!l!tary R~D

bunltedStates with all nations

cNegatlve sign denotes exports to the United States exceeding imports from the Un [ted States

SOURCES Ten Year Economic Development Plan for Taiwan, Republlc of Ch!na, ’ Taiwan Counc!l for Economic Plannlng and Development March 1980

Tecfrrrlcal Change and Econornlc Po/Icy (Paris Orqanlzatlon for Economic Cooperation and Development, 1980) p 31

Denshf Sangyo ;O Kokusafka no Hoko to sono EIkyo m Kansuru Chosa Hokoku (Survey Report on Trends In the International lzatlon of the Electronics Industry and Their Influence Part II on East and

Southeast Asia) (Tokyo Nlhon Densht Kikat Kogyokal (Electronic Industries Assoclatlon of Japan), March 1981), p 121

K Schott, Industnal frrnovatlon fn the Urr~fed Klngdorn, Canada and the Unlfed States (London Contemprlnt July 1981) p 9

J Baranson and H B Malmgren, ‘ Technology and Trade Policy Issues and An Agenda for Act Ion “ report prepared for Department of Labor and Off Ice of the U S Trade Representative. October 1981 P 158

‘Survey of R&D Actlv!t!es in the Year 1980 Republic of China, ” Nattonal Sc!ence Counc!l, Republic of China 1981

Science /ndlcators— 1980 (Washington D C National Science Board Natronal Science Foundation 1981), pp 210-214

Electrorrlcs Jan 13, 1982

C J Mosbacher WIII R&D Funds Be More Than $77 Blllfon in 82 /ndustr(a/ Research & Deve/oprnerrt January 1982 p 106

Naflonal Patterns of Sc/errce and Technology Resources— 1982 (Washington D C Nat!onal Sctence Foundation 1982) p 33

Wor/d Deve/opmerrf Reporf 1982 (New York Oxford Unlverslty Press 1982) P 114

Outlook for Scfence and Technology, National Research Council (San Francisco W H Freeman, 1982), p 519

E/ectron/c Market Data Book 1982 (Washington D C Electronics I ndustrles Assoclatton 1982) P I I 1

Information from U S Patent Off Ice Embassy of Japan, Science Dlvlsjon Coord!nat!on Council for North American Affairs Repubhc of China
380 International Competitiveness in Electronics

sumer products declined from two-thirds of

that country’s exports of electronics in 1971 to

about half by the end of the decade, while semiconductor and computer exports increased.

Many of Japan’s consumer electronics shipments to the United States have been displaced

by products from other Asian nations, partly

a result of rapid industrialization in countries

like Hong Kong and Korea.3

These changes in the composition of Japan’s

exports reflect shifts in the international division of labor—developing economies are now

producing more consumer electronic goods,

while advanced nations concentrate on higher technology products. Industrial policies can

be viewed as responses to such structural

changes; they may attempt to modify or resist

them, to smooth adaptation to change, to complement or even induce it. “Success” is most

likely when policies work to accommodate or

reinforce rather than impede changes in industrial structure—provided the policies are

based on sound judgments concerning the

strengths and weaknesses of a country’s industries, both domestically and in the international marketplace. This is no easy task; still,

policies toward electronics in other countries,

if not the United States, should be viewed

in these terms—as components of national economic strategies based at least in part on perceptions and projections of structural shifts in

the world economy.

International economic conditions now favor

American corporations less than in the earlier

postwar years; this is one reason for the growing interest in industrial policy for the United

States. This country, along with the rest of the

industrialized West, has experienced low rates

of economic growth, rising inflation, and high

unemployment over the past decade. Competition has intensified among firms here and

abroad, all seeking to maintain or enhance their

positions in markets that maybe growing only

slowly. Under these conditions, governments

have turned to industrial policy as a way out

s White Paper on International Trade-1980 (Tokyo: Ministry

of International Trade and Industry, September 1980), p. 32. As

discussed elsewhere, Orderly Marketing Agreements have also

contributed to this shift.

of persistent economic problems, Moreover,

aggressive industrial policies in one country

breed responses elsewhere. The turn toward

industrial policies, particularly in nations lacking a tradition of government involvement in

economic affairs, is partly a reaction to these

new circumstances; in other countries, industrial policy is nothing new, just a continuation of past practices under a different name.

Policy Orientations

As part of a nation’s overall development

strategy, industrial policies can be directed at

catching up, leapfrogging, or staying ahead in

worldwide competition (table 77), Absence of

a clearly defined industrial policy may indicate

general satisfaction with the situation, the case

in the United States until recently; lack of a

well-defined industrial policy could also reflect

a belief that it is improper for government to

concern itself with such issues—a widespread

attitude here. In contrast, during the 1960’s the

French and Japanese began supporting and defending their computer industries against what

they viewed as an American challenge.

In many countries and at many times, defensive industrial policies have been devised—

intended to preserve existing economic structures, maintain employment, and protect beleagured firms and industries.4 Often defended

as temporary (ch. 11), protective measures frequently turn out to be persistent if not permanent.

Adaptive industrial policies seek to encourage structural change by facilitating shifts

of resources to growing and productive industries—those in the process of becoming more

competitive. In contrast to the defensive approach, adaptive industrial policies begin with

the assumption that some sectors will eventually decline in size and importance. In practice

the boundaries between various sorts of industrial policies are vague; for instance, subsidies or protection for a given sector may be

rationalized as a means of encouraging adap-

%ee W. Diebold, Jr., Industrial Policy as an International Issue

(New York: McGraw-Hill, 1980), pp. 7-8, for an outline of types

of industrial policies.
Ch. 10—National Industrial Policies ● 381

tation, while in practice they function as

defenses against decline.

More ambitious than adaptive policies are

those that attempt to induce change, This implies moving beyond a response to economic

forces—here government takes the lead in initiating industrial change, with the object of improving the competitiveness of some sectors

of the economy. Both this approach and the

adaptive strategy tend to be associated with notions of dynamic comparative advantage and

the belief that governments can anticipate and

plan for shifts in the structure of advantage,

As pointed out in chapter 5, the competitiveness of all sectors of an economy cannot improve at once. To pursue a positive development strategy, a nation must begin with at least

the implicit acknowledgment that some of its

industries will likely decline. Common ground

concerning the prospects for industry is easier

to find in economies with simple structures.

Nations that are still attempting to catch up

have an easier time in formulating policy; they

face fewer choices, fewer possibilities,

The Tools of Industrial Policy

In market economies, governments bring a

more or less standard set of policies to bear on

industrial development—measures used for

purposes ranging from improving competitiveness to encouraging regional development or

strengthening the national defense, Regardless

of whether a country is attempting to pursue

an integrated policy, a wide variety of government actions will inevitably affect the industrial portion of its economy.

In the case of electronics, many countries

have instituted policies affecting costs and supplies of capital—for R&D as well as for investment in plant and equipment. R&D supports

can take the form of low interest loans, direct

subsidies, or government contracts. In West

Germany, government funding supports basic

research as well as projects aimed at commercialization carried out by the laboratories of the

Fraunhofer Gesellschaft; the German Ministry

of Science and Technology also subsidizes contract research undertaken by smaller enterprises, along with cooperative R&D in industrial research associations. The Very HighSpeed Integrated Circuit program of the U.S.

Department of Defense is aimed at integrated

circuits (ICs) for military applications, but will

have commercial spinoffs. The Economic

Recovery Tax Act of 1981 included a tax credit

for R&D spending, as well as accelerated depreciation of equipment used in research, Japan also offers tax credits to firms that increase

their spending for R&D over past levels. Beyond this, the Japanese Government directly

supports projects aimed at commercial microelectronics and computer technologies.

Many countries assist regions, small businesses, perhaps entire industries through investment grants and subsidies. The United

Kingdom’s National Enterprise Board provided

50 million pounds to capitalize the semiconductor firm Inmos. In the United States, the

Small Business Administration loans money at

favorable interest rates and with lengthy repayment periods. Regional development loans

have stimulated investment by American and

Japanese semiconductor firms in Ireland and

Scotland. National banks, particularly industrial development banks, have been important vehicles in many countries for channeling funds to particular sectors.

Government procurement is widely used to

support national firms. Military procurement

has been much more important in the United

States, France, and Great Britain than in countries like West Germany. The “Buy Japanese”

policies of public corporations such as Nippon

Telegraph and Telephone (NTT) were for years

an integral part of Japan’s policies in electronics. In 1980, NTT—which purchases sizable amounts of communications and electronics products—agreed, after lengthy negotiations, to open some procurements to foreign

bidders. American firms have made only limited progress in selling to NTT, but the attention given the case indicates that government

procurement is becoming more subject to international negotiation, perhaps less usable as

a tool for the promotion of domestic industries
382 ● International Competitiveness in Electronics

(nontariff barriers to trade, of which this is an

example, are discussed more extensively in the

next chapter).

Still another category of policy measure includes those bearing on the regulation of industrial structure. Nations can influence the

structure of their industries by encouraging or

discouraging mergers, not to mention nationalizing firms or industries as the Mitterrand government in France has done. American competition policy has emphasized the regulatory

side—i.e., antitrust enforcement—while in

France and the United Kingdom, governments

have steered companies into mergers (e.g., the

computer manufacturers CII-Honeywel] Bull

in France and ICL in Britain) intended to create

“national champions. ” Encouraging mergers,

often through financial incentives—sometimes

referred to in Europe as structural policy—has

been a common feature of policies toward electronics in most developed nations.

Some countries use foreign investment controls to restrict inward flows of capital, and

thus preserve domestic markets for local firms.

In years past, such regulations, as well as restrictions on imports and technology from

abroad, played a central role in the industrial

policies of Japan; several examples in electronics were outlined in chapter 5. 5

Finally, tariffs and other varieties of trade

policy are an ever-present force in international

competition. Countries erect tariff walls to protect new or old industries; the European Economic Community, for instance, maintains a

tariff of 17 percent on ICs to discourage imports and stimulate domestic production. The

United States negotiated import quotas on color televisions with Japan, Taiwan, and South

Korea during the 1970’s in an attempt to deal

with the problems of this industry (as discussed

in ch. 11). Trading nations all maintain export

promotion measures intended to help local

firms sell in the world market. In the United

States, the Export Trading Company Act

(Public Law 97-290) passed in the fall of 1982

is one of the most recent examples; modifica-

—.-

%ee also R. S. Ozaki, The Control of Imports and Foreign Cap

ita] in Japan (New York: Praeger, 1972).

tions to the Foreign Corrupt Practices Act

likewise intended to support U.S. firms in

foreign markets passed the Senate but not the

House of Representatives in 1981.

Policy measures of the types outlined above

have been deployed by governments everywhere in their attempts to influence the

development of industry and improve competitiveness. Generally speaking, tariff barriers,

controls on foreign investment, and competition policies were the tools of first choice during earlier postwar years; since the late 1960’s,

as trade liberalization gained momentum and

direct trade barriers were dismantled, R&D

policies and investment stimuli have come to

the fore. In the wake of intensified competition

in a wide range of industries, trade negotiations—both bilateral and multilateral—have increasingly centered on subsidies and indirect

barriers.

While the typical mix of industrial policy

measures has shifted over time, the group of

policy tools from which they are chosen has

not changed very much. The industrial policies

of various nations draw on the same basic ingredients—R&D supports, investment grants

and subsidies, public sector procurement,

merger policy, controls on foreign investment,

tariffs and other trade policies. Nations combine these depending on their assessments of

the strengths and weaknesses of their own industries and the objectives of their economic

development programs.

The key to effective national policies has lain,

not in the individual policy tools but in their

combination—in the extent to which the policies chosen complement one another and work

toward a more or less consistent set of objectives. The timing of policy initiatives and the

receptivity of private firms to government programs are also important, but the success or

failure of industrial policies is determined to

a large extent by the ability of policy makers to

develop and implement a consistent framework and approach, one appropriate to that nation’s position in the international economy.

The remainder of the chapter reviews industrial policy in a number of countries, with particular attention to electronics,
Ch. 10—National Industrial Policies . 383

Industrial Policies Compared

The failures of industrial policy are much

more evident than the successes. How does one

weigh the contributions of government policies

to economic development—either on a general

or a sectoral basis—when a country has been

in the “take-off” stage, with many forces working more or less in concert to speed industrialization? This was the pattern in the Japanese

steel, shipbuilding, and petrochemical industries in earlier years, when a skilled labor force

and rapidly expanding markets were aided by

the government’s push. It is now the case in

other nations that have begun to experience

rapid economic growth.

Developing Countries

The past decade has seen a striking rise in

the electronics industries of a number of newly industrializing countries (NICs), most of

them in Asia. Many of these nations—Taiwan,

South Korea, Brazil—have chosen paths of government-guided economic development, albeit

with many gradations in the extent of government involvement. With the exception of

China, which has emphasized “self-sufficiency,” the Asian nations have relied heavily

on imported technology while capitalizing on

cheap labor. In countries like Singapore, Hong

Kong, and Taiwan, economic development policies have relied more heavily on encouraging

diversified exports of manufactured goods than

protecting local industries against import competition. The typical attitude toward foreign

electronics firms has been pragmatic, with

American and Japanese involvements tolerated

or encouraged because of benefits in technology transfer and infrastructural development.

In years past, the electronics industries in

most NICs centered on relatively simple consumer products—radios and black-and-white

TVs, pocket calculators, electronic watches,

toys and games. Now, policy pronouncements

from these countries are calling for shifts

toward more sophisticated goods, In Taiwan,

which has perhaps the most ambitious government programs, the stated aim is a more knowledge-intensive industrial structure, much as in

Japan. Chinese planners, also reconsidering

their traditional approach, have become more

open to technology exchanges and business

ventures involving foreign firms. While the industries in countries like Taiwan and South

Korea have already become major producers

of middle-range products like color TVs,

simpler microelectronic devices, and computer

peripherals, it is far from certain that such nations can succeed in advanced electronics technologies. Manpower limitations are the most

severe constraint.

South Korea

The Korean Government has consistently

sought rapid industrialization; the public sector presence has perhaps been more pervasive

than in any of the other NICs. Policy instruments have ranged from money to guidance: rebates of indirect taxes, raw materials

subsidies and loans to exporters, target figures

for exports, funds for R&D. Korea’s export financing programs have also been unusually

comprehensive compared to other NICS.

6

For many years the Korean economy expanded at a high rate, with annual increases

in gross national product (GNP) averaging 10

percent over the period from the early 1960’s

into the mid-1970’s. Labor-intensive manufactured goods provided the foundation for this

growth; exports have become much more important to South Korea’s economy over the past

decade, growing from 12 percent of GNP to 35

percent. 7 Electronics has been an export leader,

the most rapidly growing sector. Korea’s electronics industry is still small compared to

Japan’s, but it accounts for more than 10 percent of Korean exports.

More recently, South Korea’s economic miracle has fallen on the same hard times that have

“’Korea’s Eximbank Provides Incentives To Diversify Export

hlix, Destination, ” I,$IF .Surt’e~’, Nov. 26, 1979, p. 366.

7P. H a sa n and 11. (;. Rao, Korea, POliL’Jr Issues for Long-Term

De\’elopment (Baltimore: Johns Hopkins Unl\fersity Press, 1979),

p. 20.
384 . International Competitiveness in Electronics

afflicted the rest of the world. The slump was

sudden: whereas Korea’s output of electronic

products grew at the astounding rate of 40 percent per year during the 1970’s, production actually fell in 1980, although rebounding strongly in 1981,8 South Korea’s Government considers continued growth in electronics necessary for recovery, and the industry remains a

focal point of development strategy. Korea’s

fourth economic plan (1977-81) concluded that

long-term export viability would depend on

structural changes in manufacturing. The plan

called for rapid increases in exports of electronic products.9 Korea’s Government assumes

that other developing economies will provide

stiff competition in sectors like textiles and apparel, where Korean industry has in the past

been strong; thus, the country needs to continue moving into durable manufactures for export. The government also intends to deemphasize petrochemicals and heavy industries

like steel—sectors that helped lead Korean economic growth in past years. The fifth and latest

plan released by South Korea’s Economic Planning Board proposes dramatic cuts in investments in these portions of the economy,

with expenditures on electronics boosted

substantially. 10 Table 78 summarizes projections by the Korean Government; electronics

exports are expected to climb to $14.5 billion

in 1991. The most rapid growth is projected in

industrial electronics products, including computers and communications equipment, with

a heavy emphasis on microelectronics. The

share of total electronics output accounted for

by consumer products is expected to begin

shrinking by the latter part of the decade, with

a pronounced move away from the less sophisticated components that are currently a staple

‘Denshi Sangyo no Kokusaika no Hoko to sono Eikyo ni Kansuru Chosa Hokoku (Survey Report on Trends in the Internationalization of the Electronics Industry and Their Influence,

part II on East and Southeast Asia) (Tokyo: Nihon Denshi Kikai

Kogyokai (Electronic Industries Association of Japan), March

1981), p. I03; A. Spaeth, “Korea’s Electronics Industry Making

Rapid Gains in Shift to High-Technology Products,” Asian Wall

Street journal Weekly, Dec. 20, 1982, p. 1.

@Denshi Sangyo no Kokusaika no Hoko to sono Eikyo ni Kansuru Chosa Hokoku, op. cit., p. 5 6 ,

1

oN. Thorpe, “South Korea’s Economic Program Reduces Expansion of Several Major Industries, ” Wall Street ]ournal, July

24, 1981, p. 24.

Table 78.— Korean Electronics Production

Output (millions of dollars)

1981 1986a

Consumer . . . . . . . . . . . . . . . . . $1,600 $5,800

Industrialb . . . . . . . . . . . . . . . . 490 2,700

Components . . . . . . . . . . . . . . 1,710 4,800

$3,800 $13,300

Total electronics exports . . $2,200 $7,000

aProJected

blncludes computers and Ielecommun!cations equl Pment

SOURCE A Spaeth, “Korea’s Electronics Industry Making Rapid Gains In Shift

to HighTechnology Products,” Asian Wa// Street Journa/ Week/y, Dec

20, 1982, p. 1 The projections come from South Korea’s Ministry of

Commerce and Industry

of the Korean industry, Such a reorientation

will entail shifts in R&D emphasis, with increases in funding for both product and process technologies. To this end, the Ministry of

Commerce and Industry has begun channeling funds to Korean electronics firms for developments in semiconductors and computers .

11

To help focus research efforts, the Korean Institute of Electronics Technology—established

with government support in Gumi, the country’s Silicon Valley—is to be built into a centerpiece for research in electronics. The institute

has been installing production lines for very

large-scale ICs; the equipment will be used for

commercial production as well as engineering

development.

12 While the staff of the $62

million institute remains small, planners hope

that it will eventually house more than a thousand research workers.13

In addition to R&D assistance, the South Korean Government has provided investment

funds to electronics firms and supported them

through procurements, For instance, Gold Star

Semiconductor—a joint Korean-U.S. venture—

will receive a loan of more than $40 million

from both foreign and domestic sources, including the Korea Development Bank, to manufacture telephone switching equipment which

none report states that $800 million has already been invested

by the government–’’Fourth Five-Year Plan,” Electronics Weekly, Apr. 25, 1979, p. 19.

“’’Korea’s Electronics Industry Making Rapid Gains in Shift

to High-Technology Products, ” op. cit. Eventually, the institute

expects to sell the production facility to a private firm.

“’’South Korea Seeks Electronics Rebound,” New York Times,

Mar, 24, 1981, p. D5.
Ch. 10—National Industrial Policies 385

will be purchased by the Ministry of Communications. 14 A second major Korean electronics

firm—Samsung, also partly U.S.-owned—is involved in the project as well. When the government decided to begin color TV broadcasting

in 1980, Samsung won loans to aid in the production of color receivers. Foreign firms have

also benefited from investment incentives, although South Korea’s electronics industry has

been less dependent on overseas capital than

most others in Asia. Foreign-owned companies

are exempt from Korean income, property, and

corporate taxes during the first 5 years of

operation .15

Government generosity has not prevented

bottlenecks such as rising labor costs and skill

shortages among the 180,000 employees of

Asia’s third largest electronics industry. The

recent push toward indigenous technological

capability implies heavy R&D commitments,

but most South Korean firms have only limited

human and financial resources to devote to

these ends. Furthermore, other countries are

likely to be cautious in transferring electronics

technology to Korea now that the country’s

competitiveness is apparent. Japanese firms

have refused repeated requests for licenses

covering video cassette recorder (VCR) technology. 16 Korean producers have already demI“<[jold Star Semiconductor Raising Loan for Motfe Into Ad-

~ancerl Electronics, ” Asian Wall Street Journal Weeklby, Apr. 13,

1981, p. 8. The company is owned 44 percent by Western Electric and 56 percent by the Korean Lucky Group.

“C, Webb, “South Korea, ” Electronics Weekl~, Apr. 25, 1979,

~). 19.

15M. Inaba, ‘(Koreans Press Japan To Share Video Cassette

Pr(}flts, ” ~]ectronic News, NOV. 30, 1980, p. F. Nonetheless, se~’-

eral Korean firms already produce VCRs of their own design,

onstrated their ability to compete in the color

TV market, but if they cannot get foreign technology in other areas their progress in electronics will be slowed.

In view of these obstacles, does South Korea’s development strategy seem feasible?

There is no question that Korean firms are well

placed to expand their shipments of products

like color TVs, passive components, discrete

transistors, and small-scale ICs to more advanced countries. Korea is already the world’s

biggest producer of black-and-white TVs, and

Korean firms have been among the leaders as

Asian nations have taken over much of the

world’s production of consumer electronics

products—table 79. But developing the capability for designing and developing new products

based on domestic technology and resources

is a more ambitious and less certain undertaking than manufacturing commodity-like products using standardized, well-understood techniques.

Taiwan

The Taiwanese electronics industry runs a

close second in sales to Korea (ch. 4), and

employs more people. Both governments have

followed the Japanese pattern in emphasizing

electronics. At the center of Taiwan’s current

10-year economic plan (1980-89) is the development of the machinery, electronics, and information industries—favored because of high

value-added, modest demands for energy, and

comparatively high technology content. Taiwan has the best trained corps of engineers and

scientists in the Far East outside of Japan, makTable 79.— Market Shares in Consumer Electronics for Japan and Other Asian Nations

Share of total world market, 1979

Japan All other Asian nations – Total Asian share

Video cassette recorders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.2°/0 o 93.20/o

Color TVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.7 3.8 31.5

Monochrome TVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.3 49,6 65.9

Radios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., ... . . . . 5.2 71.8 77.0

Audio tape recorders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.2 52.8 91.0

Auto radios and tape players . . . . . . . . . . . . . . . . . . . . . . . . . ... . . 48.6 18.7 67.3

Other home audio equipment, stereos . . . . . . . . . . . . . . . . . . . . . 40.1 12.1 52.2

SOURCE Denshl Sangyo no Kokusa/ka no Hoko to sono Eikyo ni Kansuru Chosa Hokoku (Survey Report on Trends in the International lzatlon of the Electronics Industry

and The!r Influence, Parl II on East and Southeast Asia) (Tokyo N!hon Denshl Klkal Kogyokal (Electronic Industries Association of Japan), March 1981), p 2
386 ● International Competitiveness in Electronics

ing the more technology-intensive sectors natural targets. The country’s development plans

encompass ICs, computers and peripherals,

and high-end consumer products such as

VCRs. The Taiwanese, like the South Koreans,

are not satisfied with their image as manufacturers and assemblers of components, producers of cheap TVs and consumer goods. According to the current government plan, electronics output is to double over the decade.17

For some time, the Government of Taiwan

has been encouraging shifts from labor- to

knowledge-intensive industries. One vehicle

has been the Electronics Research and Service

Organization (ERSO), which gets about 40 percent of its funding from public sources, ERSO,

established in 1974, is one of four divisions of

the Industry Technology Research Institute

(ITRI); projects have included computerized industrial control systems, Chinese language

computers, and semiconductor development.

The organization also negotiated the technology transfer agreement with RCA that helped

Taiwanese firms produce c-MOS ICs for the

country’s watch industry.18 ERSO is engaged

in manufacturing as well as R&D, and has

helped introduce improved quality control procedures in Taiwan’s electronics industry,

Wage increases have rendered Taiwan’s

labor-intensive industries increasingly vulnerable to competition from other developing

countries, an important motive for the government’s stress on knowledge-intensive sectors

and another parallel with Korea. Policy pronouncements call for greater use of computerbased automation to increase productivity and

export competitiveness. ITRI leaders hope that

Taiwan will be able to independently develop

small computers and the associated software

for both domestic and export markets. Government planners believe that Taiwan will have

the best chance of success if, instead of

attempting to challenge IBM or the Japanese,

the country’s efforts are concentrated on

special-purpose machines compatible with the

Chinese language, along with minicomputers,

peripherals, and software. 19 Examples of the

initiatives being discussed include joint ventures with Western firms in which governmentsponsored training efforts would provide

skilled workers for software development. 20 

Along with other Asian electronics industries, Taiwan depends heavily on exports (table

19, ch. 4; Taiwan exported 80 percent of its

electronics production in 1979, South Korea 70

percent), with the bulk of these shipments

going to U.S. markets. Taiwanese firms such

as Tatung and Sampo have already set up color

TV production facilities in the United States.

With an economy that has been growing at an

annual rate of about 8 percent, unemployment

at less than 2 percent, and a persistent trade

surplus with the United States, Taiwan’s electronics industry is well positioned for further

expansion. But Taiwan faces many of the same

problems policy makers in Korea are grappling

with. The country will need greater numbers

of well-trained technicians and engineers,

higher levels of spending on R&D, and continued improvements in labor productivity—the

latter of growing significance as wages rise.

As for South Korea, Taiwan may not have

the financial and human resources needed for

rapid development in electronics based on indigenous technology, And again, foreign patent holders fearful of new competitors appear

reluctant to negotiate agreements with Taiwanese companies, particularly in more advanced products such as VCRs, Some leaders

within the Japanese electronics industry have

urged “accommodation” with emerging Asian

economies—meaning that Japan should concentrate on leading-edge technologies while

importing less sophisticated goods from elsewhere in Asia; but if Taiwan’s government is

1

7

’’ Ten-Year Economic Development Plan for Taiwan, Republic of China, ” Taiwan Council for Economic Planning and Development, March 1980, p. 39.

IBR. Neff, “Taiwan pushes High Technology, E]ectror?ics,

May 8, 1980, p. 100,

I@D. Ying, “Taiwan is Counting on Its Computer Industry to

Boost Exports and Bolster the Economy,” AsiarI Wall Street ]ournal Weekly, Oct. 20, 1980, p. 1; “Upgrade or Perish: Electronics

Makers Get the Message, ” Trade Winds, October 1980, p. 11.

ZO’’Hewlett-Packard Weighs Software Center in Taiwan, ” Asian

Wall Street Journal Weekly, Mar. 15, 1982, p. 4.
Ch. 10—National Industrial Policies ● 387

serious about its commitment to high technology, such an accommodation would probably

not be acceptable. 21

China

More strongly committed to self-sufficiency

than other industrializing economies, China’s

progress in electronics and other industries has

been uneven—in part because of longstanding

conflicts between the development of science

and technology and the quest for revolutionary

social change, China’s desire for self-sufficiency has also created obstacles to efficient mass

production; as a case in point, components are

still soldered into circuit boards by hand, while

in the West wave soldering has been employed

for more than 20 years. This is not to say that

the country’s electronics industry is unrelievedly primitive: the People’s Republic of China

(PRC) builds mainframe computers as well as

ICs roughly comparable to mid-1970’s U.S.

products, Nonetheless, until recently most of

the computers were one-of-a-kind machines,

lacking even transportable software. 22 

The picture has changed in the last halfdozen years as a new consensus on the importance of science and technology—one of the

“four modernizations” advocated at the Fourth

National People’s Congress in 1975-emerged

among China’s leaders. 23 In the National Plan

for Development of Science and Technology,

announced at a nationwide science conference

in 1978, eight technical areas were singled out

for special emphasis, among them computers.

In calling for the development of China’s capability in a wide range of electronics technologies, including large-scale ICs, microcomputers, peripherals, software, and computer networks, the plan termed computer science and

technology “a conspicuous hallmark of the

level of modernization of a country. ” The

reestablishment of the Science and Technology

zls~e the SurnmarPr of the Electronic 1 nrfustry Association of

Japan’s report on A~sian electroni{;s in Asian il’a)] Street ]ourna] Weekf~r, June 8, 1981.

2ZK. Berney, “Computer Sales to China, ” China Business

Re\riew, September-October 1980, p, 25.

Z3R. p, Sutt meier, Scjence, ~echno]og~’ and China llri~’e for

Alodernization (Stanford, Calif,: Hoover Institution Press, 1980),

Commission, a central agency for policymaking and implementation, is a further indication

of the government’s new direction.

Ten factories in China now produce computers, ranging from microcomputers to machines

similar to PDP-11s and IBM 360s.24 The State

Administration of Computer Industry (SACI)

has programs underway to utilize the nation’s

existing computing capability more efficiently, and intends to move toward smaller machines rather than relying on large mainframes. As one route to such objectives, SAC I

is establishing joint ventures with foreign concerns. In 1981, the China Technical Services

Corp. and the Japanese firm NEC (Nippon

Electric Co,) signed an agreement for a computer center in Beijing. NEC will provide a

medium-sized machine free of charge, and an

annual 4-month training course for 30 to 40

Chinese software specialists. The Chinese will

supply other facilities, along with the center’s

staff, including interpreters. A similar agreement has been signed with Sperry Univac,

while negotiations have taken place with other

U.S. firms, including Wang Laboratories and

Honeywell. 25 Both Japanese and Western firms

hope to establish themselves in the potentially lucrative PRC market.

As such ventures indicate, China is putting

a good deal of effort into training computer

specialists as a basis for more effective utilization of information processing technologies.

Electronics and computer technicians will

study at an Information Processing and Training Center, established in 1979 with funding

from the United Nations. Among the plans for

the center, to be equipped with a Burroughs

mainframe, as well as five Hewlett-Packard

3000 series minicomputers, are development

of a world patent index, collection of information on food supplies, a data base on power

generation and distribution for the Electric

Power Ministry, studies of urban traffic flows,

and macroeconomic modeling. 26 Such endeav24D. 13urstein, “Chinese Foment Another Revolution, ” Electronics, Jan, 13, 1983, p. 115.

‘

SK. Berney, “China’s Computer Resolution, ” China Business

Review, November-December 1981, p. 14.

26’’ U,,N, Aid for China’s Computer Modernization, ” China Business Re\iew’, September-October 1980, pp. 33-34.
388 International Competitiveness in Electronics —

ors imply that China—at least at present—may

be more interested in applications than in

building production capacity, not only in computer equipment but in electronics more generally,

Other NICs

Rapid growth in the Asian electronics industry extends well beyond Taiwan and South

Korea. Hong Kong’s companies, which have

been basically assembly-oriented suppliers of

products like watches and calculators, accounted for 13 percent of the colony’s exports

in 1980.27 In Singapore, which has also been

a major assembly site, the government has introduced policies intended to encourage semiconductor manufacturing, as well as production of computer hardware and software; the

government, for example, owns 25 percent of

Tata Elxsi, a joint venture involving U.S. and

Indian interests formed to make mainframe

processors. 28 Government policy in Hong Kong

has been less intrusive than in Singapore, but

the electronics industry there has also been

moving toward high technology.

Clearly the Asian NICs are all, in one way

or another, attempting to learn from and

emulate Japan’s approach to industrial policy,

In the earlier postwar years, Japanese companies imported technology, while government

decisions favored heavy industries; newly industrializing nations in Asia have already abandoned this approach for one more like Japan

current industrial policy. The question is

whether South Korea, Taiwan, and other NICs

have, at this juncture, the resources to support

technological self-sufficiency. But even if their

progress in developing home-grown technologies proves slow, these countries will be increasingly competitive in world markets for

less sophisticated electronics products, well

able to challenge manufacturers anywhere that

fail to maintain a technological edge,

27’’Says Electronics Could Lead as Hong Kong Export Earner, ”

Electronic News, Oct. 26, 1981, p. FF.

‘@’’See CPU, Software Mfg. Leading Singapore’s Future, ” 13)ectronic News, Dec. 7, 1981, p. Q.

The discussion above does no more than

sketch in a few of the outlines of industrial

policy toward electronics in developing Asian

economies (Japan is treated in some detail

below). Outside Asia, governments in countries

like Brazil and Mexico have also nurtured

rapidly expanding electronics industries.

Brazil, for instance, has used access to its

rapidly growing market as the carrot for acquiring U.S. minicomputer technology.29 In all

these countries, foreign investments by American and/or Japanese firms have been one of the

starting points for indigenous development.

Today, these nations are aggressively attempting to strengthen their own capability and

reduce their dependence on more advanced

countries. None of the policies employed—the

establishment of government-supported R&D

facilities, tax breaks and financial subsidies for

local firms, preferential procurement, government encouragement of or participation in

joint ventures with foreign firms—are unique

or even unusual. Such measures are part of the

standard list. Still, government planners in

NICs have often pursued them more consistently and forcefully—South Korea is especially striking in this regard–than have developed

economies. This is partly because the paths are

well marked for NICs in comparison to advanced nations with complex industrial structures. The explicit focus on strengthening domestic technical know-how—a recent shift in

emphasis —has led to increased demands for

transfers of technology as a condition for sales

or investment by foreign firms. Countries making such demands—or alternatively, offering

incentives to attract technology inflows-see

them as a prerequisite for building their own

capabilities. Some multinational electronics

firms have accepted these conditions—which

at times have been a prerequisite for market

entry, a tactic that Japan employed in years

past—more readily than others. The draft

UNCTAD (United Nations Council on Trade

and Development) code on technology transfer

“J. Baranson and H. B. Malmgren, “Technology and Trade

Policy: Issues and an Agenda for Action, ” report prepared for

Department of Labor and Office of the U.S. Trade Representative, October 1981, pp. 125-126.
Ch. 10—National Industrial Policies ● 389 — —

illustrates the strong desire among developing

nations everywhere for technology acquisition

on more favorable terms.

A problem that the developing Asian economies all share—some more so than others—

is expanding their pools of engineers and technicians. Countries like India, Taiwan, and

Korea have labor forces containing substantial

numbers of engineers and scientists, many of

them educated in the West. Nevertheless, while

some of these nations have managed to mobilize their human resources more effectively

than others, none of the NICs have enough

skilled people to move rapidly into high-technology electronics production. They do have

one advantage: their engineers are not paid

nearly as well as in the advanced countries.

With salaries perhaps one-quarter those in the

United States, the industrializing Asian economies are striving to capitalize on lower R&D

costs as they earlier did with unskilled labor.30

While it is unlikely that any of these countries

will quickly bridge the commercial and technological gaps separating them from Japan and

the West, and while their approaches to industrial policy differ in style of government intervention and reliance on market mechanisms, all seem committed to some variety of

coordinated industrial policy as a means of

supporting local electronics manufacturers in

both domestic and world markets.

United States

The U.S. Government has not developed a

consistent, systematic set of policies directed

at industry—a task that, even if judged desirable, would be much more difficult for the

world’s most complex economy than one that

was still industrializing. It has become a commonplace to note that, while numerous public

policies exert direct or indirect effects on firms

and industries, the American approach is ad

hoc. In this sense, then, U.S. industrial policy

also differs from that in Japan or many of the

European nations, While the Federal Govern-

‘A, Spaeth, “Asian ‘NICS’ Rely on Cheap Brainpower To Plan

Output of More Advanced Goods, ” Wafl Street journal, Jan. 5,

1983, p. 25.

ment has paid more attention to some industries than others, this has most often been a

result of political pressures, as in the case of

textiles, or national security considerations.

And not even in the Department of Defense

could one find anything like an “electronics industry policy. ” Following World War II, U.S.

foreign economic policy centered on an ambitious recovery program in Western Europe and

Japan–the Marshall Plan. But despite this embrace of economic planning for other parts of

the world, domestic economic policies have revolved around macroeconomics and regulation. The United States has avoided promotion,

planning, and targeting—the common tools in

other countries.

In electronics, microlevel involvements, leaving aside national defense, have generally had

regulatory thrusts—witness the lengthy antitrust prosecution of IBM. One reason the U.S.

Government has been willing to endorse economic planning overseas but not at home lies

in the unrivaled strength of American corporations during most of the postwar period. In

light of the success of American firms such as

Boeing, IBM, or General Electric in world markets, the focus of policy makers here on freemarket competition is quite understandable;

for the Federal Government to consider policies that would promote “national champions’’—as the French did—when these champions already existed, would have seemed superfluous if not counterproductive.

Public policies have, nonetheless, exerted

considerable influence on the American electronics industry. Military procurements stimulated developments in computers and semiconductors. Since the 1960’s, trade policy has

been a persistent concern in consumer electronics. Taxation, regulations of many kinds

(particularly in the telecommunications sector),

patents, protection of computer software–all

have been debated in various contexts. But in

total, the Federal Government’s policies have

been a patchwork, often based on objectives

quite different from those motivating the industrial policies of other countries. Antitrust

enforcement stands out especially.
390 ● International Competitiveness in Electronics —

Antitrust

Where competition policies in other countries have been vehicles for mergers, joint ventures, and consolidation, notably in the computer industry—the rationale being to create

companies big enough to compete effectively—

antitrust enforcement in the United States has

aimed at breaking up large enterprises. 31 D e -

spite the common association of bigness with

badness, American law does not prohibit oligopoly (industries dominated by a small number of firms), but limits predatory or exclusionary tactics. Therefore, antitrust violations

tend to be difficult to prove, cases lengthy and

expensive .32

How has antitrust enforcement influenced

the international competitiveness of American

electronics firms? As has been the case so often

with U.S. industrial policy, the side effects may

have had the greatest impact—in this instance,

uncertainty over the intentions of the Department of Justice and the Federal Trade Commission. Business and industry in the United

States claim—perhaps with justification—that

antitrust enforcement is ambiguous and threatening, that Government officials, knowing the

line to be vague, try to keep companies far

back. Instances in which enforcement intentions have been known to actually stop

mergers, joint ventures, or acquisitions in elecslOn u ,s, antitrust law and enforcement, see U.S. ~nd~stria]

Competitiveness: A Comparison of Steel, Electronics, and Automobiles, op. cit., pp. 184-185. Also ch. 12 of the present report;

J. W. McKie, “Government Intervention in the Economy of the

United States,” Government Intervention in the Developed Economy, P. Maunder (cd. ) (London: Croom Helm, 1979), p. 75; and

M. Keller, “Regulation of Large Enterprise: The United States

Experience in Comparative Perspective, ” Managerial Hierarchies: Comparative Perspectives on the Rise of the Modern Industrial Enterprise, A. D. Chandler, Jr., and H. Daems (eds.)

(Cambridge, Mass.: Harvard University Press, 1980), p. 161.

sZThe Department of Justice initiated its suit against IBM in

1969, with the trial beginning in 1975. A decision—which would

certainly have been appealed regardless of the verdict—was still

well in the future when the case was dropped by the Government in January 1982. At the same time, the Justice Department

resolved a 7-year antitrust suit asking that AT&T divest itself

of Western Electric, the communications company’s manufacturing arm. On the settlements, see “Statement of William F. Baxter, Assistant Attorney General, Antitrust Division, on Recent

Actions of the Department of Justice in U.S. v. AT&T and U.S.

v. IBM, Before the Committee on the Judiciary, U.S. Senate, ”

Jan. 25, 1982.

tronics are few. One case arose at the end of

the 1970’s, when GE and Hitachi proposed a

joint venture to manufacture TVs in the United

States. The two companies suspended their negotiations after the Justice Department threatened to sue under provisions of the Clayton

Act.33 More frequently, the possibility—even if

remote—of costly and protracted litigation

seems to have caused American firms to steer

clear of cooperation in R&D.34 While much of

the complaining by the business community

over antitrust reflects no more than the usual

antagonism toward Government regulation, it

does appear that companies have been little inclined to explore the bounds of the permissible,

simply because the risks have been seen as far

greater than the rewards. Largely as a result

of repeated expressions of concern, the Department of Justice issued a set of written guidelines covering joint R&D ventures, but a good

deal of ambiguity nevertheless persists.35 Even

where no single project has great import, a

general discouragement of joint R&D efforts

could eventually have a large cumulative impact. Moreover, if joint international research

projects proliferate, American antitrust law—in

the absence of more concrete guidance—may

present an obstacle to participation by U.S.

firms .38

Trade and Foreign Economic Policies

If antitrust has recently been at the forefront

of U.S. industrial policies as they have affected

33J. Crudele and J. Hataye, “Fear for TV Jobs as Justice Blocks

GE-Hitachi Venture,” Electronic News, Dec. 4, 1978, sec. I, p, 1.

JqSee, for example, D. H, Ginsburg, “Antitrust, Uncertainty,

and Technological Innovation, ” Antitrust Bulletin, winter 1979,

p. 635.

ssAntitrust Guide concerning Research Joint Ventures (Washington, D. C,: Department of Justice, November 1980). At the end

of 1982, the Justice Department announced that it would not seek

to bar the formation of Microelectronics & Computer Technology Corp., the joint venture involving a dozen U.S. firms intended to pursue R&D in advanced electronics technologies (ch.

5].

‘aFor a proposal that foreign enterprises be allowed to participate equally in the government-sponsored R&D efforts of all nations, see Report of the U.S.-Japan Economic Relations Group,

January 1981, p. 80. Japan has recently agreed to open its

fifth-generation computer project, and others like it, to Japanese

subsidiaries of U.S. companies. See U. C. Lehner, “U. S., Japan

Pact Would Bolster Joint Research,” Wall Street Journal, Nov.

1, 1982, p. 35.
Ch. 10—National Industrial Policies ● 391 —

the computer industry—via the IBM case—

trade policies concerned with dumping and

other unfair practices have been central in consumer electronics, Trade policies and their effects are treated in detail in chapter 11; the

point here is simply to note their significance

as part of U.S. industrial policy. After years of

litigation, the competitive battle in color TV is

still proceeding in the courtroom as well as the

marketplace. A legalistic thrust analogous to

that in computers has dominated public policy

impacts.

To take a somewhat broader perspective, as

world competition in electronics has increased,

U.S. policy makers have renewed their attempts

to reduce overseas trade barriers. Nontariff and

indirect barriers restricting the entry of

American products into foreign markets have

been particular targets. A new flurry of activity

came in 1982; the many bills introduced in

Congress that could be loosely grouped as dealing with trade reciprocity illustrate the depth

of concern. Progress on such questions will be

slow; since most countries view subsidies and

other tools of industrial policy as internal matters, they are difficult to address via international negotiations.

Procurement and R&D

In contrast to the antitrust and trade orientations visible in computers and consumer electronics, American semiconductor firms have

seldom, since the 1960’s, been directly affected

by public policies. Through the 1950’s and

1960’s, the Federal Government stimulated developments in microelectronics by purchasing

semiconductors for military and space programs, as well as by supporting R&D (much the

same was true for the computer industry in its

early years). During this period, the Government purchased a large fraction of U.S. semiconductor output—e.g., for the Minuteman II

missile. In 1965 the Department of Defense accounted for about 70 percent of U.S. IC sales,

while by the end of the 1970’s, the figure had

dropped to around 7 percent, s’

s7,4 n A sse,y<~men t of the Impact of the Departmen f of Defense

t’(;r}’-}{igh-.$l)[;e~l integrated (lrcuit Program, National Materials

Ad~isory Board Report NMAEI-382 [Washington, E). C.: National

Research Council, ]anuarj 1982), p, 6, Also see ch. 4.

Because the military market is now so small

compared to commercial sales, specialized

contractors do much of the work on devices

for defense systems. Largely in response to the

slow rate of introduction of advanced microelectronics technologies into military hardware, the Department of Defense initiated an

R&D program directed at very high-speed integrated circuits (VHSIC) beginning in fiscal

1979. With an initial 6-year budget of more than

$200 million–since expanded substantially–

the VHSIC program is intended to speed the

development of ICs that meet military needs.

Involving all three services, VHSIC has been

structured around bidding by firms and groups

of firms for contracts covering a variety of welldefined R&D tasks. Although the ICs themselves will be tailored to military applications,

research results in areas such as processing

technology, computer-aided circuit design, and

system architectures will find their way into

the commercial efforts of U.S. merchant firms.

While most of the VHSIC contracts are closer

to development than basic research, the Defense Department has also initiated a program

entitled Ultrasmall Electronics Research intended to support R&D that will pay off 10 or

20 years in the future. 38

Even with the increases stemming from the

VHSIC program, Federal support of R&D in

semiconductor-related technologies remains a

much smaller fraction of total U.S. semiconductor R&D than in the 1960’s. While the comparisons are less than straightforward because

allocations of spending to R&D categories tend

to be rather arbitrary, and disaggregated data

seldom available, an idea of the current significance of Federal funding can be pieced

together.

For 1980, the latest year for which data is

available, total U.S. R&D spending by the “electronic components” sector—which is considerably larger than microelectronics alone—

has been put at $1.354 billion.39 For the same

seTh~ 5- ~’ear [jut)ook on $kience and Tec;hnolog.y 1981 (Washington, DC,: National Science Foundation NSF 81-40, 1981], p.

33.

30El~~ tron i[; h~arket lja ta Book 1 !282 [Wash i n gto n, D. C.: E lec -

troui(; ludustrie.s Association, 1982), p. 121. ‘I”he figure, from data

collected b}’ the National Science Foundation, is for SIC category

367, which has nine subdivisions. Of these, semiconductors (SIC

3674) is certainly the largest performer of R& Il.
392 ● International Competitiveness in Electronics ——

year, tabulations of R&D spending by U.S. merchant semiconductor firms from sources such

as annual reports give totals in the range of

$800 million. It is more difficult to determine

spending on microelectronics by captives,

which seldom report such data separately.

Allocation of software development costs also

leads to ambiguity; as microelectronic devices

become more complex and more like complete

systems, software becomes a major part of the

research, design, and development effort.

In any case, given that IBM—largest of the

captive producers—no doubt spends several

hundred million dollars annually on microelectronics, total U.S. R&D expenditures on semiconductor-related technologies in 1980 must

have been well over $1 billion. How much of

this did the Federal Government provide? For

fiscal year 1980, Government expenditures for

R&D related to ICs have been reported as $61

million, rising to $71 million in fiscal 1981.40

~OAn ASSeSSrnen t of the Impact of the Department of Defense

Very-High-Speed Integrated Circuit Program, op. cit., pp. 20-22.

For purposes of this rough comparison, R&D related to ICs can

be taken as equivalent to R&D related to microelectronics. The

Federal contribution includes work performed in Government

laboratories, but this accounts for less than 10 percent of the

Evidently, then, the Federal Government contributes something between 5 and 10 percent

of the total. This estimate illustrates the continuing decline in the Federal presence; over

the period 1958-76, Government spending accounted for about 15 percent of all U.S. semiconductor R&D. 41

Indeed, it appears that even in the early

years, Government purchases were a greater

spur to the industry than R&D contracts. 42 B y

providing a guaranteed market, Government

procurement—mostly for military purposes—

stimulated the growth of the industry at a

critical stage in its development. At the time,

semiconductor manufacturing was a far different business than today; it was part of the

defense sector of the economy, whereas sales

to the Government are now dwarfed by sales

to computer manufacturers and other nondefense customers.

Taxation

The Economic Recovery Tax Act of 1981

(ERTA) was supposed to speed economic

growth and build U.S. competitiveness by increasing incentives for saving and investment.

Photo creult /rife/ Corp

A 16-bit microprocessor

total—the rest being contracts and grants to industry, universities, and independent research laboratories. About 10 percent

of the Government money comes from the National Science

Foundation (NSF), most of the rest from the Department of Defense, NSF’s share of basic research support is closer to 30 percent. In fiscal 1980, the VHSIC program accounted for 40 percent of the Government’s total spending on microelectronics

R&D. As table 77 indicates, overall R&D spending by the U.S.

Government is heavily skewed toward military needs compared

to countries like Japan or Germany.

IBM spends well over $1 billion annually on R&D; the company’s R&D spending on very large-scale ICs has been reported

to total about $1 billion over the period 1977-80—G. Gregory,

“The U.S. Wages Micro-War, ” Far Eastern Economic Review,

Mar. 16, 1979, p. 124.

41A Report on the U.S. Semiconductor Industry (Washington,

D. C.: Department of Commerce, September 1979), p. 8. The estimates are those of the Semiconductor Industry Association.

In 1958, Department of Defense contracts and grants accounted

for nearly a quarter of the industry’s R&D spending–N. J, Asher

and L. D. Strom, “The Role of the Department of Defense in the

Development of Integrated Circuits, ” Institute for Defense Analyses paper P-1271, May 1977, p. 3, The percentage has thus been

falling more or less steadily for many years.

dZAsher and Strom, op. cit.; J. M. Utterback and A. E. Murray, “The Influence of Defense Procurement and Sponsorship

of Research and Development on the Development of the Civilian

Electronics Industry,” report CPA-77-5, Center for Policy Alternatives, Massachusetts Institute of Technology, June 30, 1977.
Ch. 10—National Industrial Policies ● 393

The wholesale changes in U.S. tax policy embodied in ERTA have affected all industries;

perhaps most significant are the altered depreciation schedules discussed in chapters 7 and

12. ERTA also extends a tax credit—amounting

to 25 percent of any increase in R&D spending

over a base figure—as part of a package of incentives for research. Although young hightechnology companies may not have profits to

set against the tax credit, at least some electronics companies will benefit from the R&D

provisions more than from accelerated depreciation.

As pointed out elsewhere, the ERTA package

has thus far had little perceptible effect on investment. Moreover, it appears that, in comparison with other U.S. industries, the relative

attractions of investments in electronics may

have been diminished, The telling point in the

context of U.S. industrial policymaking is this:

such outcomes have been neither intended nor

anticipated, instead resulting from the unexamined give-and-take of the political process.

Industrial Policymaking

As many of the examples above indicate—

from antitrust through taxation (many others

could be adduced)—public policies influencing

the American electronics industry have lacked

a framework and sense of direction, The very

notion of objectives or “goals” for policy, in

any but the most immediate sense, has been

anathema for policy makers here. In contrast,

other countries have pursued economic development quite consistently, making use of numerous policy tools. While in the United States

there has been no one agency to serve as a focal

point for industrial policies, other nations have

developed policymaking approaches involving

more or less permanent industrial advisory

councils, ministries accountable for welldefined policy areas, mechanisms for coordination. Here, many agencies participate in policy

development—sometimes on a regular basis,

sometimes infrequently.

More often than not, policies affecting electronics have been formulated with little consideration of possible impacts on international

competitiveness. National security, antitrust,

macroeconomic policy have taken priority—

competitiveness and economic efficiency have

seldom been at the forefront, or even in view.

Trade policy complaints in consumer electronics have come from domestic firms and

their employees, with Federal agencies—illequipped to take an independent view—reacting to these pressures. Short-term response to

political pressures has in fact been the common denominator of U.S. industrial policy.

Yet as competition has intensified—in computers and microelectronics, jet aircraft and

telecommunications systems—both Congress

and the executive branch have begun to debate

the question of a more explicit industrial policy

for the United States.43 In addition, the Department of Defense through VHSIC and other programs, the National Science Foundation, and

the Department of Commerce have all studied—even attempted to design, often under

rubrics such as innovation—policies that would

stimulate basic as well as applied research, and

irro give only a feW~ examples, and lea~’ing aside such related

topics as innovation or productivity, late in 1980 the Subcommittee on Trade of the House Ways and Means Committee issued

the United States-Japan Trade Report [Sept. 5, 1980), calling for

o~’erall improvement of the economy rather than trade p rotcction as a response to Japan’s growing challenge in high-technology industries. A report by J. Gresser—High Technofog} and

Japanese Industrial Policy: A Strateg~r for U.S. Polic~mlakers (Oct.

1, 1980)—recommending a more focused U.S. response was published soon thereafter under the auspices of the same committee, The Subcommittee on Trade’s Report on Trade hfissiun to

the Far East (Dee. 21, 1981 ) reiterates many of the same themes,

More recently, the Joint Economic Committee has released a

study by M, Borrus, J. Millstein, and J, Zysman entitled III ternational Competition in Advanced Industrial Sectors: Trade and

DeLreiopment in the Semiconductor industry [Feb. 18, 1982)

which stresses the importance of electronics for overall economic development.

Dozens of hearings in Congress over the past several years

have covered such issues, two examples being Industrial Polic~’, hearing, Joint Economic Committee, Congress of the United

States, May 18, 1982; and U.S. Industrial Strateg~, hearing, Subcommittee on Economic Stabilization, Committee on Banking,

Finance and Urban Affairs, House of Representatives, Sept. 22,

1982.

Trade and tax policy debates inside the Reagan administration have dealt at least peripherally with electronics, as has an

interagency stud y on high-technology trade—see A Assessmen(

of U.S. Competitiveness in High-Technology Industries (Washington, D. C,: Department of Commerce, February 1983). The

Commerce Department has begun work on an inventory of industrial policy measures employed by other countries, while the

Department of Labor has a long-standing interest in industrial

policies, particularly as they deal with adjustment.
394 ● /international Competitiveness in Electronics

encourage productive investments by the private sector. There is no dearth of concern over

policies affecting industries like electronics,

but little consensus as yet on the direction that

policy initiatives should take. 44

Chapter 12 addresses policy alternatives for

the United States in some detail; here the point

is that—in contrast to ongoing debates over industrial policy in other countries, which tend

to focus on review and redirection of measures

already in place—there is still no consensus in

this country on the need for a more coherent

industrial policy, much less on the form it

might take. In a sense, the United States is starting off behind in the race to develop effective

industrial policies simply because U.S. industries like electronics led the competitive

race for so many years.

France

Perhaps more than any other advanced Western nation, France has centralized and coordinated its industrial policymaking as one of

the primary ingredients in an interventionist

approach to economic policy. While the tools

and tactics have shifted over time, the policies

adopted by the current Socialist Government

trace their origins to the planning process

adopted by France in the aftermath of World

War II. The continuity of the French system,

like that of Japan, is one of its salient characteristics.

The Setting

The French have accepted government involvement in the economy as legitimate and

necessary. Industrial policies are part of a context that includes extensive public ownership

of both manufacturing organizations and financial institutions; under Mitterrand, the electronics firms CII-Honeywell Bull, Thomson,

WITA’S comparison of U.S. competitiveness in three industries

led to the suggestion of a “macroindu.strial” policy. The intent

would be to provide infrastructural support for American industries, rather than moving toward explicit Government decisions

favoring some sectors over others. Examples would be policies

directed at labor markets, technological development, human

resources, taxation, and economic adjustment. See U.S. ]ndustrial Competitiveness: A Comparison of Steel, Electronics, and

Automobiles, op. cit., pp. 157-165.

and CGE (Compagnie Generale d’Electricity)

have joined the roster of national enterprises,

together with a number of banks. The goal has

been not only to increase the financial resources and market power of French corporations, but to create prestigious flagships that

can lead the economy. Saving jobs in threatened industries—e.g., steel—has also been an

important motive; furthermore, the government’s plan for the electronics industry promises to create 80,000 new jobs over the 5-year

period 1982-86. 45 “National champion” firms

were a capstone of French industrial policy

during the 1960’s, when France became the

first nation to mount a direct challenge to IBM.

Aircraft, nuclear power, and telecommunications have been other government favorites.

The idea of national champions never really

died, and has simply been revived in slightly

different form under Mitterrand; electronics—

computers, semiconductors, consumer products, communications, office automation—is to

be at the core of France’s future industrial

policy.

Policymaking mechanisms in France—centered on the ministries of Industry and of

Economy and Finance—differ greatly from

those in the United States, as might be expected

in a country where the idea that the state can

and should play a role in industrial development has been widely affirmed. In the policymaking system that has evolved, the Ministry

of Economy and Finance takes the lead in

channeling funds to favored sectors (ch. 7),

while the Ministry of Industry is more heavily

involved in day-to-day matters, as well as technology and microlevel planning. Within the

Ministry of Industry, the Directorate of the

Electronics Industries and Data Processing is

responsible for efforts such as the Government

Program for Development of Electronics, announced late in 1982. Since the Socialists took

power in 1980, the Ministry for Research and

Technology has taken a larger role in industrial

policy—not only the design of policies for

high-technology industries like electronics, but

45’’ Government Funding for Electronics Industry Discussed,”

West Europe Report, Science and Technology, No. 118, Joint

Publications Research Service JPRS 81678, Aug. 31, 1982, p. 3.
Ch. 10—National Industrial Policies . 395 — —

also restructuring elsewhere in the French

economy. Broad 5-year economic plans continue to be part of the policymaking process,

although they have receded into the background compared to 30 years ago.

The staffs of French ministries tend to share

similar educational backgrounds, typically the

prestigious grandes ecoles. Not only the public

sector, but large industrial enterprises as well,

are managed by a small and homogeneous

elite; the Socialists placed at the head of nationalized firms by the Mitterrand Government

are in most respects indistinguishable from the

men they replaced. The closed nature of this

system helps the French bureaucracy wield

authority more like that granted public officials

in Japan than in the United States, Distinguishing features of French industrial policy—an

emphasis on sectoral measures, perhaps

stronger even than in Japan, and the encouragement of corporate consolidation—reflect

not only the power of the bureaucracy but the

community of interest binding industry and the

state.

Planning

Much has been written on indicative planning in France, which can be traced to the immediate postwar period and the Monnet Plan

for reconstruction. As the term “indicative”

suggests, the country’s 5-year economic plans

have not been imperative, but based on concerted actions mutually agreed on. In earlier

years especially, officials in the Planning Commission played key roles in bringing together

leaders in government and industry.

A major function of the planning process has

simply been to gather information about past

progress and future prospects by sectors in the

economy. The hard decisions have been made

elsewhere, with the role of the Planning Commission largely facilitory. While the rapid

postwar recovery of the French economy cannot be attributed solely to planning and industrial policy, the planning exercise has

helped crystallize perceptions among the

bureaucracy, as well as decisionmakers in

private industry, creating a shared referent for

government and industry. Business has been

able to operate within a fairly predictable

context.

Finance

The French financial system, like the planning mechanism, enhances government influence over economic development. Capital allocations—see chapter 7—are controlled to considerable extent by administrative fiat rather

than market forces, A rather small number of

financial institutions—closely tied to the

bureaucracy whether or not actually nationalized—link government policy makers and companies seeking funds. The Treasury determines

interest rates on bonds; through the Ministry

of Economy and Finance, as well as a variety

of semipublic lenders and the banks, the

government can exert considerable leverage

over credit decisions. Specialized institutions

such as the Institut de Developpement Industriel (IDI), funded from both public and

private sources, provide risk capital to mediumsized firms; ID I has also made equity investments in the computer firm Compagnie International pour l’Informatique (CII). Even in

light of the French Government’s traditional

use of financial channels, Mitterrand’s investment plans for electronics are extraordinarily

ambitious. The industry—which is now roughly half nationalized—is to invest $20 billion

over the period 1982-86, with the government

providing about 40 percent of the total .46 It is

not clear where the money will come from.

Le Plan Calcul

French policies as they have affected electronics have been shaped, as elsewhere in

Europe, by historical circumstance—i.e., the

relative weakness of French industry compared to American corporations. The result

during the 1960’s was a concerted thrust in

computers known as Le Plan Calcul—not

unlike what the French are now undertaking

in electronics as a whole.

+61b id, ‘rh~ ~-j,ea r i nkr~st ment p]a n ca]]s for the go~’ernmen t

to pro~ide 55 billion francs of the 140 billion total.
396 . International Competitiveness in Electronics

By the early 1960’s, the enormous strength

of IBM—combined with the comparative weakness of European firms—was perceived as a

serious threat to the viability of the French electronics industry. It was the “American challenge’’–viewed as a technological lead, but in

reality just as much commercial superiority—

that stimulated an ambitious effort by the

French. 47 The well-known Plan Calcul came in

1966, on the heels of serious difficulties for the

French computer industry. In the “Affaire

Bull” of 1964, the American firm General Electric had purchased Machines Bull, a faltering

French computer manufacturer. At about the

same time, the U.S. Department of State refused to grant export licenses for two of Control Data’s largest processors. These were to

have been used in the development of fusion

weapons; the refusal helped convince French

policy makers of the need for an independent

computer industry. Since then, if not before,

the French military, although taking some care

to stay in the background, has had a major say

in industrial policy decisions affecting electronics and telecommunications.

Le Plan Calcul was intended to build an industry capable of challenging IBM; to do this,

the bureaucracy engineered the merger of two

existing manufacturers, forming a new public

corporation—CII. The government provided

capital to the fledging champion, but as the

product of a union between two firms which

together held no more than 7 percent of the

French computer market, the new company

had a long way to go.

CII’s efforts were directed first and foremost

at medium to large mainframes—the rise of the

minicomputer was just beginning and had not

been widely recognized. CII was to be an export leader, as well as providing for France’s

own needs, of which national security was at

the forefront. Although CII was attacking IBM

at the latter’s point of greatest strength, French

planners hoped—by providing export and other

subsidies, encouraging shipments to the Soviet

bloc and developing countries, protecting CII

iTThiS interpretation of the “challenge” is elaborated by N.

Jequier, “Computers,” Big Business and the State, R. Vernon

(cd.) (Cambridge, Mass,: Harvard University Press, 1974), p. 193.

against foreign competitors, and guaranteeing

domestic procurements for the company’s

products—to enable the firm to challenge IBM.

A related series of measures over the late 1960’s

and early 1970’s comprising Le Plan des Composants (Plan for Components) was to help

with the development of semiconductor devices, primarily for computer applications.

Despite the support provided CII, the firm

never approached its targets. American companies continued to dominate sales in France,

and CII’s chief market turned out to be the

government, By 1975 Le Plan Calcul had effectively been abandoned, as a variety of factors

combined to defeat the best efforts of French

policy makers (who now insist that their efforts

at least prevented further erosion of the nation’s indigenous capabilities), Some critics emphasize the contradictions inherent in a protective strategy within a highly competitive industry, and a policy designed and implemented

by technocrats with little experience of commercial realities.48 Hindsight shows the effort

to have been overambitious, an attempt to confront American firms across a broad line of

products rather than in selected niches. In this

sense, national goals took precedence over

sound business strategy. Finally, the money

that the French Government pumped into CII—

perhaps $350 million between 1966 and 1976—

looks rather insignificant next to, say, IBM’s

resources.

49

Into the 1970’s, then, French policy toward

the electronics industry centered on one company—CII. By 1975, when the failure of Le Plan

Calcul was clear, the government encouraged

CII to merge with Honeywell Bull—the descendant of Machines Bull that emerged from

the sale of General Electric’s computer business to Honeywell. The new company, CIIHoneywell Bull (CII-HB), was majority Frenchowned; it quickly received further government

~J. Zysman, Political Strategies for Industrial Order (Berkeley,

Calif.: University of California Press, 1977), p. 99.

A9The $350 million estimate is from Technical Change and Industrial Policy; The Electronic Industry (Paris: Organization for

Economic Cooperation and Development, 1980), p, 46. Jequier

(op. cit., p. 217) gives a figure of $120 million between 1966 and

1970<
Ch. 10—National industrial Policies ● 397

assistance totaling perhaps $700 million, so In

1982, after prolonged discussions, the Mitterand government effectively nationalized CIIHB, which will become a subsidiary of a government-controlled holding company taking up

the old name Machines Bull. 51 Machines Bull

will be the centerpiece of Mitterrand’s computer thrust, discussed below, with CII-HB

responsible for mainframes,

Le Plan des Composants

Recognition that CII-HB needed infusions of

semiconductor technology led to a new 5-year

components plan in 1977. Military requirements were also a strong motive, Since the

1950’s, France had maintained a small but

high-quality semiconductor research effort.

However, this had never been translated into

a commercially viable merchant industry. By

the early to mid-1970’s, perhaps a hundred

French engineers and scientists were engaged

in R&D on advanced microelectronic devices;

the country did not have the capability for

mass-producing ICs. French engineers had little background in microprocessors, nor in

MOS (metal oxide semiconductor) ICs, most of

their expertise being in bipolar devices for communications and consumer products. Le Plan

des Composants—designed by the ministries

of Industry and Defense, plus the PTT (responsible for postal services and telecommunications)—was intended to rectify these deficiencies. In contrast to Le Plan Calcul, France did

not attempt to keep foreign participants out,

but sought to build on American technology,

In this way, French planners hoped to move

toward self-sufficiency in microelectronics,

with the eventual goal of a major share of the

European market,

The vehicles included three joint ventures

linking American semiconductor firms with

—

so 

.—

Techn jca)change and Industrial Policj’: The Electronic Industr.v, op. cit., p. 46. Other estimates have ranged as high as

$1 billion. Prior to the merger with Honeywell Bull, CI1 had been

a participant with Philips and Siemens in the European [consortium, Unidata, The consortium did not prove workable,

51’’ CII-Honeywell Bull Announces Restructuring in Line With

French Plans for Computer Firms, ” Wall Street ]ournal, Dec.

21, 1982, p, 30. Honeywell’s interest has been reduced to about

20 percent.

French partners. France would get technology,

the U.S. participants access to the French market—particularly the lucrative telecommunications sector, well protected by the PTT. These

joint ventures, in which the French partners

held controlling interests, tied Thomson to

Motorola, Saint-Gobain to National Semiconductor (in a firm named Eurotechnique), and

Matra to Harris. In addition, the plan supported two more firms: Radiotechnique, a

Philips subsidiary in France, and EFCIS, originally owned by the French atomic energy authority (Thomson purchased a majority interest

in EFCIS in 1977).

Le Plan des Composants was developed at

a time when France’s Government was rediscovering market forces, Attempting to learn

from Le Plan Calcul, French planners decided

to support a number of firms. Rather than funnel the money set aside for the program to a

single champion, the five companies would

compete with one other. Although an element

of competition was thus built in, each participant was assigned certain technologies in

which it was to take the lead. Matra-Harris, for

example, would specialize in c-MOS since this

was Harris’ strength; later the joint venture

negotiated a further agreement with Intel,

largely to gain the latter’s n-MOS technology.

ICs were new technologies for both Matra and

Saint-Gobain, which were picked for the program in part because of their success in other

fields–in the case of Matra, its high-technology experience in aerospace was a particular

attraction, Saint-Gobain-Pont-a-Mousson, a major producer of glass and chemicals, had decided of its own accord to diversify into electronics; in addition to participating in Le Plan

des Composants, the company purchased substantial interests in CII-HB and the Italian computer and office equipment firm Olivetti during this period, More recently, the French have

decided that, if one national champion is too

few, five are too many; since the Mitterrand

government came to power, extensive discussions aimed at consolidation have been underway. Three centers of excellence in microelectronics seem likely to emerge. Both Matra and

Saint-Gobain have been nationalized, with

Saint-Gobain evidently forced out of elec-
398 ● International Competitiveness in Electronics —

tronics .

52 Eurotechnique has been sold to

Thomson, which purchased the shares of both

Saint-Gobain and National Semiconductor,

while retaining a technology exchange agreement with the American firm.

The R&D portion of Le Plan des Composants,

known as Le Plan Circuits Integres, channeled

about $150 million in government funds as direct grants and loans to the five companies.

The money supported work on very large-scale

ICs, ranging from circuit design to the development of processing equipment. Research centers, including the Electronics and Informatics

Technology Laboratory of the French Atomic

Energy Commission, were strengthened, while

Le Plan Circuits Integres also supports microprocessor applications through a new Information Agency .53

It is too early to judge the success of Le Plan

des Composants in building a viable commercial industry, but in terms of technology French

semiconductor firms have made great progress. Eurotechnique manufactured its first ICs

at the end of 1980 and has since expanded output at a high rate. EFCIS’s production of advanced devices began about the same time. Despite rapid increases in production, however,

the French entrants remain small on a world

scale (see ch. 4, table 32), suffering from thin

product lines and limited distribution networks. Still, the technical know-how they have

acquired from American firms places them in

advantageous positions compared to other

European semiconductor manufacturers.

In recent years, the French bureaucracy has

also given a good deal of attention to minicomputers and peripherals through Le Plan Periinformatique. Moreover, the components program has been linked to a major push into telecommunications—including developments

‘

z

See “Possible Strategies for Executing Microelectronics

Plan, ” West Europe Report, Science and Technology, No. 112,

Joint Publications Research Service JPRS 81340, July 22, 1982,

p, 18; D. Marsh, “Thomson Absorbs Eurotechnique, ” Financial

Times, Jan. 21, 1983, p. 14.

53’’ 190 Million Francs in Next Five Years for VLSI Research, ”

West Europe Report, Science and Technology, No. 89, Joint Publications Research Service JPRS 80022, Feb. 3, 1982, p. 7; “Le

Developpement des Applications de L’informatique,” L&tre 101,

oct. 7, 1980.

such as videotext—that French planners embarked on in the mid-1970’s; the PTT’s ambitious projections envision 25 million terminals in French homes by 1990, pointing

toward a rapidly growing market for semiconductors. As part of its telecommunications

policy, the government has forced the sale of

two foreign-owned companies (subsidiaries of

ITT and Ericsson) to the Thomson group.

Recent Developments

French industrial policy has been in something of a turmoil since Mitterrand’s election.

The outlines of the Socialist Government’s program remain murky, although the intent is to

emphasize electronics. Initiatives in semiconductors, computers, communications, and consumer products are likely to be even more tightly coordinated than in the past, And, while the

themes of nationalization and merger policy

predate Mitterrand, the Socialists have carried

this aspect of French industrial policy still

further.

Even before Mitterrand came to power, the

Eleventh Five-Year Plan (1981-85) had targeted

electronics for special support. The plan singled out six fields for massive government

assistance, with electronics—ranking third in

French exports of manufactures, after machine

tools and chemicals—viewed as a critical

sector. 54 Under the plan, total R&D expenditures in France are scheduled to increase to 2.5

percent of GNP by 1985. Currently, France is

making a more concerted effort than any other

European country to strengthen its technological base and promote high-technology industries, with considerable attention to training greater numbers of engineers and technicians. Le Plan des Composants indicated that

the French had learned from the mistakes of

Le Plan Calcul—and also from the commercial

failings of the Concorde—with French industrial policy as it affects electronics and other

high-technology sectors passing into a new

stage, one marked by a more sophisticated un54Rapport & la Commission Industrie, Commissariats General

du Plan, July 1980, p. 48. According to this report, electronics

has received about 10 percent of all direct sector-specific aid

to French industry in recent years [p. 113).
Ch. 10—National Industrial Policies . 399

derstanding of international competition in

commercial products and technical developments. This shift began during the 1978-80

period. Under Prime Minister Barre, the government claimed to be “decontrolling” markets, for instance cutting back on price controls. With a reemphasis on planning and national champions, came more stress—at least

in official rhetoric—on market forces. Is Mitterrand likely to reverse this trend?

A fundamental plank in the Socialist platform had been nationalization of companies

like CII-HB. As Mitterrand himself explains the

Socialist strategy, the object is first to win back

the domestic market in key industries such as

steel, machine tools, semiconductors, and

small computers.55 In conjunction with further

nationalization in the financial sector, the announced philosophy was “flexible” nationalization—with the government providing considerable support while promising to eschew

extensive involvement in business affairs or

economic planning at the micro-level. In appearance, this is not a sharp turn from the past;

despite the lengthy history of planning in

France, nationalized firms—so long as they

have performed adequately–have operated relatively free of direct intervention by the bureaucracy.

In R&D and technology development the new

government has also moved ahead in bold if

seemingly disorganized fashion, Research support has been increased under the current

5-year plan, and is to include a new microelectronics project as a follow-on to Le Plan Circuits Integres, plus more money for computers

and data processing, The government expects

to put up two-thirds of the $500 million it

believes must be invested in microelectronics

over the 1982-86 period.56 As in the past, much

of the money will come from the Ministry of

Defense. And as also in the past, the new microelectronics plan is but one piece of a much

55’’ Mitt~rr~nd: Why N~tionali~ation Will Work, ” Wall Street

)ourna), Oct. 7, 1981, p. 27.

58’’MicroeIectronics Plan: Win Market, Technology Independence, ” West Europe Report, Science and Te(:hrrologj’, No. 113,

Joint Publications Research Ser\ice JPRS 81392, July 29, 1982,

p. 10.

larger effort aimed at strengthening the entire

French electronics industry.

While the overall outlines remain vague, the

government is promising that investments in

electronics—from both public and private

sources, and including investments by foreignowned firms (IBM, Texas Instruments, and

Motorola are among the American electronics

companies with a major presence in France)—

will total $20 billion over the 5-year period

1982-86. The Government Program for Development of Electronics—presented in September 1982 after an extensive study by an

Electronics Industry Task Force—is to be coordinated by an Interministerial Committee for

Electronics, with representatives from the ministries of Industry and Defense, the Plan, and

the PTT.

A primary vehicle will be 9 “national projects,” chosen from 14 originally recommended

by the Task Force. These national projects,

which will get extensive government support,

are intended to link private and nationalized

firms, as well as the labor and user communities. The nine projects have the following

titles: 57

consumer electronics;

information displays;

local networks;

cable TV networks;

very large-scale ICs (fabrication as well as

design);

central processing units for small computers;

computer-assisted education;

computer-assisted engineering; and

computer-assisted translation.

The list is noteworthy for emphasizing computer systems from the perspective of user

needs—not only the last three projects, but also

that on local networks. All are software-inten5TSee R, T. Gallagher, “$20 Billion for French ~ic~~~O],j[+)’

Eiecfror?ics, Sept. 8, 1982, p, 104; “Fourteen Projects, ” JVest

li’urope Reportv Science and Technofog}, No. 116, Joint Publiratiorrs Research Ser\rice J PRS 81575, Aug. 18, 1982, p. 14. Amo Ilg

the f]ve that were dropped-not necessarily permanent l~~—was

a supercomputer effort.
400 ● International Competitiveness in Electronics

sive, a field in which France is in a relatively

good position. The plan does not neglect consumer products. France hopes to increase its

presence in consumer electronics markets

throughout Europe, with Thomson moving aggressively into new generations of products like

VCRs, electronic toys and games, and home information systems. 58

The Socialist Government faces severe obstacles in implementing such a vast program. In

addition to the $20 billion in planned investments, a considerable increment compared to

recent expenditures within the industry,

France has an inadequate supply of men and

women with training and skills in electronics;

the shortfall is reckoned at more than a thousand engineers yearly and at least three times

as many technicians. The development plan

contemplates an extensive training effort, including the establishment of several new

schools, Moreover, foreign firms with investments in France may resist some elements of

the program. Joint venture participants, for instance, could prove less willing to transfer technology when the partner is a nationalized concern. But in the end, money will probably be

the limiting factor; boosting France’s R&D expenditures from 2 percent of GDP in 1982 to

2.5 percent by 1985 is extraordinarily ambitious. And, with nearly three-quarters of R&D

carried out in government-controlled institutions, France runs a real risk of stifling innovation and new ideas.

Future Prospects

While the hallmarks of French industrial policy remain the same—an elite corps of officials,

centralized policymaking, and a preference for

sectoral policy along with a tradition of state

intervention in the affairs of industry—Mitterrand’s philosophy does represent a turn away

from the market orientation of Giscard d’Estaing. It is too soon to assess the effectiveness

of the new avenue, but past results give some

insights. Government efforts under Le Plan

5a’’ First Details Published on Electronics Plan, ” West Europe

Report, Science and Technology, No. 120, Joint Publications Research Service JPRS 81804, Sept. 20, 1982, p. 7.

Calcul must be termed a failure, although CIIHB’s troubles had multiple sources. In semiconductors, Le Plan des Composants seems to

have functioned much better. Even so, the

largest French producer—Thomson—controls

only a quarter of the domestic market, with a

market share in all of Europe that is perhaps

7 percent. Most of Thomson’s sales are in

discrete semiconductors; the company has no

more than about 2 percent of the European IC

market. Although Thomson appears to have

benefited considerably from technologyassistance agreements with Motorola, as have

Matra and Eurotechnique through their joint

venture with American partners, French electronics firms—along with most European manufacturers—remain heavily dependent on

foreign sources of MOS and microprocessor

technology.

The history of French electronics policy

shows that strong government direction cannot by itself produce a competitive industry,

At the same time, the French seem to be learning how to make their electronics policy function more effectively.

United Kingdom

In contrast to the French, with their reliance

on centralization and government action, Britain’s industrial policy has been closer to that

of the United States—largely ad hoc, not well

coordinated. There is at least one major difference: the United Kingdom during the 1970’s

began to experiment with a variety of novel

measures intended to directly affect the actions

of industry. Ranging from programs to encourage applications of microprocessors to government investment in the semiconductor venture

Inmos, these initiatives are far different from

the arms-length approach to industrial policy

of the United States (U.S. policies related to national defense are, as usual, the exception). At

the same time, these policies—some of which

attracted considerable attention in other parts

of the world—were pursued with little sense

of direction. Only in its support of International Computers Ltd. (ICL) through procurement practices, R&D funding, and other con-
Ch. 10—National Industrial Policies . 401 ——...——

ventional policy tools has Britain shown much

consistency over the longer term in policies

toward electronics.

Measures to aid ICL, in several respects similar to the somewhat earlier French effort to

build and strengthen CII-HB, date from the late

1960’s. In the latter part of the 1970’s, the

United Kingdom’s electronics policies, as in

many countries, turned towards semiconductors; a group of programs were developed to

promote IC technology and applications, Even

so, neither today nor at any point over the past

decade does the British example show much

evidence of a coherent view of industrial policy.

Early Experiments

Certainly Britain has had ample incentive to

try new approaches; since the early 1960’s, policymakers in the United Kingdom have sought

ways of grappling with the nation’s lackluster

economic performance—by most measures the

poorest among industrialized nations. During

the 1950’s, macroeconomic policies had been

assumed sufficient for revival. But continuing

inflation, along with persistent wage disputes,

convinced the ruling conservatives to move toward a more active government role. The National Economic Development Council (NEDC)

was established in the early 1960’s as a forum

where business, labor, and government could

air their ideas about the future direction of the

economy. 59 Inspired by the prestigious French

Commissariats du Plan, NEDC was empowered

to produce 5-year plans intended to reduce

uncertainty about the directions of government

economic policy. Planning responsibility fell

mainly on a National Economic Development

Office attached to the NEDC.

se~’or an Ol]tline of the origin and role of the NE IX, see T. Smith

“’]’he United Kingdom, ” fllg Business and the State, op. t;it., pp.

88ff, Most of the discussion on the earlier years of Britain’s industrial policj is drawn from this source. Also see S. Blank, “Britain: The Politics of Foreign Economic Policy, the Domestic Economy, and the Prohlem of Pluralistic Stagnation, ” Between Power

and Plent~’: F’oreign Economic Policies of Advanced Industrial

States, P, ]. Katzenstein (cd. ) (Madison, Wis.: [University of Wisconsin Press, 1 978), pp. 1 14ff.

The Labor Government which came to power later in the decade continued this general

orientation, and picked up the pace by establishing a number of Economic Development

Committees to deal with specific industries.

The Electronic Development Committee, set up

in 1964, produced a series of reports that identified problems and proposed strategies for

overcoming them. But by the end of the decade, the planning experiment had run afoul of

persistent conflicts with the macroeconomic

policies that Britain’s leaders were determined

to pursue; economic planning came to be

viewed as a failure, and the visibility and influence of the Economic Development Committees waned.60

The More Recent Context

Since the beginning of the 1970’s, U.K. industrial policy has been a hedge-podge. As in

the United States, consistency has been found

mostly in the area of national defense. A host

of government offices, themselves subject to

periodic reorganization and changes in direction, have been involved in policies affecting

Britain’s electronics industry. The National

Research Development Council, set up as early

as 1948 to provide financial support for joint

research ventures under the Ministry of Technology, is one example. The Ministry of Technology also had jurisdiction over the Industrial

Reorganization Corp. (IRC), established in 1966

to aid industrial restructuring. Under the authority of the Industrial Expansion Act, the

Ministry of Technology engineered the mergers creating the computer firm ICL, as discussed in more detail below. The IRC likewise

provided financial backing and other encouragements for a series of mergers that enlarged

GEC, the British General Electric Co. But the

interventionist IRC was abolished in 1971,

about the time the Ministry of Technology became part of the larger Department of Trade

and Industry—which has since again been di-

~Orrhe}, st ill exi St, however. ‘1’he (;o mm ittee for electronics recentl} issued a report urging a comprehensive sectoral polic}’

for the industry. See “Prescription for Electronics, ” Financial

Times, Apr. 30, 1982, p. 16.
402 International Competitiveness in Electronics

vialed, leaving a Department of Industry and

a Department of Trade.

Among other agencies active in industrial

policymaking, the National Enterprise Board

(NEB) has had considerable leverage because

of its ability to provide direct financing to

British firms. Established in 1975, NEB has

concentrated on startups such as the semiconductor manufacturer Inmos, to which it gave

about $90 million in equity capital (ch. 7). In

quite different realms, the Science Research

Council and the Advisory Council for Applied

Research and Development, set up in 1976, are

intended to supply policy guidance on such

topics as applications of new technologies and

the education and training of engineers,

The number of government bodies involved

in Britain’s industrial policy provides one explanation for the random approach to programs in electronics. In France, relatively clear

lines of authority link the various parts of the

bureaucracy dealing with electronics; certain

agencies have the lead role in certain areas. By

comparison, the British approach is uncoordinated. In further contrast to the situation in

France, Britain has never been very comfortable with government intervention in the affairs of business–rather surprising considering the size of the public sector. Not only do

government plus the nationalized firms employ

about a quarter of the British labor force, but

publicly owned enterprises account for more

than 10 percent of the country’s industrial output and in recent years about a quarter of total

capital investment.61 Nationalized firms in industries like steel and automobiles have received more attention from British policymakers than electronics. Still, the United Kingdom’s approach to the electronics industry

does reflect a belief that government can

strengthen existing firms as well as create new

ones,

ICL

The formation of ICL was preceded by much

less rhetoric concerning the need to create national champions than in France, but the

emergence of ICL in 1968 was similar to that

of CII-HB. ICL benefited not only from government financing, but from aid for R&D and

the promise of public sector purchases of its

products, Britain’s Government encouraged

the series of mergers by which the company

was formed, and supplied about $12 million a

year until 1976 to stimulate its growth. 6 2

Despite this, ICL never emerged as a viable

competitor in the world computer industry. Although still holding more than a third of the

U.K. market—largely the result of government

procurements coupled with “Buy British” persuasion aimed at private firms—ICL has had

little success outside the United Kingdom.

Within Britain, the Central Computer Agency,

responsible for government purchases, gave

perhaps 90 percent of its orders to ICL during

the early 1970’s.63 This is a major reason why

the United Kingdom joins Japan as one of only

two countries where American computer manufacturers and their subsidiaries do not have

at least half the installed base.

ICL is known for its software, but—like most

computer manufacturers outside the United

States—missed the shift toward small systems.

The company has also been handicapped by

the lack of a strong local semiconductor industry. Since the latest government initiative—

a package of loan guarantees totaling nearly

half a billion dollars, and the installation of a

new management team headed by a long-time

executive of Texas Instruments’ U.K. subsidiary—there have been signs of revival. 64

Not long before jumping back into try to save

ICL—in part because mergers or takeovers involving American companies were rumored—

81P, Maunder, “Government Intervention in the Economy of

the United Kingdom, ” Government Intervention in the Developed Economy, op. cit., pp. 131-137,

““’Technology and Trade Policy: Issues and an Agenda for

Action, ” op. cit., p. 58.

‘3G. de Carmoy, “Subsidy Policies in Britain, France, and West

Germany: An Overview, ” International Trade and Industrial

Policies, S. J. Warnecke (cd.) (New York: Holmes& Meier, 1978),

p. 38.

64E. Bailey, “Britain’s Role at Ailing ICL, ” New York Times,

May 18, 1981, p. Dl; S. Love, “New Talent Spurs Britain’s ICL, ”

Wall Street Journal, Mar. 1, 1982, p, 27.
Ch. 10—National Industrial Policies ● 403

the Thatcher government had sold off the publicly held 25 percent of the company’s stock.

ICL’s checkered past thus illustrates the “stopgo” quality of industrial policy in the United

Kingdom. The uneasy relationship between

Inmos and the government has followed a similar pattern, one in which Inmos faced considerable uncertainty over whether the Thatcher administration would provide the second installment of capital—another 25 million

pounds—that the company was counting on.

Research and Development

Beyond support of ICL, the U.K. computer

industry benefited during the late 1960’s and

early 1970’s from R&D funding provided

through the Advanced Computer Technology

Project, which provided up to half the costs of

projects dealing with hardware or software.

The British have also attempted to aid their

electronics industry through efforts like a

preproduction order program, in which the

government purchases newly developed products and leases them to users—or “clients. ”

After a trial period, the client prepares a report

on the new product and then must either buy

or return it. Other programs have supported

software development and marketing, as well

as microelectronics. In addition to contracted

basic research, paid for by both civilian and

defense agencies, commercial product development has been financed through government

contracts, particularly to ICL.

Nonetheless, the United Kingdom has been

a poor performer in R&D—more precisely, in

development, Although British scientists continue to do excellent basic research, industry

has been reluctant to invest heavily in R&D directed at commercial products and processes;

between 1967 and 1975, real R&D expenditures

by industry declined. Furthermore, sectors like

electronics have suffered from a lack of capable

engineers. While government R&D expenditures have been heavily concentrated on electronics and aerospace—in 1975, 30 percent

went to electronics and communications alone

—this spending, largely motivated by military

needs (table 77, ch. 10), has had little perceptible effect on the competitiveness of British

firms. Tellingly, electronics and communications manufacturers have spent less of their

own money on R&D than the government has

contributed; in 1975, private firms spent 113

million pounds on R&D, publicly held corporations 36 million pounds, and the government

130 million.65 In the United States, the impacts

of military spending on electronics have been

far overshadowed by the vigor of the commercial industry; the British case has been vastly

different.

Other Policies Toward Electronics

Among the more intriguing programs of the

U.K. Government have been those aimed at utilization of microelectronics. In the midst of a

lengthy debate on the question of whether the

country needed an indigenous capability to design and manufacture advanced ICs, the Microprocessor Applications Project (MAP) was

established to encourage companies in any industry that could to incorporate these devices

in their products, MAP, which began in 1978

and has been somewhat reluctantly continued

by the Thatcher government, funds up to 25

percent of the costs of product development.

Increased support is provided for microelectronics-related programs in schools and colleges, principally teacher training. A third element consisted of a consciousness-raising campaign aimed at 50,000 managers in private industry, with MAP funds supporting seminars

to educate corporate decisionmakers on the virtues of the new technology. Government

spending through MAP totaled nearly $100

million over a 3-year period .88

A related program known as MISP—the Microelectronic Industry Support Programme,

also started in 1978—aids firms in developing

and manufacturing ICs. MISP was stimulated

by a report prepared for the NEDC which

stressed the importance of design and processing expertise; a central goal was mass producIMK. Schott, ]~~ustrj~j ]nnoiration in the United ~ingdon?,

Canada and the United States (London: Contemprint, July 1981),

p. 12,

“’’Microelectronics, The New Technology, ” Department of

Industry, London, 1981, p. 23.
404 ● International Competitiveness in Electronics

tion capability in standard devices. 67 Among

the steps taken were the establishment of a joint

venture between the British firm GEC and Fairchild, then still American-owned, to manufacture a broad-based line of ICs. More ambitious

was the decision to establish a greenfield firm,

Inmos.

NEB’s announcement in June 1978 that Inmos would receive equity funding from the

government to design and manufacture n-channel MOS circuits, starting with memory chips,

generated a good deal of controversy within

Great Britain (NEB has considerable independence in making such decisions). The attempt

to replicate a merchant semiconductor firm on

the American model—complete with executives experienced in U.S. companies and a design center in Colorado Springs—was a move

directly into the central arena of worldwide

competition, The risks were high. Inmos was

to begin production of 64K RAMs in 1981—a

target which slipped, but as it turned out, no

more than those of a number of well-known

American firms.

Inmos is a unique experiment; the government committed 50 million pounds, split into

two installments, with the hope not only of

creating a first-rank semiconductor company,

but also of luring talented British engineers

back from employment with foreign firms (one

reason for the Colorado Springs location), Stimulating end-users in Britain was another major

objective, While there are still many doubters,

Inmos appears to have had reasonable success

in developing its first products. The company

has plans for a new family of microprocessors,

as well as a broad line of memory chips. Becoming profitable may be more difficult.

Since the election of the conservative Thatcher government in 1979, efforts such as MAP

and MISP have been scaled back. The conservatives’ review of the Inmos venture revived

public debate over the company’s prospects.

After a considerable period of uncertainty, during which it appeared that NEB’s holdings in

~Tsee ~~icroe]eC~ronic,s Into the 1980’s (Luton, England:

Mackintosh Publications Limited, 1979], p. 27, for a summary

of the Sector Working Party report to NE DC.

the firm might be sold, and following a decision by Inmos executives to locate a production facility in the depressed area of South

Wales, funding was continued. In late 1981,

NEB reported $22 million in pretax losses,

more than half accruing from its holdings in

Inmos; losses are to be expected during the

early years of such an enterprise, and it is still

too early to judge the success of this recent entry into the world semiconductor industry, but

the qualms of the conservative government are

not surprising.

Has Britain’s Approach Worked?

The answer, implicit in much of the discussion above, is that it has not. While some of the

initiatives in electronics may eventually have

positive results, U.K. industrial policy as a

whole has suffered from lack of consistency—

even during periods when the same party has

been in power–and from a rather odd, if not

chaotic, mixture of policy instruments. Even

the direct beneficiaries, British electronics

companies, have not been very enthusiastic

about the government’s support efforts, viewing them as favors likely to be withdrawn on

short notice.68 Some executives in British industry could be described as not only skeptical

but cynical about their government’s policies.

Nothing like the symbiotic relationship between business and government in Japan, or

even France, has emerged in the United Kingdom.

The grab-bag character of U.K. policies toward electronics has stemmed in part from the

inconclusive nature of debate over the need for

a continuing British presence in semiconductor manufacturing. Many took the position

that, so long as British industry applied ICs

in its products, there was no need to have

home-grown design and production capability. Others held that, lacking an IC design and

production base, applications would always lag

those in other countries, Rather than coming

Oasee D. Imberg and J. Northcott, In dustria] Poficy and hvestment Decisions (London: Policy Studies Insitute, 1981), pp. 72-73.

Also J. Northcott and P. Rogers, Microelectronics In Industry:

What’s Happening in Britain, No. 603 (London: Policy Studies

Institute, March 1982], especia]]y ch. 8.
Ch. 10—National Industrial Policies ● 405 — ———

to a decision, the British have tried to have it

both ways—supporting Inmos, though never

whole-heartedly, while also pursuing applications and technology diffusion through MAP

and MISP. Similar patterns, over a longer time

period, have characterized the government’s

dealings with ICL; after many years of public

support, the Thatcher government withdrew,

only to find itself forced to the rescue of the

faltering computer manufacturer. Industries

like steel and automobiles show similar oscillations in government attitude.

The fact is that foreign firms have already

captured major shares of most British electronics markets, except where the government

itself is the customer—e.g., the defense sector.

Outside the government market, ICL presents

little challenge to its American and Japanese

competitors, just as British firms now hold only

a small share of U.K. semiconductor sales.

Thus, ICL’s agreement with Fujitsu, entailing

marketing of Japanese-built mainframes in

England, also involves purchases of Fujitsu

semiconductors. While ICL has also negotiated

for rights to U.S. and Canadian technology,

Britain does not seem as well-placed as France

to make use of foreign know-how, and may find

that it is already too late for technological

independence.

In sum, many of Britain’s industrial policy

efforts in electronics seem to have been too little and too late. The formation of Inmos and

the creation of MAP and MISP came at the

close of the 1970’s, by which time American

and Japanese suppliers were firmly established

in the U.K. market.

Industrial policy has been doubly difficult because of the stagnant British economy. As economic troubles continued, the government cut

back its R&D support, making progress in industries like electronics still less likely. Recently, the Thatcher administration has tried to

streamline industrial policymaking by merging

the National Research Development Corp. and

the NEB into a “British Technology Group. ”

One goal has been to temper the activist policies of the NEB, which enjoyed considerable

autonomy in the past. There is no indication

yet that this will produce positive results. To

be fair, industrial policies—of whatever stripe—

are a limited tool when the overall economic

situation has been as grim as Britain ’s. While

U.K. industrial policies may seem neither efficient nor effective, they have perhaps been

asked to do the impossible.

West Germany

Industrial policy in the Federal Republic of

Germany (FRG) has been distinguished by reliance on the market. Objectives have been

allowed to remain vague beyond the level of

macroeconomic policy, where stability has

been paramount. But if private sector actions

have been central, this does not mean the role

of the public sector has been negligible, Following a “social market philosophy, ” the West German Government has helped reconcile national, regional, and interest group concerns. The

Act for the Promotion of Stability and Economic Growth (Gesetz zur Forderung der Stabilitat und des Wachstums der Wirtschaft) provides a set of tools to coordinate economic policymaking among government, management,

and labor aimed at ‘‘macroeconomic equilibrium.” While avoiding extensive planning, policymakers have paid consistent attention to

structural adjustment; since the mid-1960’s and

the tenure of economics minister Karl Schiller,

it has been widely accepted that policy instruments could be deployed to “rationalize” markets and ease structural change. Especially

since the mid-1970’s, the FRG has also provided considerable support for R&D. Although

proponents of an avowedly sectoral approach

to industrial policy have become more vocal,

it is still true that industrial policies are marketoriented, with limited reliance on public ownership compared to a number of other Western

European nations, and a strong commitment

to open international trade. Nevertheless, the

German Government has sometimes taken

strong and direct action on the sectoral level

when economic problems have arisen.

The Institutional Setting

Economic and industrial policymaking in the

FRG combines elements of decentralized deci-
406 International Competitiveness in Electronics

sionmaking with representation by major interest groups, including labor. The ministries

of Finance, Economics, Labor and Social Affairs, and Research and Technology are among

the more influential in terms of policies affecting industry. Macroeconomic policies are developed and implemented by a number of agencies. The Ministry of Finance submits 5-year

plans. Since the early 1960’s, a five-person

Council of Economic Advisers–comprised of

academics not otherwise attached to the government—has been responsible for macroeconomic forecasting. The Council also prepares

annual reports on the health of the West German economy. Money supply is the responsibility of the Deutsche Bundesbank—legally independent of the government, though closely

tied to it. Policies and analysis related to

economic and industrial development are centered in the Ministry of Economics. The

Lander (state) governments help formulate economic as well as regional development policies.

A joint Federal-Lander planning committee, for

instance, draws up regional action programs

identifying growth points (schwerpunktorte) to

be promoted via investment grants, West Germany has emphasized regional development

perhaps more heavily than any other Western

industrial nation, with the Lander Governments central to these efforts. 69 

As chapter 7 pointed out, financial institutions have a special place in the West German

policymaking structure—as they do in France

and Japan. Executives of the central Bundesbank keep in close contact with public officials,

and normally act in support of the government’s economic policy, The Bundesbank’s

control of the money supply gives it direct influence over the value of the deutsche mark,

During the years of rapid economic expansion,

particularly the early 1960’s, the bank helped

maintain an undervalued currency—a strategy

that strengthened the export competitiveness

of German goods but earned a good deal of criticism from the country’s trading partners.

WC. de Carmoy, “Subsidy Policies in Britain, France and West

Germany: An Overview, ” International Trade and Industrial Policies, S. J. Warnecke (cd.) (New York: Holmes & Meier, 1978),

p. 52.

The Federal Government also holds majority shares in five banks, while cities and states

have their own financial institutions. One of

the nationalized banks, the Kreditanstalt fur

Wiederaufbau, is a development bank that provides funds to commercial lenders. TO While the

financial communities are major seats of influence over industrial policy in both West Germany and France, they function quite differently in the two countries: rather than selective

credit for favored firms and industries as in

France, German banks have supported fiscal

and monetary policies oriented toward aggregate growth.

If economic and industrial policymaking in

West Germany is less centralized than in

France, the lines of responsibility are more

clearly drawn than in Great Britain. While the

Research and Technology Ministry (BMFT),

say, tends to approach industrial policy with

a perspective quite different from that of the

Economics Ministry, the division of authority

is more or less predictable and consistent. Germany’s parliamentary system has seen few

changes in government since 1949; when a different party has come to power, overall objectives such as maintaining the country’s export

strength while controlling inflation have been

retained.

Policymaking Processes

A distinctive feature of the German system

is the broad representation of interests, the effort made to integrate diverse points of view.

The Stability and Growth Act empowers the

Federal Government to provide “orientation

data” for policy measures to be “simultaneously and mutually agreed upon” by Lander and

local governments, labor unions, and employers’ associations, In the late 1960’s, “concerted

action” incomes policies were developed,

aimed at consistency in approach among government bodies and socioeconomic groups on

budgetary matters as well as wages and prices.

Concerted action was not an attempt to sup70E.Owen-smith, ‘‘Government Intervention in the Economy

of the Federal Republic of Germany, ” Government Intervention

in the Developed Economy, op. cit., p. 176.
Ch. 10—National industrial Policies . 407

plant the monetary and fiscal policies of the

Federal Government, but was intended as an

adjunct and complement to these, the basic objective again being the creation of an environment conducive to economic growth. Like codetermination—which ensures labor a voice in

plant operations—concerted action sought to

integrate labor and other interest groups into

the mainstream of policy formulation. Today,

concerted action has fallen into disuse, but

speculation on its revival regularly surfaces; if

nothing else, this indicates the persistence of

the view in Germany that sound economic and

industrial policies depend on broadly based

consensus-building.

Indeed, institutionalized participation by

major social groups appears to offset much of

the fragmentation that otherwise might seem

to characterize industrial policymaking in the

FRG. As in a number of other Western European countries, notably the Scandinavian nations, Germany’s industrial policy is marked

by concern with labor issues. In 1974, the

BMFT and the Ministry of Labor and Social

Affairs set up a joint research program on “humanization of the workplace. ” Directed not

only at health and safety issues, the program

aims as well to identify and encourage organizational changes that would increase job satisfaction (ch. 8). A number of studies sponsored

by the program, which is oriented strongly toward field experiments and employee participation, have explored impacts of automation

and computer technologies. 71

The systematized participation of labor in

West Germany is especially noteworthy in contrast to Japan or France, In Japan, organized

labor is in fact—if not always in appearance—

relatively powerless; the consensus so clearly

visible in Japan comes, not from full participation, but from a rather passive acceptance by

other groups of policies that business and government have agreed on. In France, organized

labor is vocal—with a marked radical cast—

but labor participation in setting policy has not

been internalized as in Germany. French

7“’Research on the Humanization of Work, ” Ministry for Research and Technology and Ministry of Labor and Social Affa]r>, do(. umenl No. 2181/74e,

unions traditionally exert pressure on the

government through political activism, often

confrontational. Even with Mitterrand and the

Socialists in power, this is not likely to change

much,

Policies Toward Electronics

Despite its stress on macroeconomic tools,

West Germany has, over the years, instituted

a considerable number of policies directed at

specific industrial sectors, Some have been

in portions of the economy where government

ownership has been widespread—e.g., energy

and banking, In contrast, sectoral involvement

in electronics has been mostly restricted to

R&D; compared to both France and the United

Kingdom, military involvement has not been

prominent. Moreover, in further contrast with

these two countries, when FRG officials attempted to encourage a “rapprochement”

among Siemens and several other computer

manufacturers, the large and powerful Siemens

concern resisted quite successfully. 72 Whe n

AEG-Telefunken—after Siemens the country’s

largest electrical and electronics producer–fell

on hard times, the private sector at first dealt

with the crisis on its own. A consortium of 24

commercial banks engineered a massive rescue effort, with financing totaling more than

half a billion dollars.73 Only when the bankers’

efforts proved insufficient did the government

step in with a package involving further loan

guarantees and export credits. ’A As this implies,

and as chapter 7 described in more detail, cooperation among industry and financial institutions in the Federal Republic has been common—and an increasing subject of parliamentary scrutiny and public criticism, on grounds

that the power of the banks is too great.

Despite efforts such as the aborted Telefunken rescue, government influence has not

been exercised as directly in electronics as in

;:%:~:~ ~P. Cit., p. 217,

, “The Last Chance Rescue, ” Finan~ial 7-IIIIe5, {UCIC

14, 1982, under West German law, banks can own equity in private firms and act as brokerage houses (ch, 7). German banks

held about 40 percent of Telefunken’s stock.

74 See “Germany’s Telefunken Insolvent, ” New York Times,

Aug. 10, 1982, p. f)l, Nonetheless, the firm entered bankruptcy

In rn]d-1 982,
408 . International Competitiveness in Electronics

sectors such as energy (where subsidies have

contributed to high domestic coal prices), steel

(where firms such as Salzgitter are publicly

owned), or shipbuilding (where a range of policy initiatives have been marshaled to shelter

the industry from decline) .75 Still, since the late

1960’s the West German Government has

sought ways of strengthening the nation’s computer industry. While on the whole the German

electronics sector has been the strongest of any

in Europe, it has shared the common weakness

in computers. Part of the reason appears to

have been that the bigger electronics firms—

Siemens, AEG-Telefunken, SEL–were already

heavily committed to other lines of business—

consumer products, telecommunications, electrical machinery. Much like such American

companies as RCA or General Electric, these

large and diversified enterprises never developed much strength as computer manufacturers. From the standpoint of the German Government, there really was no computer industry as such to support. As a result, it proved

difficult to devise effective policies for encouraging either the technology of computing or

commercial production. As in many other

countries, government procurements have

been channeled to local firms. Nevertheless, in

contrast to Japan and France, the FRG has

largely avoided attempts to shield the industry

from foreign competition, relying instead on

domestic supports and subsidies. * A major

thrust of German efforts has been to stimulate

utilization of computers through training programs and applications support.

Although benefiting from government funding amounting to more than 100 million

deutsche marks (something over $50 million—

in fact a relatively small fraction of West Germany’s total subsidies during the 1970’s for

computers and information processing), TeleZssee owen-sm

ith, op. cit.: p. 174 on coal prices; P. 184 on

Salzgitter; p. 173 on shipbuilding.

*Even so, a recent trade dispute shows that—in Germany as

elsewhere—foreign firms are often discriminated against. In a

case similar to AT&T’s choice of Western Electric over Fujitsu

in fiber-optics, Bremen University was forced to reverse a decision to purchase a computer system from Burroughs. The contract went to Siemens at a price considerably above the American

bid. See “Technology and Trade Policy: Issues and An Agenda

for Action, ” op. cit., p. 49.

funken never achieved much success in computer systems. Siemens remains the largest

German-owned computer manufacturer, somewhat ahead of Nixdorf in sales (ch. 4, table 42).

But Siemens’ production is far less than that

of IBM’s German subsidiary; Siemens has

never appeared to view computers as a major

piece in its corporate strategy. The company

has only about 20 percent of the German computer market, and less than 10 percent for

Europe as a whole. Nonetheless, Siemens continues to receive by far the largest share of

government funds for R&D in computer technology. 75 The contrast with Nixdorf—a manufacturer of business-oriented minicomputers

—is striking. Nixdorf is an aggressive worldwide competitor in its chosen markets, much

in the American mold; the company has accomplished this with little government assistance,

Again in common with other European electronics firms, a number of German manufacturers have pursued ties with American and

Japanese enterprises, one aim being technology acquisition. In 1978 Siemens purchased 20

percent of Advanced Micro Devices. More recently, the company negotiated an agreement

with Japan’s leading producer of computers,

Fujitsu; Siemens now markets several of Fujitsu’s IBM-compatible mainframes in Europe.

Such arrangements have brought criticism of

government support for Siemens as failing to

promote an indigenous computer industry.

Research and Development Support

Financial subsidies for Siemens’ computer

efforts have been part of a considerably larger

program of technology development in the

FRG. Total R&D expenditures grew more than

60 percent in real terms between 1969 and

1980, increasing from 2.1 percent of GNP to

2.3 percent; the West German Government has

T6BY 1978, the west German Government had supplied Siemens

with a cumulative total of 351 million deutsche marks (nearly

$2OO million) for the development of large- and medium-sized

computers. See “Sixth Report of the Federal Government on Research, ’ Federal Minister for Research and Technology, Bonn,

1980, p. 82. The computer support programs of the BMFT now

seem widely viewed as failures; they have been drastically scaled

back.
Ch. 10—National Industrial Policies 409

strongly supported R&D, which has accounted

for 3 to 4 percent of the Federal budget during the past decade. 77 Since the initiation of the

second data processing program in 1969, the

electronics industry, and particularly the components sector, has received a substantial fraction of this spending; 30 percent of German

R&D funds have gone to electronics (and electrical equipment)—a greater fraction than in

any of the other countries listed in table 77, But

while government support for electronics as a

whole increased steadily during the latter part

of the 1970’s, it appears to have peaked at the

end of the decade, with the more recent contraction stemming from disappointing results

in computer technology. 78

Disillusionment with support for computer

systems has led industrial policy makers in the

Federal Republic to reorient their programs

toward microelectronics. Here funds have

gone toward device physics and processing

technologies, as well as IC design and development. Between 1974 and 1978 relatively modest

sums were spent by the government on microelectronics R&D—about $30 million annually.

A somewhat more ambitious effort began in

1979. Like the computer R&D which it supplanted, VLSI support at first centered on the

large electronics manufacturers. In its first program, the government contributed about $300

million over the period 1976-82, with industry

participants putting up matching funds and

competing on a proposal basis.79 The German

VLSI program has been much less centralized

than Japan’s; participants work independent-

““S i tt t) [<t’~)ort of tt)(: F’(’d[; ral Government on Research, ” op.

I It,. [) 77, “F’R(l’\ l)()~itl()n III J$’orld R&I) IIomrnunitt Assessed, ”

L%”e,$t h’urop(: Re~)orf, ,%. Ien(;e and ‘~echnofog~, No. 72, Joint Pubii( atlt)n~ F!t\(:,tr(.]) Ser\i(,(~ J[JRS 78876, Sept. 1, 1981, p. 40,

“%1111 “S1 xth Ke~)(]rt of the Federal (government on Research, ”

()[), (, i t., ~), b‘] Wh i Ie the t)udget for gut’t; rnment e xpen(i itu res

on [;l(;(, t 1011 I(. \ R&L) was s(. heduled to increase from about 3 so

mill I(JO (if; ut ~(:he marks I n 1975 and 1976 to more than 600 m i 1-

Iion in 1980 and 1981, expend i!uros in these later ~!ears were

(, u t I)[i(, h (.onsi[ierahly from the amo(I nt~ origi n,ill}’ pl,lnne(i,

‘fi~l (Iol(i, “tlrt~~t (; PrIII~II}I Rei)ortc(l ,qt)()~]t ‘1’(J l,,iul~( }) $)()()

klIll IOII L’l, S1 K <III(] 1) f’l,irl, ” E](X, troIII[, .\’(’1$’$, A[)l’ :}(), 1979,

[). 1, ‘‘ [l(]r(}~)(,,]ll S(J[n]c ondl]c tor In(ill>t rl \farkt~t\, (j[)~{:rnm[:nt

l)rogran)s, ” L1’e,$t [juro[)[” Rc{)[)rt, .%, ~fjn(,fj an(i ‘1’(:( III]olog}”, ,\ro.

134, J(JIIlt l)ul)l it ,it II)II\ R[~\(:ar(;h S[:r[ i( ~’ J I)RS 82 fiH(j, Jan. 20,

1 (48:1, ~) \2.

ly, with the responsibilities of government officials limited mostly to coordination and

avoiding duplication. Siemens has received 25

to 30 percent of the money, with Telefunken

and Valvo each getting 10 percent or more. Industry seems to have regarded the program as

useful but not of great impact; the major German electronics firms have traditionally had

strong commitments to R&D—including basic

research—and government money appears to

have gone mostly to efforts that the private sector has judged marginal. Indeed, a principal rationale has been to finance projects with time

horizons too long for industry to justify.

While most of the money in this first major

VLSI program went to big companies, the FRG

has also paid a good deal of attention to smaller

firms—of which there are more than a thousand in electronics.80 In contrast to the market

orientation of other German industrial policy

initiatives, the BMFT—a relatively new agency—has designed an array of sector-specific

programs aimed at small enterprises and

growth industries like electronics and biotechnology. Small technology-based firms in the

Federal Republic often face difficulty in raising capital. As in most countries other than the

United States, venture capital markets are miniscule. Viewing this as an obstacle to innovation, and with motives much like those leading to the creation of the National Enterprise

Board in Great Britain, the FRG Government

set up a venture financing company (Deutsche

Wagnisfinanzierungsgesellschaft) in 1975. This

organization purchases minority interests in

German firms —with the intent of backing innovative developments—while giving the proprietors preferential rights to buy back the equity if their business succeeds.

The turn toward support for smaller companies has also been reflected in the BMFT’s latest
410 ● International Competitiveness in Electronics

semiconductor program. The 3-year effort, beginning in 1982 and funded at about $45 million per year is—like a number of Britain’s

more recent initiatives—directed primarily at

applications. 81 This new program comes on top

of a 40-percent increase in microelectronics

R&D support that had already been scheduled.

Most of the applications money will be channeled to small firms, with one of the objectives

being job creation; of 1,000 grant applications

received during the first 6 months, two-thirds

were from companies with fewer than 200 employees, Administration is the responsibility of

the VDI Technology Center, established by

the BMFT in 1976 specifically to help smalland medium-sized firms develop and apply microprocessor technology.

The Fraunhofer Gesellschaft82

West Germany’s attentiveness to smaller enterprises does not stop with microelectronics.

The Ministry of Economics supports more than

80 industrial research associations, while the

Fraunhofer Gesellschaft (Association of Institutes of Applied Research, FhG)—comprised

of some 25 institutes which function as R&D

laboratories—has as one of its major responsibilities the diffusion of technology to industry, especially small companies.

Strengthening the FhG, which was founded

in 1949 to perform applied research and engineering development on a contract basis, has

been one of the more intriguing BMFT initiatives. The FhG remained small until a government decision in 1969 made it the chief vehicle for support of applied research. At this

point funding began to increase rapidly. A reexamination of FhG goals in 1973-74 led to a

strengthening of its mandate for transferring

Slsee ‘<Increased Government Funding for Mic roe}ectron ics,

J%rest Europe Report, Science and Technologjr, No. 92, Joint Publications Researcb Service JPRS 80133, Feb. 18, 1982, p. 5;

“Special Microelectronics Program, ” West Europe Report,

Science and Technology, No. 113, Joint Publications Research

Service JPRS 81392, July 29, 1982, p. 13.

8ZMuch of the information in this section is based on interviews. See also H. Keller, ‘(30 Jahre Fraunhofer-Gesellschaft:

Riick-und Ausblick, ” FhG Berichte 3-79 (Munich: Fraunhofer-Gesellschaft, 1979), p, 3, and Vertragsforschungfiir Wirts[; haft und Staat [Munich: Fraunhofer-Gesellsc haft, 1981 ].

technologies to the private sector, as well as

developing them.

Joint government-industry financing on a

project basis is the rule. FhG institutes—which

together employ more than 2,500 people—provide technical advice to smaller firms, cooperate with universities, and function as technology conduits. Institutes are organized

around technical disciplines; one concentrates

on semiconductor devices and processing technology (the Institute for Solid State Technology

in Munich), another on computer systems (the

Institute for Information and Data Processing,

Karlsruhe). Several others work in areas less

directly related to electronics.

The Institute for Solid State Technology, one

of the more successful of the Fraunhofer laboratories, can serve to illustrate the FhG model.

Loosely associated with the Technical University of Munich—the Institute’s director holds

a chair there, and perhaps 20 students work

at the laboratory—the Institute employs nearly 100 people, about half of them engineers or

scientists. This makes it the largest organization of its type in West Germany, and perhaps

in Europe. Founded in 1974, housed in its own

building away from the university, and growing largely through the initiatives of its director, internationally known for his research in

semiconductor technology, the laboratory gets

70 percent of its annual funding—about $5 million—via separately budgeted R&D projects.

The BMFT typically provides a major share of

project budgets, the remainder coming from

one or more industrial sponsors. In essence,

the government shares risks with industry,

Two of the Institute’s staff members are paid

directly by the BMFT to advise and consult

with small- and medium-sized companies.

Much of the laboratory’s work is concerned

with processing technology; prototype circuits

can be fabricated, along with small lots of specialized devices such as sensors and ICs for

medical applications. The Institute also operates an X-ray lithography facility at West Germany’s synchrotrons storage ring in Hamburg.

Perhaps the most noteworthy aspect of the

FhG and its mandate from the BMFT is the ori-
-— Ch. 10—National Industrial Policies . 411

.

entation toward commercial technologies. The

institutes are not basic research organizations

—that function remains with the Max Planck

Gesellschaft. Nor do they function as government laboratories, although the relationships

between individual FhG institutes and government agencies vary considerably; the ties are

closest among the six that carry out R&D financed by the Federal Ministry of Defense. The

institutes are a conscious attempt to speed

commercialization of new technologies and diffuse R&D results through industry. One way in

which the FhG does this is simply to provide a

venue for bringing representatives of Federal,

Lander, and local governments together with

industry and the universities, The Fraunhofer

experiment is an attempt to compensate or the

weak links that exist in Germany-as in most

countries—among these groups, especially

where commercial technologies rather than

basic research are involved. Likewise, the decision to accept defense-related projects in 1955

was based on the belief that it was better not

to isolate defense R&D, but to combine it with

civilian work in hopes that each would benefit.

(Defense-related projects now account for 20

to 25 percent of the FhG’s effort. )

Within Germany, the Fraunhofer Gesellschaft has won high marks for facilitating technology transfer while avoiding direct government involvement in decisions on directions

and priorities, but its comparatively small

budget—about 230 million deutsche marks in

1981, something over $100 million—limits the

assistance that flows to any one industry, *s

The Future

If a joint strategy for the European Community in electronics comes to pass—a prospect

that seems slight, as discussed in the next section, but not so improbable as a few years ago—

West Germany’s industry would probably be

E~ \’f)r/r:igsforsC;hung fti’r Wirtschaft und Staa t, op. cit. I II 1978,

~~, 7 million deutsche marks ($ I 8,7 million) went to the four

I:raunhofcr irlstitut(~s invol~,ed in work related to mi( rf)t;lw,-

tr[)n ir, ~ and lnformat ion pr[jc:essing; see “Coo] Jerati\t; R and 1 )

prr)gr;lrll J ‘[’() Stlmtl]ate Industrial Innovation In Se]ected COun -

trioi-it’e>t (; f!rmany, ” I)epartment of Commerce, National B\ir(’all of Stan da r(fs, ( )ffl(. e of (:oo~)erat il’f)‘1’cc;h nolog}, N(]\remher

1979, [). 6!).

the best placed of any in Europe. But in the

more likely event, progress in electronics in the

Federal Republic will depend—as it has in the

past—on domestic actions, public and private.

Past government policies, when directed at

electronics, have not been notably successful.

Nonetheless, German industry has a sound

base to work from. Siemens, if not a leader in

computers, probably has the best semiconductor technology of any company in Europe.

(Philips is strong in linear circuits because of

its emphasis on consumer electronics, but Siemens was virtually the only European manufacturer that recognized the importance of

MOS ICs at an early date.) Germany’s domestic

production of ICs has grown as a percentage

of consumption in recent years, a sign of

Siemens’ continued technical strength and perhaps of positive results from government R&D

programs .

84 But the entire consumer electronics sector in West Germany, not just AEGTelefunken, has faltered under the pressure of

Japanese competition. ZVEI, the Central Association for the Electrotechnical Industry, has

claimed that increased sales of imported home

entertainment products have been a direct

cause of shrinkage by such firms as Grundig

AG, and consequent losses of jobs; at the end

of 1982, Grundig and Philips filed an antidumping complaint against Japanese producers of

V C RS .

85 In computers, West German firms

have less than 5 percent of world sales. Nixdorf has chalked up respectable profits and exports by concentrating on smaller businessoriented systems; the company has done this

on its own, without significant government aid.

As the example of Nixdorf shows--a lesson

repeated in other countries-industrial policy

is no substitute for well-managed private firms,

West Germany has thus maintained its position in the second tier of the world electronics

industry. Can it compete in the years ahead

when faced with both American and Japanese

%. 1 losi, 7’echm(:al Change and ,~’ur~i~,al.” The Europtwn tSem)-

(:on ductor in dus tr~ [B rightoo, (J. K.: Sussex European Resca r[ l)

(;entre, Sussex European Papers, May 1981. )

R’]. Gos(;h “(lerrni+n (lonsumer Firms Face Bad Times, ” E)e[;-

tronics, Sept. 11, 1980, p. 97; “]apanese \’TRs Are Target of E(;

Antidumping ( ;ase, \l’a]] ,$trwt )ourna~, Dec. 24, 1982, p. 9.
412 . International Competitiveness in Electronics —.—

firms? At present, many of the industry’s problems stem from the broader dilemmas of the

FRG economy; high interest rates and low profit margins have made it difficult for German

companies, which have traditionally borne the

bulk of such expenses themselves, to maintain

high levels of spending for R&D and new capital investment. In recent years, Siemens has

accounted for as much as 12 percent of all West

German industrial R&D—for many observers

this alone signifies imbalance. 86

West German firms also face a critical deficit

in technical manpower, despite mounting unemployment in the nation as a whole. According to the Association of German Engineers,

16,000 jobs have been vacant for lack of people

—particularly in electrical, mechanical, and

civil engineering; in 1980 only 3,600 students

were enrolled in technical universities able to

accommodate 4,700.87 Such problems are in no

sense unique to West Germany—the question

is whether government policies will help to

resolve them.

How Effective Are West German

Industrial Policies?

Industrial policy has a less distinct identity

in the FRG than in many other countries—at

least it is harder to summarize. On the one

hand, the approach has been more market oriented than in France; certainly planning and

coordination on the French model are absent.

On the other hand, the West German Government has consistently supported industrial

development through macroeconomic measures and by integrating a broad range of

perspectives and interests into the policymaking process (critics in some countries might

regard this as a weakness). The role of the

~According to Siemens’ annual report for 1980, the company

spent over 3 billion deutsche marks [about $1.6 billion), more

than 9 percent of worldwide sales, on R&D. Over 90 percent of

the money came from Siemens’ own funds, the rest from government contracts and grants. For compilrisorl, U.S. firms during

the same year spent the following amounts as a percentage of

sales: Amdahl, 15.8 percent; I13M, 5.8 percent; Data Genera], 10.0

percent. See ‘*Spending for Research Still Outposes Inflation, ”

Husiness Week+ July 6, 1981, p. 60. Siemens is clearly committed

to keeping up in technology

87J, Tagliabue, “(h:rmany’s Economy Stumbles, ’ New York

7’irnes, Apr. 13, 1981, p. 1]1.

government, then, is far from laissez-faire. In

contrast to the British case, sectoral initiatives

have been pursued with a good deal of consistency over time, although such policies have not

necessarily entailed extensive involvement by

government officials. The West German case

does underscore the critical importance of aggregate policies as necessary (if perhaps not

sufficient) to sectoral development.

Industrial policy in Germany has benefited

from a better sense of timing than in the United

Kingdom. Government support for R&D in

electronics began to pick up in the late 1960’s,

and has continued to grow—this despite an ongoing debate between the BMFT, which favors

expanded sectoral thrusts, and the Economics

Ministry, which continues to stress aggregate

measures. While R&D programs—including

funding for VLSI research and the efforts of

the FhG—have not advanced the competitive

position of the German electronics industry in

any very obvious or dramatic sense, they appear to have nurtured it in a variety of less

direct and visible ways. Unlike electronics

policies in nations which have tried to leapfrog

the competition, the German approach has

been one of broad support for more basic kinds

of research, in the hope of returns over the

longer run.

As the Federal Republic struggles with rising unemployment and continuing economic

stagnation, such policies will be severely tested.

Formulated in a time of overall growth, there

is no guarantee that the FRG view of industrial

policy will prove adequate to deal with the

adverse conditions promised by the rest of the

1980’s. Germany’s problem is much the same

as that faced by the United States.

The European Community

In West Germany and elsewhere in Europe,

concern over technology gaps vis a vis American and Japanese competitors has led to periodic proposals that the European Community

(EC) develop a joint policy toward electronics.

Rapid increases in consumer electronics shipments from Japan have stimulated talk of import restraints, but a common effort in R&D has

been the most frequent suggestion. A 1980
Ch. 10—National Industrial Policies ● 413

study by Siemens, for instance, held out little

hope for indigenous semiconductor industries;

the conclusion was that continued growth in

European sales would probably benefit Japanese firms the most, with the U.S. market share

dropping from three-quarters to less than twothirds by 1985.88

Although much of Europe has suffered similar problems—the twin maladies of recession

and inflation, a perceived slowdown in technological advance, rising labor costs, unemployment, low rates of capital investment, slipping competitiveness—joint responses have

been slow to appear. In 1980, the EC’s industry

commission proposed a European strategy in

electronics that would have included government-funded programs to develop semiconductor processing equipment, as well as an advanced communications network linking the

members of the Community. *g The proposal,

which would have required modifications to

national procurement policies, stalled when the

French dismissed it as insufficient while the

British dithered over the implications of exposing ICL to open procurements. So, while the

EC countries have recognized the need for a

more unified approach, national concerns have

thus far remained paramount.

The latest attempt—which bears the name

Esprit (European Strategic Programme of Research in Information Technology)—got underway in mid-1982. At first directed chiefly at

semiconductor processing, in part because

Europe has been heavily dependent on imported processing equipment, Esprit will also

support work on chip architectures for VLSI,

device modeling, and computer-aided circuit

design and testing.90 The program has been

88’’ Growth of Electronics Market in Europe Seen Benefiting

Japan, ” NeL$ }’ork Times, Nov. 28, 1980, p. D3.

89’4Europe’s Electronic Strategy is Modest, But It Still Isn’t

Easy, ’ ‘ The Economist, July 26, 1980, p. 63. Over the years, the

E(U Commission has produced a variety of elaborate proposals

and stud ies, to little evident effect. See, for example: “New Information Technologies, ” Sept. 1, 1980; “Proposal for Counci] Regulation Concerning Community Actions in the Field of Microelectron ic Tech nology, ” Sept. 1, 1980; “The Competitiveness of

European Community Industry, ’ Mar 5, 1982; all Commission

o f the European Co m m u n lt ies, Brussels.

MID. Fish look, ‘‘Why Europe Wants Esprit, ” Financial Times,

Aug. 3, 1982, p, 13; J. Smith, “Can Europe Cooperate on Research?” Electronics, Aug. 25, 1982, p. 85.

carefully designed to avoid areas where countries and companies compete directly. Funding, planned to be about $45 million over 3

years, will be contingent on substantial contributions from the industrial participants,

which number a dozen of Europe’s largest electronics firms (ICL, Siemens, Nixdorf, CII-HB,

Philips, Olivetti—the planning effort began

with company managements rather than government officials). EC planners hope the effort

will expand within a few years to encompass

more ambitious targets—e.g., projects analogous to Japan’s government-sponsored R&D

ventures in supercomputers and fifth-generation systems. It remains to be seen, however,

whether the Europeans will manage to cooperate effectively—and, if they do, whether

cooperation in basic research will make much

difference, given that many of the large European electronics companies have always performed high-quality research but have had difficulty translating the results into commercial

products.

Japan

Japan is the exception to many rules in the

international electronics industry. Government

policies evolved along with the industry; they

have consistently supported private firms,

directly and indirectly. Subsidies have been

substantial, though not inordinately large compared with other countries. Both financial support and indirect measures have been carefully targeted—benefiting some parts of Japan’s

electronics industry much more than others—a

feature that has attracted much attention in the

United States. Consumer electronics, for example, has not been a major focus of government

policy compared to microelectronics and computers; nevertheless, during the period of consolidation and concentration that extended

through the 1960’s, the government maintained

a series of barriers to imports and foreign investment that effectively limited competition

in consumer electronics to local firms. 91 Lib-

—..—

‘

l

’’ Sources of Japan’s International Competitiveness in the Consumer Electronics Industry: An Examination of Selected Issues, ”

prepared for OTA by Developing World Industr~ and Technology, Inc. under contract No. 033-1010.0, pp. 31-46; see also The

U.S. Consumer Electronics lndustr~r (Washington, DC.: Depart-
474 International Competitiveness in Electronics —. —— —————

eralization began only in the late 1960’s, as the

government’s attention turned elsewhere; by

this time Japan’s consumer electronics industry

had become well established. Foreign investment controls on monochrome TV production

facilities were relaxed in 1967, on color production 2 years later (in some contrast with

European governments, Japan limited inflows

of foreign capital as well as products). Likewise, the tariff on color TV imports—formerly

30 percent—dropped to 71⁄2 percent in 1971.

Similar measures were adopted to protect the

fledgling computer and microelectronics

industries.

TV manufacturers clearly benefited from

government support of broadcasting, from the

array of direct and indirect trade barriers that

Japan erected during the postwar years, and

from policies that encouraged exporting. Still,

direct and positive support–e.g., for R&D and

product development—was modest compared

to the attention lavished on information processing. Beginning in the 1960’s, computers and

semiconductors have been at the center of policies toward electronics and ‘‘the information

industry. ” As these sectors grew, Japanese policymakers shifted direction—away from the

complex of measures for protecting domestic

industries that had been the hallmark of the

government’s approach during the 1950’s and

1960’s, toward more positive measures. Rather

than simply sheltering local companies, the

government sought to actively strengthen Japan’s capability in data processing, with the

aim of moving into world markets. Financial

subsidies, primarily for R&D, were a major vehicle, along with other, less direct supports for

research, as well as measures to encourage and

facilitate applications of new technologies. An

example of the latter is the Japan Electronic

Computer Co., which buys data processing

equipment from computer manufacturers and

leases to users (ch. 4).

Today the information industries are viewed

as the flagship of the knowledge-intensive sectors at the core of Japan’s emerging industrial

structure, the structure that will keep the country’s economy growing and competitive into

the next century. A unique feature of electronics policy in Japan—since copied by other

nations—is official sanction and promotion,

not only of the industry as such, but of electronics as the epitome of a broad array of

emerging technologies (including CAD/CAM,

robotics, composite and ceramic materials, and

biotechnology); the policies of Japan's Government toward electronics are in fact aimed at

goals transcending conventional sectoral

boundaries. These policies, for years, have also

been consciously directed at leapfrogging other

nation’s technologies—another aspect of the

Japanese strategy that governments elsewhere,

particularly in Asia, have tried to emulate. In

several respects then, Japan’s use of the tools

of industrial policy has been innovative; Japanese policy makers have been both more ambitious and more experimental than, for inment of Commerce, September 1975), pp. 12- I 3, and United

States—Japan Trade: Issues and Problems [Washington, D. C.:

General Accounting Office, ID-79-53, Sept. 21, 1979], ch. 5.

PhotcJ credit Be// L.aborator/es

Light emerging from glass filaments used

in fiber-optic communications
Ch. 10—National Industrial Policies ● 415 —

stance, their counterparts in France or the

United Kingdom.

The efforts of people like Yoneji Masuda

have fed the broad consensus which evolved

among leaders i n Japanese business and government concerning the critical importance of

electronics, and particularly computers. Active

since the mid-1960’s on advisory councils to

the government, Masuda was responsible—as

Executive Director of the Japan Computer

UJsage Development Institute—for the 1972 report, “The Plan for an Information Society:

Japan’s National Goal Toward the Year 2000.”

Respected academic and author of more than

20 books, as a government advisor Masuda advocated a comprehensive national plan for

‘‘computerization" in Japan, including government investment in future-oriented projects

such as a ‘‘c o m p u t opolis, or computerized

city, and a computer peace corps. Masuda’s

ideas--which are well within the mainstream

of this brand of futurism, based on the assumption that the production of information will

gradually overshadow the production of material goods, eventually comprising the next

stage in economic development-heavily influenced MITI’s (the Ministry of International

Trade and Industry) vision of a future information society.92 Most Japanese policy makers

take a more pragmatic view, but the visionary

outlook of Masuda and others like him helped

crystallize a broadly based consensus on the

importance of computer technology.

The Institutional Setting

In contrast to the United States or the United

Kingdom, a well-defined group of government

agencies in Japan bears the responsibility for

official policies toward the electronics industry. Both policy development and implementation are centralized in MITI, specifically its Information Machine Industries Bureau.

Satellites attached to MITI include the Agency for Industrial Technology, with functions

in R&D, and the Information Processing Industries Advisory Council, a prestigious group

with membership drawn from the private sector.

The only other public agency with significant

ongoing jurisdiction related to electronics is the

Science and Technology Agency (STA), under

the Prime Minister’s Office. In size and resources, STA cannot rival MITI. It does, however, coordinate the government budgetary

outlays for R&D and related expenditures, preparing, for example, an annual “Science and

Technology White Paper. ” STA also funds research projects, including contract research by

private firms, through its New Technology Development Corp. 93 STA influence over nuclear,

ocean, and space technologies has been more

extensive than in electronics.

This is not to say that other government agencies do not develop policies that affect the Japanese electronics industry. They do, b u t o n a

less regular basis than MITI and STA; moreover, the influence of other agencies tends to

be less direct, The Ministry of Finance (MOF)

has jurisdiction over macroeconomic matterse.g., fiscal and monetary policy. In recent

years, growing budget deficits have forced the

MOF to weigh proposals for sectoral assistance

more carefully; competition for funds among

electronics and other industries-as well as

with government objectives other than industrial—development-has become stiffer. The

MOF also exercises a good deal of’ influence

over the Bank of Japan, while public corporations such as the Japan Development Bank can

channel funds to favored companies through

loans and grants (ch. 7). Long-term projections

by the Economic Planning Agency include

forecasts of output by sector of the economy

that are widely regarded as reliable guideposts

to future business prospects. While neither

public nor private banks need subscribe to the

government’s investment priorities, they often

put money into sectors targeted by such plans.

An independent body, the Fair Trade Commission (FTC)—though peripheral in industrial

policy compared to MITI or the MOF--has
416 ● International Competitiveness in Electronics

often resisted policies formulated by those

agencies. Examples include legislation exempting sectors like electronics from provisions of

Japanese antitrust law to facilitate “collaboration” among firms for “rationalizing” the industry. 94 The FTC has repeatedly, though seldom successfully, opposed MITI recommendations for antitrust exemptions—but in contrast

to the Japanese petroleum industry, where the

FTC has frequently investigated particular

companies, electronics firms have seldom been

scrutinized apart from matters of rebates and

resale price maintenance. Even the public outcry over price-fixing among color TV manufacturers fueled by media reports of dumping

charges against Japanese firms in the United

States—was assuaged informally rather than by

FTC decision; MITI persuaded the companies

involved to lower domestic prices by 15 percent. Legal challenges to the business activities

of Japanese electronics firms have come primarily from abroad: in the United States alone,

Japanese electronics companies have been involved in more than 30 lawsuits, the majority

over dumping.95

In addition to these traditional actors, other

agencies and organizations have recently

found more prominent roles, The interministerial Council for Science and Technology

has been active in developing and coordinating

large-scale R&D programs, The Ministry of Education has launched its own 3-year VLSI project, Diet (parliamentary) committees dealing

with science and technology have become

more visible. Local governments have started

to court new technology-based industries;

Kawasaki has put together a plan calling for

transformation into a “microcomputer city, ”

while Hiroshima has organized a council to

study the impacts of high technology on its

established industrial base, Given this proliferation, science and technology policy in Japan

may become more politicized in the years

oi~;~oho n. ~aisetsu (An Explication of the Law for special

Measures for Specified and Information Industries) (Tokyo: Ministry of International Trade and Industry, 1979). mDenShi Kogyo /Venkan, Ig79 (Electronics Industry Annual,

1979, Ministry of International Trade and Industry) [Tokyo:

Denpa Shuppansha, 1979), p. 303.

ahead (in some energy research areas, such as

nuclear power, this has already occurred).

Policymaking in Japan

Japanese industrial policy is built on close

consultation among business leaders and government officials. Corporate executives routinely participate in both formal and informal

discussions concerning policies toward electronics. It is an overstatement to claim, as some

observers have, that in Japan industry tells

government what to do, while in France government tells industry—but this does convey

a sense of the difference. The Information

Processing Promotion Advisory Council, for

instance, brings together representatives of

Japan’s leading electronics firms to discuss

MITI proposals. While such advisory councils

meet relatively infrequently, and rarely have

a determining voice in policy development,

they serve to mobilize business interests and

help form a consensus in support of the eventual outcome, Advisory councils are only one

such forum. Representatives of the many electronics industry associations in Japan interact

with officials from MITI and other agencies

through a wide network of public and semipublic institutions. Several organizations bring

together government, industry, and university leaders to stimulate work on computer software; the Information Technology Promotion

Association (IPA), for one, had a 2.78 billion

yen budget (about $13 million) in 1980, raised

from both public and private sources. Established in 1970, IPA organizes programs

through which private corporations and IPA

staff conduct joint research on problems such

as computer-aided design or software packages

for small businesses.96

Similarly, the Japan Information Processing

Development Center (JIPDEC)—a semipublic

organization with a staff of 150, the bulk of

whom are engineers—was established in 1967

with the support of MITI and the Ministry of

Posts and Telecommunications. JIPDEC’s pri-

‘Konputa Hakjushe 1979 (Computer White Paper-1979), Nihon

Joho Shori Kaihatsu Kyodai (Japan Information Processing Development Association) (Tokyo: Konputa Ejisha, 1979), p. 94,
Ch. 10—National industrial Policies ● 417

.

mary mission is the marketing of software.

Loans and grants for some of its programs have

been provided by IPA. Operating with a $10

million budget, JIPDEC carries out surveys on

information processing, conducts R&D, supports technical training and education, and encourages information exchange through seminars and publications. Examples of JIPDEC

projects include a microcomputer promotion

center and an Institute of Information Technology for retraining technical specialists,

JIPDEC activities also led to the fifth-generation computer project,

Government-Sponsored Research and

Development Projects

The fifth-generation computer effort typifies

Japan’s approach to R&D–bringing together

private sector firms, along with selected public

institutions. With funding from MITI and the

bicycle racing association, the fifth-generation

project—which has attracted worldwide publicity—is overseen by a 22-member panel including representatives from Tokyo University, companies such as Fujitsu, and MITI. 97

About half the roughly $500 milIion budgeted

for the lo-year effort is to be provided by the

government. A research association (kenkyu

kumiai) was setup in 1979 to mobilize nine Japanese companies for R&D on microelectronics

devices and peripheral and terminal equipment, as well as software—all aimed at major

strides in computing technology. JIPDEC’s role

has been largely facilitative; the research association now carries the primary responsibility. The association’s administrative staff has

been drawn from employees of the participating companies, who are dividing the R&D

effort.

As discussed in more detail in chapter 5, the

fifth-generation computer project is far from

an independent or all-inclusive effort; its work

is proceeding in a context of government-subsidized R&D—as well as company-funded research—aimed at related aspects of informa-

‘

7

’’ F\fth Generation Computers, ” J1}).VEC Report, Japan Information Processing f)eveloprnent Center, summer 1980. The dis-

[;us ~ion follow i ng also dra w’s on inter~’iews with !M 1’1’1 officials

I n the 1 nformat ion hfachi nc Industries Bureau.

tion processing. Likewise, the project is only

one of a number of follow-ons to earlier MITIsponsored activities such as the VLSI R&D program (discussed in ch. 5, as well as below) and

the Pattern Information Processing System

Project (PIPS).98 Such R&D efforts complement

one another; they involve shifting groups of

public and private sector participants drawn

from a wide range of institutions. In parallel

with the fifth-generation computer project,

MITI is sponsoring the supercomputer effort

mentioned earlier, along with a 10-year program on advanced microelectronic devices and

work on optical measurement and control. Despite the funding that MITI provides, the Ministry’s officials seldom attempt to guide or

direct research, but confine their participation

to helping shape objectives and to administrative functions,

Compared with other countries, Japan’s approach to aid for electronics is unique in at

least three ways: 1) government-supported programs are multiple but carefully coordinated

with one another; 2) they are oriented toward

facilitating the activities of industry, rather

than telling industry what to do; and 3) the time

horizons are unusually long. The last point is

critical: the 8- or 10-year planning horizons for

many current Japanese R&D projects—with

every indication that, while projects will be

adapted to evolving circumstances, continuity will be preserved—point to the depth of the

government’s commitment, Certainly there are

few analogs in the United States, even in defense research–where the 6-year VHSIC program is the exception, not the rule.

Cooperation in Research and Development

Observers in the West often misconstrue the

nature of Japan’s “cooperative” R&D efforts.

While corporate leaders and government officials do in some cases work closely with one

98P] ~s has been much less “l~lb]e in the u n ,te(] states tha ~1

setrera 1 0 f Ja pa n‘s other R&El efforts, but it plajed a major ro)e

in ]aj’ing groundwork for the fifth-generation computer project.

See H, Nishino, “PIPS (Pattern Information Processing System]

]Jrolect_Background and C)utline, ” Proceedings Of the 4~h 1nternafiona] /oint Conference on IJfittern Recognition, Kyoto, No\’,

7-10, 1978, lnternationa] Association for Pattern Recognition,

p. 1152,
418 ● International Competitiveness in Electronics

another during ongoing projects, the more

usual pattern has been a carefully planned division of labor. MITI bureaucrats help initiate

new projects—after lengthy preliminary discussions with industry advisory committees—by

winning budgetary approval, They also monitor ongoing programs, evaluating progress and

judging success, Government officials are often

detailed to organizations like JIPDEC. Program

administration is normally delegated to representatives of participating firms, with the

research itself divided among these firms. People from different companies seldom work side

by side.

The two government-supported VLSI projects—paralleling one another in time—illustrate

these patterns. The first, oriented toward communications, was carried out by the public corporation Nippon Telegraph & Telephone (NTT)

under the aegis of the Ministry of Posts and

Telecommunications. The second, directed at

applications of ICs to computers and much better known outside Japan, was sponsored by

MITI; with 40 percent government and 60 percent private funding, the $300 million, 4-year

effort took the form of a research association

linking five participating firms, Three laboratories divided the work: a shared facility

managed by the VLSI Technology Research Association; the Computer Development Laboratory jointly run by Hitachi, Fujitsu, and Mitsubishi; and the NEC-Toshiba Information Systems Laboratory. Staffs of the latter two laboratories came, not from the larger group of

participants, but from the companies operating

them; the joint facility drew engineers and scientists from all five, as well as MITI employees

from the AIST. MITI was deeply involved in

planning and organization during the preliminary stages. Later, the teams from the participating companies independently carried out

their assigned research tasks. Only in the

association’s joint laboratory was a real effort

at cooperation—with technical people from different companies working together—undertaken; this was a minor portion of the overall

program, restricted to more fundamental research. 99 Individual firms did not cooperate on

either product designs or processing technology. Thus, while the MITI-sponsored VLSI

project has become known abroad as a “cooperative” effort, the actual extent of interaction

among participating firms was limited; spokesmen for the Japanese electronics industry say

that dividing the research enhanced the overall

success of the project. It appears that the organizational form involved a compromise between attempts to encourage individual interactions—with objectives such as stimulating

personnel development—and the more concrete technical goals. Certainly as the work

undertaken by joint R&D projects in Japan

moves toward development, interfirm cooperation declines; a MITI-orchestrated follow-on to

this VLSI project, which began in 1980 and emphasizes chip designs and applications, takes

the form of totally independent efforts by each

participant.

The work of the “Research Association for

R&D on New Function Elements, ” also beginning in 1980, can be viewed as another followon to the VLSI project; it illustrates the way in

which MITI-sponsored research efforts complement one another. This association’s laboratory draws on a larger group of companies.

Matsushita, Sanyo, Sharp, Oki, and Sumitomo

Electric—none as strong in their technology as

the five companies that had participated in the

VLSI project—will all be involved in one or

more of three major microelectronics development efforts. 100 These are:

●

●

Three-dimensional circuit elements—

which can be visualized as more or less

conventional ICs stacked atop one another, increasing the density,

High electron mobility transistor s

(HEMTs), one variety of which consists of

extremely thin layers of semiconducting

gQ1ntervieW~ with Mr. NebaShi, I B M-Japan and formerly at the

VLSI Cooperative Laboratory, Nihon Keizai Shimbun, Jan, 19,

1981, p. 1.

IW’’FY82 Government Projects in Electronics Listed, ” Japan

Report, Joint Publications Research Service JPRS 1,/10676, July

22, 1982, p. 55,
— — .

materials such as gallium arsenide or

gallium aluminum arsenide; these structures carry the potential for higher switching speeds, hence faster computers,

Radiation-hardened devices suitable for

use in extreme environments such as

nuclear powerplants or outer space (resistance to heat and vibration is a related

objective).

The first two especially will support both the

supercomputer and fifth-generation projects.

The Role of Universities

University-industry interactions in R&D are

no closer in Japan than in other countries—

again perhaps in some contrast to the common

perception. Close collaboration is rare, even

though the rules prohibiting professors in the

national universities from working for private

companies can be circumvented. Contract research and consulting by university faculty are

more limited than in the United States,

Japanese policy makers universally express

the wish that university-industry relations be

improved, and that sufficient numbers of welltrained professionals be available to meet the

economy’s needs. To date, however, little progress seems to have been made—nor, in fact,

have new policy initiatives directed at such

concerns emerged. As discussed in chapter 8,

Japan’s colleges and universities have for some

years been turning out more engineering graduates than in the United States. Nonetheless,

as in other industrialized countries, there has

been concern over future shortfalls in the supply of engineers and scientists; a recent survey

covering the hiring plans of more than 1,600

Japanese firms points to stiff competition during the 1980’s for university graduates trained

in technical fields.101

How Significant Are Supports and

Subsidies in Japan?

As for any country, it is impossible to place

a monetary value on the policy measures that

benefit Japanese electronics companies. Nor

1O1’’I)alsotsu Danshi Nohi Niketa” [Number of Nlale Graduates

[)e(,lines), NihorI Ke]zai Shimbun, Aug. 27, 1981, p. 1.

Ch. 10—National Industrial Policies ● 419

would an attempt at such an accounting be

very meaningful. Indirect benefits—e.g., temporary exemptions from antitrust provisions—

escape quantification. Even when government

funds flow directly to industry—as in the costsharing typical of joint R&D projects in Japan,

or the subsidies for the West German computer

industry during the 1970’s—the real questions

concern the effectiveness with which the

money is spent,

Nevertheless, subsidies deserve special attention in the case of Japan because the (J. S. electronics industry has argued that they have been

a key to the competitive success of Japanese

firms. Research funding is only part of the total

picture of industry-specific support, but as

table 77 indicates—and in common with other

industrialized countries—more than a quarter

of all Japanese R&D expenditures, both government-funded and industry-sponsored, have

gone to the electronics/electrical machinery

sector. At the same time, government expenditures on research are not high compared to

other countries; considering only R&D, and

counting only expenditures directly related to

electronics, public funding is quite small—

about 1 percent of the total for 1978, according

to the Japanese Government. 102 This is hardly

the whole story; it does make the point that

R&D in Japan is primarily the responsibility of

private industry, Japanese R&D is heavily concentrated on commercial applications; neither

military technologies nor basic research get the

attention they do in other countries. Looking

at all R&D spending, the private sector in Japan

provides over 70 percent of total funding—

more than in the United States, where industry

spending accounts for 50 to 60 percent (table

77).

MITI’s annual compilation of government

supports and subsidies for the “information industry” is the most comprehensive listing of

102 I n 1978, ~Oyrernm~nt bc)tiies i n Japan, 1 nc ] ud i ng state and

local, reportedly contributed 6.8 billion jcn (about $3LI milllonj

(o the total of 580 billion yen (about $3 billion) spent for K&D

on ‘‘electrical machinery. ” Tbis includes household electric

(;(~(] l[)ment, as well as communications and electronics. Most

of the R&I] work is for development, See A’agaku Gijutsu k’enk}ru

Chosa (Report on the Survey of Research and Development,

Prime Minister’s Office, Statistical Bureau) (Tok~o: Nihon ‘1’okei

Kyoka], 1979), pp. 39-40, 94,
420 International Competitiveness in Electronics

programs related to electronics. (For the United

States, no comparable data exist—in part because no one agency has responsibility for such

programs). For 1980, the Japanese Government

budgeted about $1.3 billion toward the development of the information industry—expenditures encompassing much more than just the

R&D programs highlighted above; a large fraction of the total consists of loans and loan

guarantees rather than direct grants. 103 I n -

cluded in the total, for instance, is the more

than $200 million that the Japan Development

Bank loaned to the Japan Electronic Computer

Corp. for lease financing; this aids Japanese

computer manufacturers by reducing the funds

they would otherwise have to commit to rental and lease arrangements with their customers, as well as absorbing risks associated

with repurchasing.

The computer industry has received a substantial share of direct subsidies. Budgeted

MITI expenditures for major projects closely

related to data processing—including several

of those outlined above—are listed in table 80.

The table is not inclusive, and is intended only

to give an idea of the magnitudes of typical government expenditures, These sums are not

large compared to R&D spending by industry

itself in either Japan or the United States, or

in comparison with government funding in

other countries. Portions of such subsidies have

funded large-scale, long-term programs aimed

at social applications of electronics technolIOallenshl Kogyo fVenkan 1979, op. Cit., p. 340.

ogies—e.g., health care, regional energy saving,

computerized traffic control systems. The figures in the table also include money for conducting surveys on computer usage, administering qualifying examinations taken by computer technicians, and the costs to the government of special tax deductions extended to

companies that train information processing

specialists.

Taken together, it is the comprehensive nature of such programs—not their spending levels—that distinguishes Japan’s policies toward

electronics and other targeted industries.104 The

very fact that the government publishes an information industries budget indicates the care

with which the bureaucracy monitors developments in electronics and disseminates information among government, business, and financial circles. It is this attentiveness on the

part of government, and the fact that most programs are coordinated by MITI, that sets Japanese industrial policies apart. Over the years,

funding by the Japanese Government has

grown, but the significance of MITI’s initiatives goes well beyond financial support; indeed, to look only at the money spent is to unIOqThe “ Research and Development Project of Basic Technologies for New Industries, ” established in late 1981, is another

example. The original plan called for total spending of about

$460 million over 10 years; however, the first year’s expenditures

have been scaled down by the finance-conscious MOF. Private

corporations are being funded to participate in one of 12 R&D

“themes,” such as biotechnology and advanced materials. The

“New Function Elements” microelectronics projects mentioned

earlier are also part of this umbrella program, See “AIST 1982, ”

Agency of Industrial Science and Technology, Ministry of International Trade and Industry, Tokyo, pp. 6 and 7.

Table 80.—Japanese Government Expenditures on Selected Projects

Related to Computer Technology

Budgeted expenditure

(millions of dollars)a

Project 1981 1982

Basic technology for next-generation computers . . . . . . . . . . . . . . . . . . $28 $22

Basic software technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 20

Microelectronics (“new function elements”) . . . . . . . . . . . . . . . . . . . . . . 3.1 4.5

Supercomputer R&D . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.14 3.3

Peripherals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 2.6

Fifth-generation computer R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.07 1.7

$60.1 $54.1

aFl~~al ~ear basis, convened from yen at 22o to the dollar for 1981, 249 for 19132

SOURCE “FY82 Government Pro]ects in Electronics Listed,” Japan Report, Joint Publications Research Service JPRS U10676,

July 22, 1982, p 59
—— —...

Ch. 10—National Industrial Policies ● 421

derestimate the impacts of such programs,

They have considerable symbolic and psychological value in galvanizing the efforts of many

participants behind a set of goals shared by

government and industry. Programs in electronics have typically been aimed at breaking

bottlenecks viewed as critical to continued

progress. Both the VLSI project—which, as outlined in chapter 5, was intended to help Japan

catch up to the United States in digital MOS

ICs—and the fifth-generation computer project,

with its software push, have been designed to

serve such purposes. The supercomputer project is quite different; not particularly important in any commercial sense, it is first and

foremost intended as a highly visible symbol

of Japan’s ability to compete technologically

with the United States—from the Japanese perspective, supercomputers are one of the critical

propaganda battlefields of the “computer war. ”

Comparing Japan’s industrial policy with efforts in Britain or France points to a major difference: government policies in Japan are directed at further strengthening a private sector that is vital and still expanding rapidly, not

at revivifying a stagnant industry. Government

programs in Japan complement the dynamism

and international orientation of the country’s

electronics firms; they have contributed to, but

not created, their competitive ability.

Recent Trends

Major thrusts of Japan’s industrial policy

have been aid and encouragement for exports

of electronics and, to a lesser extent, overseas

investment, The international activities of Japanese electronics firms are especially visible

in Asian markets, where interdependence is

growing (ch. 4). A study by the Electronic Industries Association of Japan forecasts strong

expansion elsewhere in the Far East, and urges

Japanese firms to develop strategies of “accommodation’’—promoting Japanese investment

and technology transfer, while importing lowtechnology, labor-intensive electronics products from other Asian nations.105 These interna1{]~ [)f.ll $hl ,s~ rlg~,fj [lo k’ok[~.~a ika no 1 {ok) to SOIIII ~<~h}ro II i ~?iIISIIr IJ (,’hosa tiok)ku ( $ur~”cy Report on ‘[’rends i n th(! I ntcrnat l[Jlla ] i z,! t i ( J n of the F;](x: t r{)n i(. \ I n (i u st ry a n d ‘1’hei r I n fl u~> n (.tI, f]a rl

1 I on ~;a~t an(] Southeast Asia], (JI), tit,, pp 271-291 ,

tional moves by Japanese electronics manufacturers have for many years had the active support of Japan’s Government.

In the United States, many signs indicate that

Japanese manufacturers are now often recognized as peers. Technical exchange agreements

between American and Japanese electronics

companies—rather than outright purchases by

Japan–are on the upswing. Mitsubishi and

Westinghouse have arranged a joint venture to

design and manufacture ICs. Hewlett-Packard

is getting RAM technology from Hitachi. The

U.S. Department of Defense has persuaded Japan to transfer defense-related electronics

technologies to this country (although what

these technologies will consist of is far from

clear). American semiconductor firms are setting up design centers in Japan, as well as production facilities—while Japanese firms do likewise in the United States, each seeking to draw

on the other’s technical talent.

Movement toward cooperation amidst ongoing commercial rivalries has not been confined to the initiatives of private companies,

In response to criticism from the United States

and elsewhere that MITI-sponsored electronics

R&D constitutes an unfair subsidy, Japan has

suggested steps in the direction of international

cooperation. For example, foreign firms have

been invited to participate in discussions aimed

at an enlarged fifth-generation computer project having the form of an international joint

venture .

106 Such proposals—even if carried

through—would not by themselves stem the rising tide of criticism aimed at Japan’s industrial

policies, as well as the country’s indirect and

nontariff barriers to trade. Still, if nothing else,

they are a sign of the confidence the Japanese

now have in their own abilities—while also being a well-calculated public relations ploy.

There are two fundamental perspectives in

the United States on questions of Japan’s subsidies and indirect trade barriers. On the one

hand, those who believe free flows of technology to be a prerequisite for economic growth
422 ● International Competitiveness in Electronics —.

and technical innovation call for equal access

by U.S. firms to programs sponsored by the

Japanese Government. The other view is held

by those who would prefer restrictions on outward flows of U.S. technology in an effort to

preserve “technological security. ” As debates

in this country continue, the procurement,

R&D, and customs and standards activities of

Japan’s Government will be scrutinized by

partisans of both viewpoints.

How Effective is Japanese Industrial Policy?

Any judgment of the contribution of Japan’s

industrial policies—or government policies

anywhere-to international competitiveness in

electronics rests in part on intangibles. Precise

evaluations are impossible. What is the

“worth” of the networks for information transmittal and consensus-building woven by MITI?

What are the costs and benefits of the ambiguities and uncertainties surrounding antitrust enforcement in the United States?

In judging the effectiveness of Japanese industrial policy, the starting point is its basic

thrust—to cultivate rather than confine the nation’s electronics companies. The institutional

apparatus that has evolved over the years has

contributed far more than absolute levels of

financial assistance might indicate. The end

result has been effective mobilization of institutional and human resources, comprehensiveness in government efforts, a substantial degree

of policy integration without rigidity. The focus

of Western observers on cooperation between

government and business only hints at how the

system works.

With few exceptions, Japan’s Government

has used the same policy tools to promote electronics as other nations: in the early years,

tariff barriers combined with controls on foreign technology and capital flows; today, supports and subsidies for R&D and commercialization. While the highly publicized VLSI R&D

project has been held out as a unique instance

of cooperation—one that would violate antitrust laws in the United States—under closer

examination much of the appearance of interfirm cooperation vanishes. The program was

effective because it was carefully crafted to

help Japanese firms overcome specific weaknesses that MITI and industry leaders had

identified: emphasis on linear devices, a legacy

of production for consumer products; lagging

capability in the processing of large-scale ICs,

because Japanese firms were dependent on

semiconductor manufacturing equipment from

the United States; lack of experience in digital

circuitry among engineers and technicians, In

contrast to government-supported R&D projects in West Germany or the United Kingdom,

the Japanese were able to define their needs

and agree on a program that would help them

catch up to the United States. It is the consistent and coordinated attentiveness to the problems and potentials of electronics (and other

industries) that distinguishes the policies of

MITI and the rest of Japan Government more

than the character of individual programs or

policy instruments.

At a more general level, the long-term orientation of policies toward electronics—typified

by the fifth-generation computer project—also

distinguishes Japan from other countries. Further, development of the electronics industry

—while a goal in itself—has been pursued for

larger reasons: electronics is viewed as the key

to Japan’s overall industrial development, the

first ingredient in the knowledge-intensive, energy-efficient economy that the country’s technocrats are striving toward,

Japanese industrial policies have certainly

not been universal triumphs—efforts to prop

up declining sectors (steel) or to counter international market trends (petroleum) have not

been particularly successful. But policies

toward electronics have complemented the dynamism of private companies already well positioned both domestically and internationally. It is the congruence of public policy and

evolving shifts in industrial structure that, in

the end, is the hallmark of present-day Japanese

policies toward the information industry.
Ch. 10—National Industrial Policies . 423 ———

Summary and Conclusions

Among nations that have set out to promote

their electronics industries, the policy tools

come from a common list: R&D funding, investment grants and subsidies, procurement,

merger and trade policies. No avenue emerges

that can guarantee success in strengthening the

competitive ability of a country’s electronics

firms. Under closer scrutiny, many of the policies adopted by nations like Japan—sometimes

thought to be unfair or unique—are not so dissimilar from those used in other advanced industrial economies, even the United States.

Matters of timing, comprehensiveness, consistency—rather than the types of policies

adopted-differentiate the industrial policies of

various countries,

As competition in the international electronics industry has intensified, governments

have stepped in to help their own entrants. In

the early 1960’s, European and Japanese fears

over the “American challenge” sparked systematic attempts to protect and strengthen domestic computer manufacturers. At that time,

the preferred policy approach began with trade

protection-tariffs, controls on flows of foreign

investment and technology, discriminatory

procurements. Several countries encouraged

mergers among computer firms. In the 1970’s,

as trade liberalization under the General Agreement on Tariffs and Trade continued, industrial policies shifted away from overtly protectionist and defensive approaches. Today, supports for R&D, indirect subsidies such as tax

incentives, and other less direct measures comprise the foundations of public policies toward

electronics in virtually all countries. Except in

threatened sectors like consumer products,

trade liberalization has been accompanied by

a parallel movement toward policies with secondary rather than primary effects on international flows of electronics goods. If there is an

exception, it is the United States—where, leaving aside defense-related policies, the most

prominent measures have continued to be regulatory.

Can, then, industrial policies create comparative advantage? The answer is clearly no.

Competitive success in electronics, here and

abroad, depends on many factors, of which

government actions are only one. Taken alone,

public policies are seldom as important as the

capabilities of a nation’s private companies:

human resources and their utilization, including the quality of management; costs and availability of capital; technological ability in electronics and the complementary infrastructure;

overall market conditions—these are more central to international competition. Public policies can add or subtract from them, but the

ability of governments to compensate for weaknesses—or to reverse declines in competitiveness—is circumscribed. Although they can

either help or hinder industrial development,

public policies alone do not determine—

directly or indirectly–the competitive standing

of electronics industries in any nation.

Today, policy makers in the U.S. Government

must decide whether to continue the ad hoc

approach of years past or move toward measures aimed more consciously at preserving and

strengthening the advantages that the American electronics industry draws from its setting

and structure. If the choice is to develop a more

comprehensive industrial policy, much can be

learned from studying foreign experience—

West Germany’s Fraunhofer Gesellschaft,

Japan’s VLSI project, Britain’s schemes to promote commercial applications. But no recipe

for success emerges from the countries that

have experimented with industrial policy, It is

one thing to say that policies toward electronics should be in tune with overall changes

in industrial structure and international markets; it is quite another to actually design and

implement an effective industrial policy amidst

the ongoing uncertainties and ambiguities that

characterize the political and economic context,

Government policies, then–as illustrated by

the countries examined in this chapter—are
424 ● International Competitiveness in Electronics

generally tailored to the level of technological

and commercial development of firms in the

local industry. It is no coincidence that the nation which led initially in semiconductors, in

color TV, in computers—the United States—

made no attempt to devise a systematic policy

orientation toward electronics. Where was the

need? Nor is it surprising that the countries

with more comprehensive policies have generally been those that have perceived themselves at a disadvantage. But why have some

countries been more successful in mobilizing

institutional resources to create sustained and

coordinated industrial policies than others?

A variety of forces work to enhance the ability of government officials to design and implement coordinated, timely, and comprehensive

policies toward industries like electronics. A

relatively centralized policymaking apparatus,

where a single agency or a select few have welldefined responsibilities, is one. The grab-bag

nature of British policies mirrors the agencies

charged, at one time or another, with policy

development. In countries where government

officials belong to a respected civil service they

are more likely to have the resources to analyze

and initiate actions with positive effects on industry. The dominance of political appointees

in the United States, and their rapid turnover,

works against the kind of consistency seen in

nations like Japan. So too does the lack of understanding of technology characteristic of

both bureaucrats and politicians in this country. An elite civil service does not ensure success, as the mixed record of French industrial

policy shows. But especially in Japan—where

consultation and cooperation between industry

and government have been closer than in many

other countries, if not so close as sometimes

pictured in the West—consensus is easier to

achieve than in nations where adversarial relations are the norm. Easier too is carrying

through the actions that have been agreed on.

Such factors have enhanced the effectiveness

of industrial policy in Japan, the one nation that

has so far managed to catch up—in at least

some respects —with the United States. Of

course, Japanese electronics firms have been

favored by other circumstances as well–skilled

labor supplied by a long-established educational system is only one example. Structural

features of the political and economic system

in Japan-–natural resource endowments, existing capital markets, political stability, established mechanisms for policymaking, characteristic systems of labor-management relations—have tended to shape and limit industrial policy decisions, rather than the other way

around.

As Japan and other countries seem likely to

discover, it may be easier to develop policies

aimed at catching up than to devise strategies

for keeping up or jumping ahead. For one

thing, as internationalization of industrial and

market structures proceeds, the influence of

national governments will diminish. But the

fundamental point is that in any industry or

technology, creating a new model is harder

than following a recognized leader. Government aid has helped electronics firms in

other countries improve relative to American

competitors; the situation for the United States

has been—and remains—different. The leaders,

be they American or Japanese, have to break

new ground—a commitment that industrial

policymakers in Japan have long since made.

Japan’s publicly voiced determination to improve the technological base for the country’s

electronics industry stems from a recognition

that past successes have been built on the adaptation and commercialization of technologies

originating elsewhere, mostly within American

firms. Now, Japan is a leader along with the

United States. The public as well as the private

sectors in each country face the need to develop appropriate strategies for the years ahead.

Industrial policies for the 1980’s and beyond

will be most successful where policymakers

grasp the dynamics of ongoing shifts in domestic and international markets and industries.

To the degree that public policies ignore or attempt to counteract such forces, they will be

less likely to reach their objectives. Policies

designed to complement and reinforce ongoing trends will be more likely to have positive

effects. This is not to say that public policies

cannot help shape these trends. If it is true that

the industries which fueled postwar economic
Ch. 10—National Industrial Policies ● 425

growth—steel, petrochemicals, automobiles— well as electronics and information processing

have attained a stage of relative maturity, then —will contribute to growth in existing as well

emerging technologies are indeed an appropri- as new industries. It follows that the appropriate focus of government policy. Technologies ate emphasis of public policy may not be elecbased on genetic engineering, advanced ma- tronics alone, but economic adjustment and

terials, computer-integrated manufacturing—as technological development more broadly.

A 1– ‘ 1 – ,. > -
CHAPTER 11

U.S. Trade Policies and

Their Effects
Contents

Page

overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429

Tariffs; the Multilateral Trade Negotiations . . . . . . . .*,,*,,. ● O*..... ...,... 0 430

Tariff Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431

Other Tokyo Round Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436

Dumping ● . . . . . . .,..0... ● ..0.... ● ..*..*. . . . . . . . . .,..0... ......60 ...,., 438

The Law and Its Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438

The Color Television Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439

Prospects for Dumping Actions Elsewhere in Electronics.. . . . . . . . . . . . . . . . . . . . . 441

Subsidies and Countervailing Duties ..*.*.** ● **.*..*. .***..**. . . . . . . . . . . . 442

Countervailing Duty Law and Its Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443

The Question of Indirect Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444

Other Unfair Practices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445

Quantitative Restrictions and the Escape Clause ● .**..* . . . . . . . . ● ..0,... ..0. 4 4 6

Orderly Marketing Agreements for Color Television Imports . . . . . . . . . . . . . . . . . . . 446

Escape Clause Proceedings in Color Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447

Effects of Quotas and Other Nontariff Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 449

The Escape Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449

Prospective Effects of U.S. Trade Policy on the Electronics Industry ● *..*... . 4 5 0

Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452

Computers . . . . . . . . . . . 0 . . . . . . . . . . . . . . . . .......0. . . . . . . . ., . . . . . . 0 . . . . . . . . . 457

Summary and Conclusions .*....* ● 0...... .0.0.... .00..... . . . . . . . . . . . . . . . 4 5 9

Table No. Page

81. Hypothetical Example Illustrating Tariff Effects on a Product With Nominal

Manufacturing Costs of $1,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
CHAPTER 11

U.S. Trade Policies and Their Effects

—. — — — — — —

Overview

All trading nations develop policies dealing

with imports and exports. On the import side,

such policies are usually intended to control

flows of incoming goods judged harmful to the

domestic economy. Formalized export policies,

as a general rule, are less numerous and typically intended to encourage overseas sales. To

the extent that international commerce is restricted to trade and its financing, countries

must export to be able to import, and vice versa. Over time, exports will therefore approximately equal imports. For such reasons, trade

policies seldom have first-order effects in determining overall levels of imports and exports,

but tend to guide and regulate trade—influencing, for example, the composition of a nation’s

imports. Policies can also be adopted to encourage exports so that needed imports—e.g.,

oil—can be paid for. Most common remain import controls serving to limit threats faced by

domestic industries.

In recent years, the governments of industrialized nations have, as matters of official

policy, generally taken the position that unrestricted trade—or at least trade with minimum

impediments in the form of tariffs or similar

restrictions—benefits all countries. Although

a principle often honored in the breach, nations

usually assume that relatively open trade is in

their self-interest. Countries import goods

which they themselves cannot produce as efficiently, and export products in which they

have a comparative advantage (ch. 5). In

theory, everyone is better off.

But while the benefits of open international

trade are spread widely across society, the

costs against which they are arrayed tend to

be concentrated. Individual companies, their

employees, the cities and regions in which they

are located, bear the brunt of shifting patterns

of trade and competition. When imports rise,

the injured parties are more vocal than the

beneficiaries—many of whom do not realize

they are paying less for some of the goods and

services they purchase. Because of this imbalance, governments often raise barriers for political reasons, sometimes creating serious

disruptions. The familiar example is the SmootHawley Trade Bill, adopted by the United

States in 1930, which raised the average U.S.

tariff to more than 50 percent and was one

cause of a steep decline in world trade. More

recently, Japan has utilized a wide variety of

tariff and nontariff barriers to protect developing industries, including electronics.

Near the end of World War II and afterwards, the United States took the lead in efforts

to establish a liberal world trade order. This

commitment has continued uninterrupted to

the present day. American leadership has been

a major force in negotiations among trading

nations aimed at moderating tariff and, more

recently, nontariff barriers to trade. These efforts have taken place largely within the structure of the General Agreement on Tariffs and

Trade (GATT], an organization now comprising some 80 nations. GATT provides a forum

for negotiations together with mechanisms for

resolving conflicts.

While trade negotiators have made considerable progress in reducing tariffs, nontariff

measures are proving less tractable—within

GATT or on a bilateral basis. As more nations

develop industrial policies nominally for domestic reasons, the trade arena has taken on

a new complexion: indirect and nontariff barriers have risen as tariff walls have declined.

The result has sometimes been termed “the

new protectionism. ” In essence, negotiators

are struggling to fit the policy framework from

an earlier era—GATT mechanisms have roots

in the 1940’s—to a radically different setting.

International corporations now compete in

some parts of the world, cooperate in others,

429
430 ● International Competitiveness in Electronics —— —

ship goods between subsidiaries located in

dozens of countries, and take advantage of national industrial policies where they can. Governments design policies to attract foreign investment and technology under some circumstances, to keep it out under others. Traderelated complaints by U.S. firms embrace not

only the old-style unfair practices—dumping or

export subsidization to boost trade balances,

predatory practices aimed at building monopolies or cartels—but asymmetries in the “rules

of the game. ” The claim is that the industrial

and trade policies of other nations tilt the rules

in their favor. Trade negotiators will be faced,

for years to come, with adapting rulemaking

and adjudicating procedures to these new

realities,

This chapter briefly reviews the environment

for international trade in electronics under

GATT, then discusses the trade policies of the

United States, particularly as these relate to the

electronics industry. Only limited attention

goes to other countries, The chapter illustrates

impacts of trade policies and discusses policy

directions that may be important in the future.

On the whole, the U.S. electronics industry

has been helped by the Federal Government’s

trade initiatives during the postwar period.

Semiconductor and computer firms, in particular, have benefited from the opening of international markets. Much of their success has

been due to a global perspective and worldwide

operations—neither of which would have been

possible without the open environment for

trade and investment created since World War

II. To be sure, foreign countries have often

adopted policies intended to restrict inflows of

American-made electronics products. But in

most though not all cases, such restrictions

have had effects that were marginal or indirect

or both. While trade barriers have sometimes

encouraged U.S. firms to establish overseas

manufacturing facilities, for many years American electronics companies had such advantages in technology and cost that they would

have been potent competitors virtually regardless of the trade policies adopted by other nations (the principal exception has been Japan).

Still, these advantages have gradually diminished over time.

Where technological change is less rapid and

labor costs more significant, trade policies

carry more weight. In such products as television receivers, CB radios, and passive components, U.S. firms have not been able to maintain advantages in technology or manufacturing cost. Here, liberal U.S. trade policies have

made it more difficult for American firms to

compete effectively—most notably in the

domestic consumer electronics market.

Tariffs; the Multilateral Trade Negotiations

The General Agreement on Tariffs and Trade

provides the basic context for negotiations

among nations concerning trade, and, where

needed, for adjudicating disputes. Other

bodies, including the Organization for Economic Cooperation and Development (OECD)

and the United Nations, play more limited roles

—e.g., collecting statistics. GATT is the primary vehicle for multilateral trade negotiations

(MTNs), the latest of which–the so-called

Tokyo Round, concluded in 1979—resulted in

an agreement which will be the principal

framework for international trade over at least

the rest of the decade (another round of multilateral trade negotiations before the end of the

1980’s is unlikely). This Multilateral Trade

Agreement was implemented in the United

States by the Trade Agreements Act of 1979.1

Earlier negotiations under GATT had focused on tariffs; although the Tokyo Round

MTN resulted in further cuts, negotiators concentrated on such matters as quotas, customs

procedures, product standards, and public sector procurement practices. Examples of Tokyo

IPublic Law 96-39, July 26, 1979.
—

Round topics of special relevance for trade in

electronics include:

A revised subsidies code, intended to provide a framework for dealing with national

industrial policies having the indirect effect of subsidizing exports or otherwise affecting trade flows (as by giving domestic

products advantages over imports).

Staging of tariff reductions for semiconductors, accelerated by Japan in 1981 after

extensive bilateral negotiations with the

United States, a similar acceleration of

Japanese tariff reductions on computers

following a year later.

An agreement on government procurement, where again negotiations between

the United States and Japan concluded, at

the end of 1980, in a bilateral accord more

liberal than that arrived at under the MTN

framework,

In the United States, passage of the Trade

Agreements Act of 1979 was accompanied by

a reorganization of trade-related activities carried out by executive order, As discussed below, responsibility for dumping and countervailing duty investigations moved from the

Department of Treasury to Commerce, while

a new Foreign Commercial Service was established in the Department of Commerce in place

of the commercial officers attached to the

Department of State, At the same time, the Office of the U.S. Trade Representative was given

the job of coordinating international trade negotiations on a continuing basis. This reorganization followed mounting criticism of the

fragmentation and diffusion of responsibility

for trade matters within the executive branch.

Ch. 11—U.S. Trade Policies and Their Effects ● 431

Tariff Effects

As taxes on imported goods, tariffs directly

affect price competitiveness. From the viewpoint of the country imposing them, tariffs can

serve multiple purposes. One effect is normally

to raise domestic prices; tariffs permit local

firms to manufacture at higher costs while remaining competitive in the marketplace, protecting domestic industries from foreign rivals.

Alternatively, governments impose tariffs to

counter unfair trade practices such as dumping or export subsidies, or to retaliate against

restrictions by other nations.

The impacts of tariffs on trade patterns are

not always so straightforward as the nominal

percentage rate would indicate; “real” rates of

protection may exceed nominal rates by significant amounts. Table 81 gives a hypothetical but

not unrealistic example—a product (which

might be something like a computer terminal)

with a nominal production cost of $1,000, purchased components constituting 80 percent of

this, final assembly the remainder. The table

compares two cases: 1) final assembly overseas,

with the complete system imported and subject to a tariff of 10 percent; and, 2) final

assembly in the United States, with components imported at a tariff rate of 5 percent. In

both cases, the components are assumed to be

purchased abroad at the same cost. (Transportation costs are ignored.) As shown, assembly

in the United States gives a cost advantage of

$60. The real protective effect with respect to

the operations carried out domestically—the

“effective rate’’—would then be $60/$200, or

30 percent. This percentage can be interpreted

as the amount by which domestic costs of asTable 81. —Hypothetical Example Illustrating Tariff Effects on a Product With

Nominal Manufacturing Costs of $1,000

Foreign assembly U.S. assembly

Cost of components . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800 $ 800

Tariff on imported components (5°/0) . . . . . . . . . . . . . — 40

Cost of assembly . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 200

$1,000 $1,040 -

Tariff on imported system (10°/0) . . . . . . . . . . . . . . . . . 100 —

Total cost in the United States ., . . . . . . . . . . . . . . . . $1,100 $1,040

SOURCE Off Ice of Technology Assessment
432 International Competitiveness in Electronics

sembly could exceed foreign costs before

American firms would begin to lose competitiveness. As a result, even where nominal tariff

rates are identical, protective effects can differ; each case must be considered individually, The example in table 81 is not atypical in

that tariffs on parts and components are generally lower than tariffs on final products;

where this is the case, effective tariffs are

always higher than nominal tariffs.

Tariff Changes in the Tokyo Round MTN

and After

Nominal tariff levels on electronics products

vary a good deal, with the Tokyo Round resulting in significant changes for microelectronic devices and computers. As mentioned

above, tariffs on both semiconductors and computers were the subject of bilateral negotiations

between the United States and Japan subsequent to the multilateral agreement itself, In

1981, Japan agreed to reduce its tariffs on integrated circuits (ICs) to 4.2 percent as of the

beginning of 1983. Originally, they were to

have dropped in stages, reaching the 4.2 percent level only in 1987. U.S. tariffs on ICs went

from 6 to 4.2 percent in 1982. Somewhat later,

as part of a larger package of trade concessions,

the Japanese Government announced a parallel

reduction in tariffs on computers. The cuts,

from 7 to 4.9 percent—the U.S. level—went into

effect at the beginning of 1983, rather than in

1987 as again originally scheduled.2

As part of the Tokyo Round, the United

States granted a variety of tariff concessions

on imports of electronic products, but these

cuts will not have much impact because most

U.S. tariffs were already low. The reductions—

seldom amounting to more than a few percentage points—will make little difference in

landed costs of imports. For example, the

average level of tariffs on components (including passive devices such as resistors and

capacitors, as well as semiconductors) and

telecommunications equipment will decline

2]. Robertson, “]apan Offers To Speed Up Tariff Cuts,” Electronic News, May 31, 1982, p. 1.

from 6.6 to 5 percents Staging—the sequence

of stepwise reductions—varies by product; the

most common pattern is yearly cuts over the

period 1979-87 of about one-eighth the total

negotiated concession. Likewise, duties on office and computing equipment will fall from

an average of 5.4 to 3.6 percent. In certain

cases, the United States did not grant reductions. Not surprisingly, these were generally

products where imports have caused problems

for domestic manufacturers. Tariffs on color

TVs, for example, will remain at the current

level of 5 percent. Indeed, for items subject to

section 201 escape clause findings (discussed

below), of which this was one, U.S. negotiators

had no authority to offer concessions.

Tariff reductions agreed to by countries

which have been important export markets for

American electronics firms were generally

somewhat larger—though with important exceptions, Many nations have maintained considerably higher tariffs than the United States;

shipments of ICs into the European Community (EC), for instance, have been taxed at 17

percent—a duty that the Europeans declined

to reduce.

4 The tariff wall has been steep

enough that both American and Japanese firms

3MTN Studies, Vol. 6, Part 5, Agreements Being Negotiated

at the Multilateral Trade Negotiations in Geneva— U. S. international Trade Commission Investigation No. 332-101, Subcommittee on International Trade, Committee on Finance, U.S.

Senate, August 1979, p. 251, Computer parts, as well as peripheral equipment, can be imported duty-free from some countries

as a result of the Generalized System of Preferences (GSP), under

which the United States, the European Economic Community,

and Japan have agreed to give preferential tariff treatment to

products manufactured in developing nations. However, imports

of such products into the United States under the GSP are expected to remain small. Of those that do enter this country, many

originate in Arnerican~owned facilities such as Texas Instruments’ plant in El Salvador.

4A group of nations that did not join the European Community—including Austria, Switzerland, Portugal, and several of the

Scandinavian countries-have formed the European Free Trade

Association, EFTA. In contrast to the EC—which has common

tariffs on imports-each EFTA member sets its own duty levels.

Once inside an EFTA country, however, goods can move freely within either EFTA or the EC without further tariffs. To keep

exporters from channeling all goods through the EFTA member

with the lowest duties, the Association has adopted a complex

set of rules of origin. U.S. firms have sometimes charged that

these rules are significant trade barriers. See Consumer ELxtronics Market in Europe (London: Frost & Sullivan, Inc., 1978), p. 95.
Ch. 11—U.S. Trade Policies and Their Effects 433

-— —

have built plants within the EC to avoid it.

European countries did cut tariffs on a variety of other electronic components and on

communications equipment—but for communications especially, nontariff barriers remain

a strong impediment to trade. Average EC tariffs on office and computing equipment will

drop from 6.9 to 4.9 percent. Overall, the Community’s reductions will have little effect on

competitiveness because American electronics

products generally had significant price (or

technology) advantages in the European market even at the old tariff levels. The European

case is a general one: reductions in tariffs by

other countries will seldom have large net effects on U.S. exports of electronics, if only

because nontariff barriers have usually been

more significant (nontariff measures and their

impacts are discussed in more detail in a later

section).

Reductions in Japan’s tariffs must also be

kept in perspective, The protective barriers that

shielded the Japanese computer industry during its earlier years have been coming down

for some time. In 1978, duties on mainframe

computers were cut from 13.5 to 10.5 percent,

tariffs on peripherals from 22.5 to 17.5 percent.

The further reductions to which Japan agreed

are no surprise given that Japanese computer

manufacturers are now highly competitive in

their home market. Likewise, accelerated staging for ICs is evidence of the domestic industry’s strength; Japan’s Government was

therefore willing to grant concessions in order

to reduce trade frictions with the United States.

EC countries did not feel they had this option.

Although both the EC and Japan have lowered some of their tariffs on consumer electronics—but not on color TVs—this will have little

effect on U.S. exports, which have not been

large. In Japan, prospective importers of color TVs face, in addition to tariffs, a commodity tax levied on 17 categories of consumer

goods—including automobiles, home appliances, and cameras—that adds 15 to 20 percent

to the cost of imported as well as domestically

produced TV receivers.

Secondary Effects of Tariffs

In addition to raising the costs of imports

compared with domestic goods, tariffs can

have a variety of less direct impacts on trade

and production; for instance, they may stimulate local investment by foreign manufacturers seeking to avoid the extra costs borne by

imports. The complex patterns of U.S. direct

investment in electronics have been shaped by

tariffs among many other factors. Foreign electronics firms have also invested in the United

States, particularly in the consumer sector;

European and Japanese firms hold majority or

partial ownership positions in U.S. electronics

companies ranging from producers of color

TVs (Magnavox, Quasar) to those designing

and manufacturing sophisticated ICs (Advanced Micro Devices, Fairchild) and computer systems (Amdahl).

Tariff barriers are seldom the sole cause of

foreign investment—and may be minor factors

compared with the desire to locate R&D and/or

production facilities closer to markets, or to acquire state-of-the-art technical knowledge. Still,

tariffs can sometimes be a major consideration,

In 1978, Nippon Electric Co. (NEC) opened a

semiconductor plant in Ireland specifically to

be within the European Community.5 production from this factory is not subject to the 17

percent EC duty; semiconductors can also

be sold in European Free Trade Association

(EFTA) nations free of tariffs. NEC, like the

many American firms that had made earlier

European investments, took advantage of what

is in essence a single market in Western Europe. The opportunity to reduce costs in such

a market, combined with the investment incentives provided by the Irish Government—which

was seeking jobs—sufficed to attract NEC.

Ironically, while both U.S. and Japanese firms

have been able to treat Europe as. one large

market, local manufacturers have seldom been

able to manage this. The rather parochial attitudes of both corporations and governments

‘R. 11. S i] i n, The )a~)a nrse Sem icon du(; tor In rfus tr}r.” An O\wrtiew (Hong Kong: Hank of America Asia, I,td., Januar}’ 1979],

p. 161.
434 . International Competitiveness in Electronics

within the EC have hindered indigenous development. The Japanese case is quite different.

There, relatively high tariffs on imports of electronics were combined with restrictions on foreign direct investment—imposed by the Foreign Investment Law of 1950 as well as stringent exchange controls—to protect the local

industry, o

Secondary effects also arise when imports

subject to tariffs are incorporated into final

products. While intended to shield domestic

manufacturers, say of components, these tariffs

may have the unintended consequence of raising costs for firms making the final product—

perhaps harming their competitiveness and

eventually leading to demands for further protection. Protection extended to the American

steel industry, for instance, has increased costs

for U.S. automobile companies.

In the electronics industries of some countries tariffs and other trade barriers have

created incentives for internal production and

vertical integration. When selecting vendors,

companies weigh prices along with such factors as quality and delivery schedules. High

product manufacturers to integrate backward,

particularly where domestic suppliers have

been protected because they were too weak to

compete effectively, Such factors have been at

work in both the EC and Japan, where many

firms whose primary end products have been

computers or communications systems have

established internal semiconductor operations.

The tendency has been especially pronounced

in Japan, where American semiconductor

products were not as freely available as in

Europe,

In the longer term, vertical integration—

where semiconductor facilities produce for internal as well as external sales—could lead to

scale economies that smaller U.S. merchant

firms may not be able to match. While American firms have had the advantage in flexibility compared with their integrated Japanese

competitors, and in products where innovative

design has been critical for market success,

they-have not fared so well in mass-produced

sUnited States—]apan Trade: Issues and Problems (Washington, D.C.: Genera] Accounting Office, September 1979), p. 27.

commodity-like products such as memory circuits. To the extent that such patterns continue,

they will imply that the tariff walls which protected Japanese semiconductor manufacturers

for so many years contributed to their eventual

competitive success by making it expensive for

these companies to import for their own needs.

On the other hand, price competition fueled

by imported components has probably benefited U.S. electronics firms that manufacture

final products. Sectors like consumer electronics and computers have gained from lower

cost and better quality components—the consequences of heightened competition. Widespread foreign sourcing of components by

American manufacturers points to the potential conflicts of interest with respect to import

restrictions that often arise between purchasers

and suppliers.

Tariff Treatment of Offshore Manufacturing

American-made components incorporated in

imported goods have been exempted from tariffs for almost 200 years. The current version

of the law is embodied in items 806.30 and

807.00 of the Tariff Schedules of the United

States. Under specified conditions, shipments

from overseas plants benefit from duty-free

treatment of the value of materials or parts sent

abroad for processing or assembly and then returned to the United States. Without this provision, re-imports after offshore assembly

would be subject to tariffs on their full value.

Because the tariff exemptions in items 806 and

807 lower the cost of overseas production relative to the no-exemption case, they implicitly encourage American corporations to split

production between domestic and foreign

plants. U.S. electronics firms began investing

in production facilities in developing countries

as early as the 1950’s. While central to cost

competition among TV and semiconductor

manufacturers, offshore production has been

a secondary element in the strategies of U.S.

firms making computers and business machines. Although labor unions have tended to

oppose 806/807 on grounds that they encourage

“exports” of jobs, the evidence concerning the

actual extent to which this occurs remains ambiguous (see app. B).
Ch. 11—U.S. Trade Policies and Their Effects ● 435

The 806 and 807 provisions differ in scope.

Item 806.30 is restricted to metallic articles,

sent abroad for processing, which undergo still

more processing after their return to the United

States. Silicon wafers qualify under the typical

manufacturing sequence outlined in chapter 6.

Item 807.00, on the other hand, requires neither

that the articles be metallic, nor that they be

further processed upon their return. However,

there are three other conditions, not required

under 806, 30: 1) the items must have been exported in a state ready for assembly, with no

additional fabrication needed; 2) they must not

lose their physical identity; and 3) they must

not have been advanced in value or improved

in condition except through the assembly process. 7 By value, the largest category of 807 imports consists of automobiles incorporating

parts originating here. Other major items include clothing made from fabrics cut in the

United States. Under both 806 and 807, tariffs

are levied at rates equal to those for equivalent

articles made wholly overseas but are based

only on the value added abroad.

Of the two statutes, 807 accounts for the

greater value of imports by far, in electronics

as in other product categories. Total value of

all 807,00 imports in 1980 was $13.8 billion,

compared with $237 million for 806,30.8 Total

value of 806.30 electronics imports in 1980 was

only $55 million, continuing a steep decline

from more than $250 million 3 years earlier.9

The major electronics imports under both

statute items are semiconductors and parts,

some of which qualify under either provision,

Item 807.00 imports of semiconductor devices

increased nearly threefold during the period

1978-80, reaching $2,45 billion—something

over three times the value of color TV shipments entering under 807. 10 Imports under

806.30 are being replaced by those under

807.00 because of the 806 requirement for fur-

‘ln]~)f)rts ( ~rrder items /?06.30 and 807. oo of the Tariff Schedules

c) f the / ~n itec] S’ta tc,s, I {)?7-80 (Wash i ngton, I). ( ~,: (J, S. I ntt~ rn; l

tiona] Trade (;ommissiorr Publ]t. ation 1170, Jl]l\I 1 981], ~1, 4,

‘l Ibiti,, p. B-2.

‘Ibid., pp. 134(i, 1148, The duty-free \’alues run ahout twt>th i rxis

of the total va] ue,

lrllbi~i 1)[), f]. 1 ~, ~j- 17. ( ;olor- ‘rv im[)orts un(ier item 807.()()

.,

can be found in (:h, q, table I q,

ther processing, Offshore plants owned by

American semiconductor firms have been extending their operations downstream, shipping

completed rather than semifinished ICs back

to the United States.

Semiconductor devices and TVs are not the

only electronic products to enter under 806 and

807. Modest volumes (in dollar terms) of capacitors and vacuum tubes come in under

806.30, Under 807,00 the list is much longer;

it includes office machinery, communications

apparatus, watches, stereo and high-fidelity

equipment, and many types of components.

As the size of 806/807 flows indicates, the

tariff exemptions have had significant impact

on the global structuring of the American electronics industry. Companies have rationalized

production by shifting manufacturing to parts

of the world where costs are lower. In only a

few cases have the tariff exemptions been

deciding factors, but they have certainly made

it easier for U.S. firms to move abroad. As discussed in chapter 9 and appendix B, the effects

on employment of such transfers are difficult

to evaluate, Depending on the assumptions,

they can be negative or positive. Even so, in

at least some cases the choice may not be production here versus production there, but production there or no production at all.

In any event, much of the electronics industry today is globally integrated-a trend to

which items 806.30 and 807.00 have contributed. The consequences span a considerable

range, U.S. firms have retained competitiveness in product lines where they would otherwise face marked cost disadvantages. Less-developed countries have been helped to industrialize, while outward flows of American technology have been accelerated. Some domestic

employment opportunities may have been sacrificed. From a policy perspective, many of the

impacts by now appear irrelevant, The laws

have been on the books in one form or another

for decades, and are not likely to be rescinded,

As tariff levels continue to come down, such

exemptions become more marginal to decisions on production locations; indeed, wage

levels rather than tariff exemptions have nearly

always been the determining factor.
436 . International Competitiveness in Electronics

Other Tokyo Round Agreements

Ten distinct understandings—comprising the

Multilateral Trade Agreement (MTA)—came

from the Tokyo Round negotiations. Some of

these, each covering a particular subset of trade

issues, are irrelevant to electronics—e.g., that

on dairy products. In other cases, little of substance is changed under the new language; this

is the case for the antidumping and subsidies/countervailing duty provisions discussed

in later sections.

Other MTA provisions pertinent to international trade in electronics deal with:

● government procurement,

• technical barriers to trade, and

● import licensing procedures.

These agreements could yield dividends in the

form of increased exports by U.S. electronics

manufacturers, but are not likely to have much

effect on imports of electronics products.

“Could” because the rather general nature of

the MTA makes infractions difficult to pinpoint. A series of test cases is likely, focusing

at first on more blatant departures from the intentions of the codes.

The first of the three provisions listed above,

that covering government procurement, calls

in essence for nondiscriminatory treatment of

foreign firms seeking access to government

purchases. That is, foreign and domestic bidders are to be treated the same. Exceptions

related to military sales and national security

will doubtless be interpreted broadly. The stipulations—which cover purchases above about

$200,()()()-are” rather far-reaching; they include,

for example, state and local as well as national

governments. On the other hand, developing

countries are not bound by this part of the

MTA, and virtually none have signed it.

The government procurement agreement

also addresses matters such as technical specifications and notification of bidders, which

have considerable impact in practice. Technical specifications are, where possible, to be

based on international performance standards,

Bidding is to be opened to the broadest possible group of qualified suppliers, the agreement

stating that invitations to bid should allow adequate time for foreign companies to respond,

Obviously, considerable latitude remains for

hindering foreign respondents, but grievance

machinery is to be established for handling the

complaints of parties alleging discrimination.

The MTA procurement code could have farreaching effects if it functions as written. The

governments of industrialized nations are

major customers for many types of goods; if

the provisions are fully implemented, these

markets would be opened to foreign suppliers.

In actuality, this is not likely to happen very

rapidly, Imagine the repercussions in the

United States if the General Services Administration bought 5,000 Toyotas for the Federal

motor pool.

The second of the listed agreements—that relating to technical barriers to trade—tackles,

or presumes to tackle, the collages of policies

used by governments in many countries to reduce import volumes via discriminatory technical standards or regulations. This code is not

tightly written, and leaves a number of loopholes that could easily be employed to evade

meaningful compliance, For instance, governments can promulgate regulations or product

standards different from international standards for national security reasons, to prevent

deceptive practices, to protect health and safety, to preserve the environment, and finally to

help with “fundamental technological problems.” Such rationales have been marshaled in

the past to defend regulations that discriminate

against foreign firms and, without much question, will continue to be so used in the future.

This agreement, it is fair to say, is long on

rhetoric but short on substance.

With the exceptions noted above, technical

regulations and standards are to be written so

as not to discriminate among potential suppliers or be undue impediments to international trade. Where a country’s regulations cannot be harmonized with international standards, GATT and other interested parties are to

receive full notification of differences. Likewise, laboratory or other testing procedures

should not place foreign manufacturers at a

disadvantage, Such provisions indicate that the
Ch. 11—U.S. Trade Policies and Their Effects ● 437

parties to the MTA were at least in principle

willing to accept the notion of relatively free

access for foreign suppliers.

Whether or not the MTA code on technical

barriers will have significant effects on commercial practices remains to be seen, In terms

of U.S. exports, the extent to which standards

and regulations elsewhere impede shipments

has not always been clear—leaving aside such

well-known examples as the procurement practices of NTT (Nippon Telegraph and Telephone) in Japan, U.S. exporters, in electronics

as in other industries, have generally attempted

to sell goods abroad that are as close to their

domestic production as possible. In some

cases, exports have been stifled not by foreign

standards but by the unwillingness of American firms to cater to foreign market conditions.

The third agreement relevant to trade in electronics is that on import licensing. The text sets

forth rather general stipulations intended to

simplify procedures associated with permits

and licenses, making it more difficult to use

licensing procedures as nontariff barriers—and

especially to single out and discriminate

against particular countries. Because import

quotas or Orderly Marketing Agreements frequently involve licensing requirements, companies attempting to gain or hold market share

when such quotas are in effect have a special

interest in equitable treatment, Perhaps the

most important provision in the import licensing code states that any enterprise fulfilling the

importing country’s legal requirements “shall

be equally eligible to apply and be considered

for a license. ” The only exception relates to applicants in developing countries, who are given

preference, Governments signing the MTA

also agree, in awarding licenses, to take into

account: 1) economic order quantities or lot

sizes, 2) past import performance of the applicant, and 3) “reasonable” distribution of licenses to new importers.

This brief review of MTA provisions points

out the central difficulty now faced by international trade negotiators—nontariff barriers.

The Tokyo Round was the first to comprehensively address such questions. As a result, the

MTA is wide ranging—not surprising given the

immense complexity and diversity of nontariff

barriers in various parts of the world-and

should be regarded as no more than a first step.

It represents an attempt to broaden the common ground among participating nations, moving beyond questions of tariffs and other direct

impediments to trade while holding to the

premise that has guided negotiations since the

original Reciprocal Trade Agreements Act,

before World War II—that free and open trade

is good for all concerned, with the distribution

of benefits improved by concessions to less-developed nations.

The ultimate impact of the Tokyo Round on

nontariff barriers, and on future trading patterns, remains to be seen. As a statement of intentions, the agreements—including the new

subsidies code—are commendable. From an

operational perspective, the verdict is less

clear. Governments seeking politically acceptable reasons for eliminating some of their regulatory clutter can begin; countries intent on

maintaining trade protection will not find

themselves severely constrained. The course

of the world economy will also play a role;

governments are loathe to reduce nontariff barriers during periods of stagnation.

In the context of electronics, the Tokyo

Round agreements have already had some effect. For example, the U.S. Government has

been able to convince Japan to soften its stand

on exempting NTT from the provisions of the

new procurement code. NTT, a major purchaser of high-technology communications and

switching equipment, is not—strictly speaking—an agent of the Japanese Government. But

its exclusion from the government procurement agreement created a whirlwind of protest from spokesmen for U.S. industry, who

believed the exemption to be symbolic of continuing efforts by Japan to evade the intent of

the MTA while subscribing to its language,

After prolonged discussions, the Japanese

Government persuaded NTT to open its procurements to foreign bidders.11 Thus far, there
438 ● International Competitiveness in Electronics

———. —

have been few foreign sales to the communica- opened by the agreements, Without this awaretions giant. ness, and without the pressure on foreign governments that such awareness can generate,

In electronics and other industries, the even- the agreements will have less effect. Equally

tual consequences of the MTA for nontariff important will be attitudes of officials in imbarriers will depend on factors such as aware- porting countries who have responsibilities for

ness among exporting firms of the possibilities monitoring and enforcement.

Dumping

The practice of dumping—selling goods in

export markets at less than their home market

price, or under some circumstances at less than

cost—is one of the unfair trade practices restricted by GATT. In essence, dumping is a

form of price discrimination; it is proscribed

in export markets for the same reasons as in

domestic markets—because price discrimination can be used to drive out competitors and

construct monopolies, In recent years, as

American industries have faced stiffer competition from imports, the number of dumping

complaints has climbed—from 11 in 1974 to 44

in 1982. 12

In electronics, most of the dumping cases

have involved consumer products; there have

been lengthy proceedings concerning TV receivers, as well as products like CB radios. Antidumping complaints were among the first attempts by American TV manufacturers to stem

the rising tide of imports in the late 1960’s and

early 1970’s. As other portions of the industry

face increasing import competition–not only

from Japan, but in lower technology products

from developing countries–the number of filings may continue to grow. In recent years,

American semiconductor firms have frequently accused Japanese manufacturers of dumping, but have not filed formal charges.

The Law and Its Administration

U.S. antidumping law is now contained in

two statutes: the Revenue Act of 1916 and the

Trade Agreements Act of 1979. While the 1916

121 nf~rmation from Department of Commerce, International

Trade Administration. During 1982, 136 countervailing duty

cases were filed as well.

Act contains strong sanctions against predatory dumping—that intended to eliminate

competition and increase market power—its

application is narrowly circumscribed. An action filed in consumer electronics under this

statute remained before the courts for some

years, but more generally the stipulation that

the plaintiff demonstrate predatory intent

makes it unlikely that the Revenue Act of 1916

will form the basis of future dumping findings. 13 This leaves the Trade Agreements Act

of 1979 as the primary mechanism for antidumping enforcement. The 1979 Act modified

U.S. law to conform to the revised GATT antidumping code negotiated during the Tokyo

Round.

14 Although the Antidumping Act of

1921 was repealed and the Tariff Act of 1930

amended, with a few exceptions the substance

of the changes was minor.

According to U.S. law, dumping is the sale

of foreign goods in the United States at less

than “fair value. ” The 1979 Act transferred

responsibility for less than fair value determinations to the Department of Commerce;

earlier, the Department of the Treasury had investigated dumping complaints and made fair

value determinations. The new act also shortened the timetable for investigations, and

changed the definition and determination of

fair value somewhat; fair value had formerly

been defined as foreign market value–basically

13 U. S, Administration of the An tidumping Act of 1921 (Washington, D. C.: General Accounting Office, Mar. 15, 1979).

“’’The Agreement on the Implementation of Article IV of the

General Agreement on Tariffs and Trade, ” Agreements

Negotiated Under Section 102 of the Trade Act of 1974 in the

Multilateral Trade Negotiations Submitted on ]une 19, 1979, for

Approval by Congress (Washington, D.C.: U.S. Government

Printing Office, July 1979).
— Ch. 11—U.S. Trade Policies and Their Effects ● 439

the selling price in the country of origin, or,

where such information was not available (the

goods might not be sold at home), the selling

price in third countries. Prices formed the basis

of comparison; the law allowed sales at less

than cost provided the manufacturer also sold

below cost elsewhere. If goods were sold only

in the U.S. market, the old law specified that

a “constructed value” based on estimated production costs be determined, In essence, current law extends the use of cost-based constructed values to cover fair value determinations where goods are being sold below cost

either at home or in third-country markets.15

Foreign firms that, for whatever reasons, sell

below cost at home cannot do so in the United

States without risking dumping convictions,

even under circumstances where this would

not otherwise be judged an unfair competitive

tactic—e.g., when cash flows remain positive

even though full costs might not be covered.

Earlier, sales at less than cost constituted

dumping only in narrower circumstances, This

provision of U.S. trade law, which is not consistent with definitions of dumping in most

other countries, has meant that the Department

of Commerce—now responsible for antidumping enforcement—often finds itself estimating

overseas production costs, an exercise fraught

with uncertainties and possible distortions. 16

Statutory relief is available only when sales

in the United States at less than fair value are

found to cause or threaten to cause “material”

injury to a U.S. industry, or to materially retard

the establishment of a domestic industry. 17 Responsibility for establishing injury or threat of

injury rests with the U.S. International Trade

Commission (ITC)--an independent agency of

the Government—which weighs factors such

as actual or potential declines in output, sales,

market share, profits, and employment. In the

usual course of events, the ITC staff prepares

—

I ~Se[;tlOn 773, Trade Agreements Act of 1979. AIsO see J.

Sklaroff, ‘‘[Jn ited States Antidumping Procedures ( Jnder the

Trade Agreements Act of 1979: A Crack in the Darn of Nontariff

Barriers, ” flo. ston College International and Conl~arati~re I,a It”

Retrict~, v{)l. 3, winter 1979, p. 223,

‘“’’( ;ommer{,f;, 1“1’(; of fi(,ials I)iscuss Continuing Prohlf;m Arf;a>

in (jascs, [1, s’. ]n]]x]rt 11’eekl~, Sept. 29, 1 982, 1). 800.

I TSectl On 73I, ‘1’rad[; Agreements Act of 1979.

an analysis based on such considerations, after

which the six commissioners (appointed by the

President and confirmed by the Senate for

9-year terms) vote—each making their own

judgments as to injury or threat of injury. Commissioners, singly or jointly, prepare written

opinions that explain their reasoning, If a majority of Commissioners find injury, the remedy

is assessment of a special dumping duty intended to equalize prices between home country sales and those in the United States. These

antidumping duties are assessed and collected

by the Department of Commerce (formerly

Treasury).

The Color Television Case

The long and complex history of antidumping complaints in consumer electronics—still

not fully resolved—was no doubt one of the

reasons for provisions in the Trade Agreements Act of 1979 transferring responsibility

for enforcement from the Department of Treasury to Commerce; advocates of stricter administration of the law felt that Treasury officials

had been less than diligent, in part because of

the Department’s traditional commitment to

open trade.

Complaints that Japanese firms were dumping TVs in the United States began in 1968 with

a filing by the Electronic Industries Association (EIA). This initiated what has perhaps

been the lengthiest case in the history of U.S.

antidumping law.18 The EIA complaint alleged

that the Japanese were able to maintain low

prices in the United States for predatory purposes because prices in Japan were kept artificially high by import barriers. The Japanese

manufacturers acknowledged that retail prices

were higher in Japan, but held that the differences were caused by higher taxes and by

a complex and costly system of marketing and

distribution.

It took 3 years for the Department of Treasury to complete its investigation, finding—in

March 1971—that the Japanese had indeed

In’rh[; e~,~nts are surnm~ri~(:d in Tejet’isiorl Recei~’ing L$et$

From }apan (Washington, 11.(; ,: ( 1.S. International Trade (;onmission Puh]i(, ation 1153, ]unc 1 !381 ), pp. A-4 to A-12.
440 . International Competitiveness in Electronics —

\

Photo credit RC/

Color TVs undergoing long-term tests

dumped TVs in the American market. The case ing the duty rate. Eventually, the Department

then went to ITC for determination of injury.

Later that year, ITC returned a positive finding,

concluding that the dumped TVs had injured

the U.S. industry and clearing the way for the

assessment and collection of antidumping

duties–at that time still the responsibility of

Treasury. Importers of TVs from Japan were

required to post a 9 percent bond toward these

duties.

Fixing the size of the antidumping duties—

intended to elevate prices of imports to the

level of TV prices in Japan–proved another

lengthy process. The wholesale price information provided by Japanese manufacturers was

judged inadequate and in some cases false,

leaving Treasury without a means of calculatresorted to constructed value estimates based

on commodity taxes collected by the Japanese

Government.

An extraordinary number of claims and

counterclaims accompanied the efforts of

Treasury and the Customs Service to determine

and collect these duties. Not only were American manufacturers of TVs and components involved, but also the unions representing their

employees. Arrayed on the other side were the

Japanese manufacturers, their U.S. representatives, and the American firms which had been

importing TVs from Japan—mostly large retailers such as Sears and J. C. Penney. The protracted course of the disputes also mirrored

conflicts within the Federal Government—e.g.,
Ch. 11—U.S. Trade Policies and Their Effects ● 441 — . . .

between the Customs Service and other parts

of the Treasury Depart ment. 19 By 1980, only

about $13 m i 11 i o n i n dumping duties had been

collected. Moreover, assessment of duties for

1975 and later years has never been completed,

pending final resolution of disputes covering

earlier periods. Not only have duties been at

issue, but also civil penalties for alleged illegal

rebates to importers as a means of circumventing the added duties.

With the transfer of antidumping enforcement to the Department of Commerce in 1980,

a new agreement was negotiated with importers. Commerce agreed to accept a total of about

$75 million, rather than pursuing in the courts

duties which the Department estimated at nearly $130 million for the period 1971-79. The

EIA—original plaintiff in the dumping proceedings—and its allies then claimed that the

actual dumping liability was $700 million or

more, and challenged the Commerce Department’s proposed settlement in the courts; a

1981 decision allowing the settlement to stand

was appealed to the Supreme Court. Late in

1982, the Supreme Court denied the appeal;

evidently Commerce’s negotiated settlement

can now proceed. 20

This 15-year history—which has still not

come to an end, and during which the complexion of the American consumer electronics

industry changed irreversibly—dramatizes the

inadequacies of U.S. antidumping procedures

as a means of relief from “unfair” import competition. The lessons hold for other industries

as well-witness the example of steel. Not only

is enforcement slow, complex, and susceptible to delay by various parties, but the legal

definitions of dumping–which, in the United

States as in many other countries, predate

GATT--seem remote from the realities of business competition, No one argues that predatory practices should not be outlawed, but what

relevance, for example, does the relationship

of home market price to export price have to

predatory pricing? Would Japanese firms for

a dozen years or more willfully cut the prices

they charge in the United States below those

the market would otherwise set because in

some still longer term they seek to monopolize

the market? Does selling imported goods at less

than cost—now effectively prohibited by the

1979 Trade Act—always constitute an unfair

business practice? Still, regardless of how these

questions are viewed, the fact is that Japanese

firms were found under U.S. law to have

dumped TVs. Injury to the domestic industry

was established. American manufacturers of

TVs have been entitled to trade protection but

have not received it. The uncertainty and confusion created by the these long and convoluted

proceedings has probably done more damage

to the industry than the dumping itself.

The modifications to U.S. antidumping law

incorporated in the Trade Agreements Act of

1979 address some of the procedural problems

illustrated by the TV case. Not only has responsibility for dumping determinations and the

assessment of duties been transferred from

Treasury to Commerce (by Executive Reorganization Plan No. 3, effective Jan. 1, 1980), but

the ITC injury investigation now begins immediately, rather than awaiting a positive finding of dumping. The concurrent investigations

—for which the act sets relatively short time

schedules—are intended to speed the process.

If future dumping investigations are shorter

because of the 1979 Act, this will limit uncertainties and disruptions, reducing costs for

both defendants and plaintiffs. This would also

make it more difficult for domestic firms to use

dumping proceedings in “strategic” fashion to

deter foreign competitors from entering U.S.

markets; dumping complaints can discourage

market entry through the threat of future

penalties as well as by imposing legal costs on

defend ants.

Prospects for Dumping Actions

Elsewhere in Electronics

Antidumping proceedings-and other trade

a ctions discussed later—have bee n m a j o r

events in U.S. consumer electronics markets

., 1
442 . International Competitiveness in Electronics

but rare in semiconductors or computers. The

single case involving semiconductors, in 1972,

led to a finding of dumping but not injury. Imports of computers into the United States have

been at low levels, leaving little reason to expect complaints. If computer imports were to

rise and dumping to be alleged, less than fair

value pricing would be difficult to establish, at

least for large systems. The complexity of such

systems, the difficulty of establishing comparability in performance, and the high R&D

expenses that must be borne, complicate pricing comparisons. Moreover, selling prices for

data processing systems often include service

or software charges that are hard to isolate.

pricing structures in the computer market—

particularly the establishment of “qualityadjusted” pricing—have already created formidable difficulties in purely domestic antitrust

actions where predatory pricing has been at

issue.

21 Less than fair value determinations

based on foreign market prices or constructed

values would be still more troublesome, at least

for mainframes. The problems are not so intractable for small systems and peripherals,

where significant import penetration is in any

event more likely, while personal computers

sold at retail could be treated much like other

consumer products.

The characteristics of the semiconductor industry also work against antidumping proceedings. Large-scale ICs—including computer

memory chips, where import sales have increased rapidly—experience relatively short

product lifetimes, Coupled with the large economies of scale in IC production, and the importance of yields, deep market penetration—

zls~e, fOr exarn[]l~, R Michaels, “Hedonic Prices and the Structure of the I)igital Computer Industry, ” )ourna] of lndustria~ ECO

r]omics, ~ro], 28, March 1979, I). 263,

Plasma etching system used

with resulting cost adva

Photo credit Perk/n-E/rner

n semiconductor fabrication

ntages from the learning curve—might well occur before dumping

proceedings could be resolved, even under the

accelerated timetable of the 1979 Act;

moreover, the same factors lead to advance

pricing—which is not in general illegal. Therefore, while antidumping actions may continue

to be filed in more mature sectors of the electronics industry—e.g., consumer products,

where the technology is relatively stable and

price competition based on low production

costs intense—dumping allegations in hightechnology sectors seem less likely to escalate

from verbal attacks on imports to formal complaints. In high-technology industries, products

can be obsolete by the time dumping actions

have been resolved.

Subsidies and Countervailing Duties

Where along the spectrum from advertising in the form of credits or guarantees extended

a country’s goods to giving rebates to exporters to purchasers through institutions such as exdoes promotion turn into subsidy? Or is that port-import banks have become accepted tools

no longer a relevant question? Export subsidies of industrial and trade policy. International
Ch. 11—U.S. Trade Policies and Their Effects ● 443

agreements limit interest rates—to levels that

can be below the market rate but not too far

below. ” In such forms, export subsidies have

become one of the most common nontariff

measures affecting international trade; subsidies with domestic objectives also have consequences for exports,

Although important in capital goods industries, neither export financing nor export

promotion have played major roles in electronics outside of telecommunications. ’s In

contrast, subsidies with ostensibly domestic objectives have become a major tool by which

governments promote their electronics industries; these have less direct and visible effects

than export credits, making them difficult to

countervails or to negotiate over, While revisions to the GATT subsidies code were a central item on the agenda for the Tokyo Round

negotiations, little progress was made; the

changes were basically matters of procedure.

Distinguishing export from domestic or internal subsidies—the latter of many forms but

universally employed—is central to a workable

code but fraught with practical difficulties,

Measures adopted by governments that have

the effect of subsidizing domestic electronics

industries range from grants for basic research

to regional development incentives. Because

any such policy, even relocation assistance for

displaced workers, could in principle help

firms to export–by cutting costs, raising profits, or improving technical capability—the

dividing line between measures that most people would agree are domestic subsidies (e. g.,

R&D support) and what are clearly export subsidies (e. g., low-interest loans to foreign purchasers) will always be ambiguous. As nations

pursue increasingly sophisticated industrial

policies, it becomes still more difficult to draw

that line.

Countervailing Duty Law and

Its Administration

GATT and U.S. law provide remedies paralleling those for dumping where American

firms and industries are injured by export subsidies. In dumping cases, private firms set the

prices at issue, while prices are distorted by

direct or indirect government action in the case

of subsidies. Importing nations then impose

countervailing duties for essentially the same

purpose: to eliminate price differentials created

by the unfair trade practice. In principle, the

countervailing duty is set at a level that balances the effect of the subsidy. In practice, the

administration of countervailing duties in the

United States is even more problematic than

for antidumping duties,

U.S. countervailing duty legislation is found

in two statutes—the Tariff Act of 1930 and the

Trade Agreements Act of 1979. As in the case

of antidumping law, responsibilities in countervailing duty cases are split—the Department of

Commerce investigates foreign export subsidies (this responsibility was again lodged with

Treasury until 1980); ITC determines injury.

If ITC votes any of three findings—injury to a

U.S. industry, threat of injury, or impediments

to the establishment of a new U.S. industry—

then a countervailing duty equal to the net

value of the subsidy is to be imposed on the

imports.

Under the 1979 Act, the test turns on “material” injury—including actual or potential

declines in output, sales, market share, cash

flow, profits, productivity, capacity utilization,

employment, wage levels, or the ability to raise

capital. 24 In earlier years, U.S. law did not require that injury be found before countervailing duties could be imposed; the existence of
444 ● International Competitiveness in Electronics

—

subsidies was enough. Although differing from

GATT language, this provision had preceded

the establishment of GATT and been retained

under a grandfather clause. The original law

had been passed before the turn of the century,

but no countervailing duty was imposed by the

United States until 1967.

The Question of Indirect Taxes

What then is a “subsidy” under GATT and/or

U.S. law? As might be expected, the definitions

have been controversial. There has been a major legal action in consumer electronics, the

case hinging on whether exemptions or rebates

of indirect taxes on exported goods constitute

a subsidy, Both the old and new GATT subsidies codes permit indirect taxes—e.g., value-added taxes—to be rebated, but not direct

taxes. (Direct taxes—such as corporate income

taxes—are levies based on factors of production like capital or labor, indirect taxes are

those levied on the product itself.) The assumption underlying this rule is that indirect taxes

can be easily included in prices and passed

along to consumers, while direct taxes cannot

(they depend, for instance, on annualized profit

levels). If the full indirect taxis passed through

to the purchaser, profits to the seller are unaffected. Under these circumstances, a rebate or

exemption of such taxes on export sales would

not constitute a subsidy under the usual definitions.

Compared with its trading partners, the

United States relies less heavily on indirect

levies—sales, excise, and value-added taxes—

and more heavily on direct taxation, primarily of corporate and personal income. Many

European nations impose a value-added tax

(VAT) at each stage of the production process.

In Japan, consumption taxes of 5 to 30 percent

apply to items such as automobiles, electrical

appliances (including TVs), and a variety of

luxury goods, while excise taxes apply to other

classes. 25 Under GATT rules, countries that

z~E,~pOrt Stlm ula ti~n l+ograrns in the Major Industrial Countries: The United States and Eight Main Competitors, Congressional Research Service, prepared for the Committee on Internationa] Relations, [J, S. House of Representatives, Oct. 6, 1978,

p. 66.

levy such taxes can exempt or rebate them as

they wish. The United States has less latitude

than nations with extensive arrays of indirect

taxes.

After the Trade Act of 1974 had been passed,

Zenith challenged rebates of Japan’s commodity tax on exported TVs under the act’s provisions. The American manufacturer sued the

Department of Treasury, claiming that rebated

indirect taxes in Japan constituted subsidies

and that Treasury had failed to properly interpret the new law. 26 Treasury countersued,

claiming that decades of acceptance by all parties of its past practices had effectively ratified

these practices, Four years later, in 1978, the

Supreme Court upheld Treasury’s position, ruling that rebated commodity taxes do not constitute subsidies under U.S. law.

Countries with commodity or value-added

taxes generally levy them on imports as well

as domestic production. Thus, within a country having indirect taxes the impacts are, at

least in principle, neutral: both imports and

domestic goods are subject to a tax based on

their value. However, matters are not really this

simple. Exports from a nation like the United

States that relies on direct taxation may be

burdened with higher selling prices reflecting

higher corporate taxes, thus at a disadvantage

in markets where indirect taxes are the rule

(countries with substantial revenues from indirect levies normally tax personal and corporate income at correspondingly lower rates).

Furthermore, foreign manufacturers shipping

to the United States may reap benefits: after

receiving rebates on indirect taxes at home,

such firms face no compensating border tax

adjustments when their goods enter the United

States—though they generally must pay tariffs.

They are free to sell in a market where the

prices charged by domestic firms may well

have to cover higher corporate taxes. As a

result, nations that rely heavily on indirect

taxes can be presumed to have advantages in

international trade—although the size and

Z6D. A. De Rosa, J. M. Finger, S, S. Golub, and W. W. Nye,

“What the ‘Zenith Case’ Might Have Meant, ” Journal of World

Trade Law, vol. 13, January-February 197!3, p. 47.
—..

significance of the advantages can be difficult

to judge,

VAT systems have sometimes been suggested

for the United States, in part because of their

potential for stimulating exports (assuming corporate taxes were reduced at the same time).

The effects of such a shift in U.S. tax policy

on specific firms and industries would depend

on factors such as: 27

compensating reductions in income taxes,

as well as the overall tax liabilities (and

profitabilities) of the firms in question;

the extent of vertical integration characteristic of the industry, along with the

place of particular firms in the chain of

production;

fractions of revenues stemming from exports;

price elasticity of demand for each product

affected; and

design and implementation of the system

for collecting the VAT or other indirect tax

and (optionally) rebating it for exported

goods,

While the merits of VATS have thus far not

been seriously debated in this country, since

1971, U.S. law has provided a mechanism—

the Domestic International Sales Corp. (DISC)

—intended to put American exporters on a

more even footing with manufacturers in countries having indirect taxes. DISCs—subsidiary

corporations whose activities are confined to

selling goods in export markets—permit U.S.

firms to defer a portion of tax liabilities from

profits on overseas sales. Several thousand

DISCS have been established, primarily by

larger American corporations with substantial

volumes of export business. In recent years,

more than half of all U.S. exports have been

channeled through DISCs.

28 For exports of

.

ZTsee A valu~Added Tax for the U, S. ? Selected Viewpoints

(New York: The Tax Foundation, Inc., 1979).

zeb’~-i)ort ~’[lnlu/a[Ion Programs in the Major lndustria] COUIltries, op. cit., p, 319,

Ch. 11—U.S. Trade Policies and Their Effects . 445

.

electronics, however, the proportion is much

lower—perhaps in the range of 10 percent. 29

Other countries have registered complaints

with GATT against the DISC mechanism, arguing that it functions as an export subsidy but

does not qualify as an exemption from indirect

taxes. 30 Despite a finding by GATT that DISCS

do constitute subsidies, no country has yet imposed countervailing duties on U.S. exports,

nor has the United States offered to repeal the

legislation that permits DISCS. (Recently, the

Reagan administration has proposed an alternative to DISCS, as pointed out in the next

chapter.)

Other Unfair Practices

Section 337 of the Tariff Act of 1930—which

was amended in 1979 but has seldom been used

—deals with unfair competition in international trade not already covered by anti dumping or countervailing duty laws. Most of the

complaints filed under section 337 have concerned patent infringements, as in Apple’s

complaint to ITC over counterfeit computers,

but in yet another case concerning imported

TV receivers, two American manufacturers accused Japanese firms of illegal predatory pricing practices—specifically, of cutting prices in

the United States below costs in an effort to

drive American firms from the market.31 When

imports are involved, price-cutting complaints

are usually filed under antidumping or countervailing duty statutes, but section 337 actions

can also be brought if conspiracy or intent to

monopolize is alleged. In this instance, ITC

proceeded with a section 337 investigation

even though the Department of Treasury

ZgThis estimate is based on a survey of 325 member firms by

the American Electronics Association. Because most of the nlembers of the Association are smaller companies, it probably understates the actual fraction for electronics. St:[: Capital I’orn]ation, part I, hearing, Senate .Select Committee on Small Business,

Feb. 8 and 10, 1978, p. 53.

30 See J. M. McGuim, “The GATT Panel Report on I)omestic

International Sales Corporations: Il]egal Subsidl IInder GATT,”

lnterna(iona] Trade l.a~t’ )ournal, vol. 3, 1978, p, 387,

31 IT~; I n~restigatlon 337-TA-2 3, filed Jan. 15, 1976.
446 ● International Competitiveness in Electronics

claimed exclusive jurisdiction under countervailing duty law. The theory behind the complaint was that assistance given Japanese TV

manufacturers by their government—though

not necessarily bounties or grants within the

definitions of countervailing duty statutes—

might still constitute a conspiracy to restrict

trade, an unfair practice under section 337. The

. .—

case was terminated when ITC issued consent

orders prohibiting predatory pricing and special purchase inducements for color TVs. Future section 337 complaints by American electronics firms are perhaps most likely as attempts to expedite relief, given the slow pace

of past antidumping and countervailing duty

investigations.

Quantitative Restrictions and the Escape Clause

Over the past two decades, tariff levels have

been reduced by international agreement to the

point that, for many goods and in many advanced economies, they are no longer a major

factor in market outcomes. Nowhere is this

movement plainer than in electronics. With

tariffs largely closed off as a legitimate vehicle for protection, industries exposed to the

rigors of international competition—together

with their employees and political supporters—

have sought other forms of relief. Along with

many other nations, the United States has increasingly fallen back on import quotas. By

whatever name—Orderly Marketing Agreement, Voluntary Restraint Agreement—quotas

limit shipments originating in particular countries. Under GATT, unilaterally imposed quotas are explicitly disallowed except to correct

persistent balance of payments deficits, and

then are to be temporary. Nonetheless, quotas

have proliferated—typically on a negotiated

bilateral basis–with the path often cleared by

“escape clause” actions permitted under

GATT. An outline of the escape clause mechanism in U.S. law—section 201 of the Trade

Act of 1974—follows the discussion below of

quotas on color TVs.

Orderly Marketing Agreements for

Color Television Imports

The only direct quotas on U.S. electronics

imports have been termed Orderly Marketing

Agreements (OMAs). Like the earlier Voluntary

Restraint Agreements on steel shipments, or

the Japanese automobile quota—in appearance,

the result of unilateral action by Japan rather

than negotiations between two governments—

exporting nations have entered into OMAs of

their own volition.

The United States negotiated its first OMA

covering imports of color TV receivers in 1977

with Japan, Under the conditions, Japan agreed

to limit shipments of color TVs to this country for a 3-year period; no more than 1,560,000

complete sets and 190,000 incomplete sets

were allowed each year. Except for being the

outcome of bilateral negotiations, the color TV

OMA was equivalent to a quota of the type outlawed under GATT.

The stop-gap nature of this first OMA—covering a single troublesome exporter—was illuminated when Taiwan and South Korea took

up the slack (ch. 4). It quickly became necessary

to extend quotas to these two countries if the

U.S. industry was to be effectively shielded.

OMAs were negotiated with Taiwan and South

Korea late in 1978, to expire at the same time

as the Japanese quota—June 30, 1980. Imports

from Taiwan were limited to roughly half a million units, plus twice as many incomplete sets

(without picture tubes), over the year-long

period beginning July 1, 1979. Korean shipments were restricted to about 300,000 TVs.32

This extension to other countries illustrates a

common failing: when initially directed against

a single exporter, quotas must often be widened as new competitors step in—the series of

bilateral agreements under the umbrella Mul-

.——

32 Television Receiving Sets From Japan, op. cit., p. F-2. Several

adjustments were made over the course of the agreements.
Ch. 11 —U.S. Trade Policies and Their Effects 447 — —

tifiber Agreement being the classic case. Note

that table 14 in chapter 4 shows imports from

Mexico more than doubling over the period

1976-80—during which time the OMAs with Japan, Korea, and Taiwan took effect—while

shipments from Singapore increased more

than seven times. Virtually all the imports from

Mexico enter under item 807.00 of the Tariff

Schedules–meaning they are shipments by

American-owned firms—while both 807 and

non-807 imports from Singapore have gone up

sharply; Singapore now ships more TVs to the

United States than Korea did at the time the

OMA with that nation was negotiated (table

14). Might there be pressure for quotas with

Singapore at some future time? Or other Asian

countries? If so, could unrestricted Mexican

shipments be justified simply because they are

intracorporate transfers of U, S.-based multinationals?

As expected by the American negotiators,

Japanese manufacturers responded strategically to the OMA. To avoid the new restrictions,

they not only invested in Taiwanese and South

Korean manufacturing facilities but opened

assembly plants in the United States—a desirable consequence from the viewpoint of the

Federal Government because these plants

would help maintain domestic employment,

diffusing some of the pressure from labor

unions. As these U.S. plants came onstream,

Japanese shipments of color TVs (but not of

subassemblies) diminished. By 1980, Japan’s

exports of completed and nearly completed sets

were no longer considered a threat, and the

OMA with Japan was allowed to expire on

schedule, Of course, the possibility of a new

quota continues to shape business decisions by

Japanese exporters.

OMAs with Taiwan and Korea, on the other

hand, were renegotiated to cover the period

through June 30, 1982 at new levels (Taiwan:

400,000 sets in the first year, 425,000 in the second; Korea: 385,000 sets in the first year,

575,000 in the second), after which they too

were allowed to end.33 One consequence, again —.

Sssee “(; Irr JU~~e l~nles Government Motion To I)issol\re TL’

Settlement, ” [1. S. Import WeekfJJ, July 7, 1982, p. 422, Since the

expiration of these OMAs, imports from both countries have

again jumped, leading to dumping complaints by U.S. interests—

R. D. Hershey, Jr., “TV Import Charges Are Filed: Korea, Taiwan

Ilurnp]ng Seen, ” N’ewr }’ork Times, May 3, 1983, p. L)l 3,

predictable, were decisions by Korean and

Taiwanese firms to follow the Japanese lead in

establishing assembly operations in the United

States.

Escape Clause Proceedings in

Color Television

Why have the United States and other nations resorted to quotas? Partly because quantitative restrictions are administratively clean—

simple to monitor. More important, for a harried government, quotas may seem the best

choice among a set of generally unattractive

alternatives. The color TV case illustrates the

political dilemmas that often foster such decisions,

The OMA with Japan followed a series of

legal actions initiated by the U.S. industry in

attempts to stem rapid increases in imports. As

discussed earlier, dumping charges against the

Japanese came first, but for a variety of reasons

duty collection was repeatedly postponed.

American firms together with labor unions representing their employees continued to press

for import relief via other avenues—one being

Zenith’s countervailing duty suit, mentioned

earlier and destined ultimately to fail. The

avenue that finally proved successful began

with an appeal filed in October 1976 by a group

of companies and unions for relief under the

escape clause, section 201(b) of the Trade Act

of 1974. This provision, following article XIX

of GATT, permits trade restrictions—independent of questions concerning fairness—if imports are found to be causing serious injury or

threat of injury to domestic producers. The purpose is to allow a temporary respite or escape

from import competition while industries adjust to new conditions. The protective measures adopted in such cases, termed safeguards,

need not be quotas—higher tariffs are one alternative.

In terms of the color TV OMAs, two features

of the escape clause mechanism are noteworthy. First, remedies depend solely on demonstration of injury—not on any allegation or

proof of unfair or discriminatory practices by

exporters. Second, the Trade Act of 1974 removed earlier provisions in U.S. law requiring

that increased imports be associated with trade
448 International Competitiveness in Electronics —- —

liberalization. Without this change, protection

for the American industry via the escape clause

would almost certainly have been precluded.

Another feature new to the 1974 Act—concerning the role of ITC in the investigation of

injury—bore on the ultimate outcome of the

color TV case. Under earlier law, when injury

was found ITC recommended remedies to the

President, who could either accept or reject

them. The 1974 Act added a time limit, stipulating that the President respond within 60

days to an ITC injury finding. Further—and

most significant—the act provided that whatever action the President took could be overridden by a simple majority of Congress, *

Thus, the options available to the executive

branch had been narrowed, the hand of those

advocating import relief strengthened. The

threat of reversal by Congress greatly increases

pressures on the Executive, for whom the color TV case posed a dilemma. The ITC Commissioners determined that the U.S. industry had

suffered injury, and—with only one dissenting

vote—recommended a large tariff increase, If

the President took this course, an international

trade dispute of major proportions would

almost certainly have been precipitated. On the

other hand, rejecting the ITC recommendation

would bring with equal certainty the prospect

of reversal by Congress—even more embarrassing. Under these circumstances, the White

House finessed the entire problem by negotiating with Japan for voluntary restrictions. Discussions carried out between the (then) Office

of the Special Trade Representative and the

Japanese Ministry of International Trade and

Industry (MITI) led to the OMA.

What have been the consequences for the

U.S. TV industry? That the political victory had

any very substantial impact on its competitive

vitality can be questioned. Imports were cut

back, and the frontal assault by Asian firms arrested, The specter of U.S. manufacturers being totally overridden, which underlay the appeals by industry and labor (though the indus-

*A Supreme Court decision in June 1983 ruling legislative

vetoes unconstitutional has, for the moment, rendered this provision of the act moot.

try did not in fact stand together on this), receded. But the OMAs also accelerated a process begun earlier—the establishment of U.S.

operations by Japanese TV manufacturers, and

later Taiwanese and South Korean firms. Sony

had initiated the trend in 1972; since then,

many others have followed—as described in

chapter 4—sometimes by taking over the plants

of ailing American rivals. Wholly owned Japanese subsidiaries now supply perhaps onethird of the U.S. market (table 10). If American

manufacturers expected to recapture the domestic market, or if they anticipated a slackening in price competition, they were disappointed.

The full range of consequences provides

other causes for reflection. OMAs did not stop

the transfer of U.S.-owned production facilities

to foreign countries, a movement that had begun earlier. Zenith, for instance, continued to

shift TV manufacture to offshore plants in

Mexico and Taiwan. Still, if the industry does

not appear to have gained materially from the

quotas, it is likely that further losses were

avoided.

That competition did not abate is shown by

price data collected by ITC over the period of

the initial agreement with Japan; retail prices

for color TVs (19 inch and smaller) remained

essentially constant during a period of severe

inflation in the U.S. economy.34 Even for largescreen sets, where U.S.-owned firms continued

to dominate the market, prices increased only

about 6 percent, While price stability also mirrors cost-cutting improvements in both product

and process technologies, it seems clear that

competitive responses by Far Eastern manufacturers were the chief cause. During the same

period, many household appliances rose in

price by 50 percent and more.

Nor did profits recover. While OMAs reduced import market shares–in the 18- and

19-inch categories, penetration declined from

about 30 to 10 percent during the first year—

~aco~or Television Receivers: U.S. Production, Shipments, Inventories, Imports, Employment, Man-hours and Prices, 4th Calendar Quarter, 1979 (Washington, D, C.: U.S. International Trade

Commission Publication 1036, February 1980), p. A-8.
Ch. 11—U.S. Trade Policies and Their Effects 449

—

in terms of the competitive position of the U.S.

industry, this apparent benefit was partly offset by the output of Japanese firms assembling

TVs here. Capacity utilization rates of domestic

firms improved but profitability did not follow.

The ratio of net operating profits before taxes

to net sales, which had declined from 8.7 percent in 1972 to a loss in 1974 of 1.2 percent,

has been running at less than 2 percent in recent years, as pointed in chapter 4. While

OMAs helped preserve domestic employment

opportunities, they provided no more than

modest relief from competitive pressures.

Effects of Quotas and Other

Nontariff Restrictions

Many nations have utilized restrictions other

than tariffs to regulate trade in electronics.

Japan–a major beneficiary over the past three

decades of vigorous advocacy by the United

States of open international trade—has employed nontariff restrictions frequently and effectively as part of its economic development

strategy. Among the more blatant nontariff barriers created by the Japanese has been MITI’s

definition of domestically produced computers. These are confined to systems manufactured by firms in which majority ownership is

Japanese.

35 Machines built within Japan by

American-owned firms are “foreign’ ’-despite

the fact that IBM-Japan, for instance, employs

some 13,000 Japanese and only a handful of

Americans. MITI has preferred that purchasers of computers chose “domestic” equipment,

using controls over foreign exchange to help

enforce its wishes; although exchange controls

were dismantled in 1975, MITI continues to

monitor the market, and reportedly advises

customers to buy Japanese computers. 36

That nontariff restrictions appear to have

been more effective in achieving their ostensible goals in Japan than in most nations illustrates once again that evaluating industrial

policy measures is seldom straightforward.

One lesson of the Japanese experience appears

35E, J. Kaplan, Japan: The Government-Business Relationship

(Washington, D. C.: Department of Commerce, 1972], p. 85.

JO Un jted Sta tes-]apan Trade.. Issues and problems, op. ~ it.,

p. 28.

to be that restrictions may work better in protecting what are essentially infant industries,

at least if combined with other policies supporting industrial development. In the United

States, on the other hand, quotas intended to

protect mature industries—not only color TV,

but automobiles or steel—have had ambiguous

outcomes.

Could quantitative restrictions effectively

shield other portions of the U.S. electronics industry should imports surge as they have, say,

in semiconductor RAMs (random access memory circuits)? Probably not. Early in 1982,

amidst consternation created by heavy import

penetration figures for 64K RAMs, Hitachi, Fujitsu, and NEC all announced accelerated timetables for assembly in the United States. These

moves were clearly aimed at heading off formal complaints. If dumping or escape clause

proceedings had been instituted, the parallels

with color TV would probably have been replicated still further. As for color TVs, Japanese

firms already have enough volume in the U.S.

IC market to attain the scale economies needed

for standardized products. In general, quotas

are not a promising route to improved competitiveness for high-technology American industries like electronics.

The Escape Clause

As mentioned above, GATT permits governments to come to the aid of domestic industries

threatened by imports. But before protection

can be extended under the escape clause provision in section 201 of the 1974 Trade Act, ITC

must return a finding that “an article is being

imported into the United States in such increased quantities as to be a substantial cause

of serious injury, or the threat thereof, to the

domestic industry producing an article like or

directly competitive with the imported article.” 37 Fairness or unfairness is not part of the

text. The rationale is to provide a time interval during which the threatened industry and

its workers can adjust to the (new) competitive

circumstances associated with imports. Permanent protection or relief is not the intent.

3719 u ,s.c. sec. 2251(b).
450 ● International Competitiveness in Electronics

Revisions to U.S. law in the 1974 Act made

it considerably easier for an industry to

demonstrate injury and thus qualify for protection. As noted above, relaxation of the provision that relief be contingent on a rise in imports stemming from tariff concessions or

other forms of trade liberalization by the

United States was instrumental in the color TV

action. Furthermore, previous incarnations of

the escape clause required that increased imports be a major cause of injury. The 1974 version changed the adjective to substantial, defined as “important and not less than any other

cause, ” This standard is considerably weaker,

and all else equal makes it easier for beleaguered industries to secure protection. 38

Other than the color TV case, only one successful escape clause action involving electronics products has been advanced since the

passage of the 1974 Trade Act. This was filed

in late 1977 after a fourfold increase in imports

of CB radios. ITC worded its findings strongly: “ ., . serious injury is clearly imminent and

threatens the domestic industry with extinction

unless remedial action is taken to enable U.S.

producers to compete on more equal price

terms.” 39 The president responded by raising

import duties from 6 to 21 percent. After the

first year, the duties decreased in increments,

reverting to their original level at the end of

the third year, The impact of this period of

tariff protection on the CB radio industry is difficult to judge, largely because sales dropped

precipitously—from around 5 million units in

1978 to only 2 million the next year—as the CB

31JW. R.C]ine, N, Kawanabe, T. O. M. Kronsjo, and T. Williams,

Trade Negotiations in the Tokyo Round: A Quantitative Assessment (Washington, D. C.: Brookings Institution, 1978), p. 203.

WU, S. Import week]~~— Reference File (Washington, D. C.:

Bureau of National Affairs, 1979), p. 58:0106.

fad tapered off. Nonetheless, imports captured

the vast majority of 1979 sales.40

Despite questionable effectiveness in past

cases in electronics, the escape clause remains

a tempting vehicle for portions of the U.S. industry that find themselves harassed by shipments from overseas. First and foremost, it

does not require that imports be linked to unfair behavior—a condition that has often

proved difficult to satisfy in dumping or

countervailing duty actions. Furthermore, injury can be defined in terms of narrow product

categories. The law requires only that injury

be demonstrated in “that portion or subdivision of the producer which produces the like

or directly competitive article;” the market in

which such injury occurs can be limited to “a

major geographic area of the United States.”41

The implications can be appreciated by recalling the typical competitive strategies of Japanese exporters. In both consumer electronics

and semiconductors, exporters selected specialized market niches where American manufacturers seemed vulnerable, the intent being

to gain a substantial market share within this

niche and then diversify. Thus Japanese semiconductor manufacturers concentrated on 16K

RAM chips, taking advantage of a shortfall in

U.S. production capacity to quickly gain some

40 percent of the American market, Under the

provisions of the Trade Act of 1974, an export

strategy of this type could be subject to trade

restraints.

~Electronic Market Data Book 1980 (Washington, D. C.: Electronic Industries Association, 1980), p. 49.

4119 U.S, C. sec. 2251(b). Dumping and countervailing duty

statutes invite complaints on a narrow product line basis as well;

during 1982, more than 120 separate investigations in carbon

steel products alone were undertaken by ITC.

Prospective Effects of U.S. Trade Policy on the

Electronics Industry

To what extent, then, might the panopoly of the course of international competition, but

U.S. trade laws be exercised against imports also on the attitudes of Federal agencies

in the future? The answer depends not only on charged with enforcing these statutes. One
Ch. 11 —U.S. Trade Policies and Their Effects 451

.— .-

result of transferring responsibility for antidumping and countervailing duty provisions

from Treasury to the Department of Commerce

has been a more sympathetic hearing for American business—and as a consequence, the filing of more complaints. Much also depends on

the complexion of ITC, which shifts as Presidentially appointed commissioners come and

go. Changes in the definition of injury have

made protection at least in principle easier to

obtain; these too, in the ordinary course of

events, serve to encourage demands for trade

restrictions. Thus far in electronics, trade actions have centered on consumer products; as

Japanese manufacturers step up their price

competition in semiconductors and computer

equipment, there may be filings in these product categories. Furthermore, complaints by the

U.S. industry are increasingly centered on subsidies and other tools of national industrial

policy—e.g., Japan’s R&D programs. By and

large, trade negotiations and the GATT have

proved unable to deal with such issues.

Certainly protectionist sentiment has been

rising over the past half-dozen years. Is a turning point in the American attitude toward trade

a real possibility? For some 50 years, the United

States has taken the lead in international negotiations to lower barriers to trade. From the

first Reciprocal Trade Agreements Act in the

1930’s to the Tokyo Round MTN, U.S. policies

have supported liberalization as being in the

Nation’s long-term interests. Both major political parties have for the most part accepted the

underlying premise of these policies: open

trade leads to an efficient allocation of global

resources, as a result of which the American

people will, more often than not, find themselves better off. Other nations have benefited

as well. The export-based economic growth of

West Germany and Japan owes much to the

openness of the large and affluent U.S. market,

while American consumers have gained access

to a greater variety of products, as-well as lower

prices resulting from foreign competition, On

the other side of the ledger are the costs of dislocation and adjustment that follow upsurges

of imports. These costs tend to fall most heavily

on a few firms and their employees; they stand

out sharply, whereas the benefits are visible

mostly in the aggregate. Is it possible that the

U.S. economy is too open, given changes in the

international marketplace? Does the absence

of effective import controls in electronics make

the domestic industry overly vulnerable to inroads by foreign industries?

Consumer Electronics

International competition has generated continuing pressures for trade protection in consumer electronics, yet the current situation of

the U.S. industry is partly a consequence of

domestic competition. Today, two Americanowned firms, Zenith and RCA, account for

roughly 40 percent of U.S. color TV sales—as

they have, rather consistently, for many years.

Although import penetration increased dramatically during the 1970-77 period, the brunt

of the sales losses were borne by other manufacturers. In a single year, Magnavox and

Motorola each saw their domestic TV sales

drop by more than 15 percent. These market

declines led rather directly to the sale of their

TV operations—to North American Philips and

Matsushita, respectively. While only four domestically owned producers remained in 1983

(compared with 17 in 1970), they have been

joined by more than 10 foreign companies

manufacturing or assembling sets here. Concentration has not increased significantly and

no one firm-American or Japanese—has come

close to dominating the market. Policy decisions by the U.S. Government stimulated the

influx of foreign capital, although OMAs probably influenced timing more than decisions to

invest. Foreign-owned plants in the United

States—together with continuing imports from

Japan and other Far Eastern nations–created

relentless pressures on American TV manufacturers, even while quotas were in force. U.S.

firms shifted production abroad to reduce

costs, at the expense of jobs here—but consumers have benefited via low prices and highquality products. Still, only the largest and

strongest American manufacturers managed

to stay in business.
452 ● International Competitiveness in Electronics

For other consumer goods, Federal policies

have rarely come into play–and seem unlikely to, at least in a manner similar to events in

the TV industry. Far Eastern firms are today

the unchallenged leaders in most other consumer electronic products; there is virtually no

U.S. manufacturing left to protect when it

comes to portable radios, monochrome TVs,

stereo/high fidelity equipment, the simpler

pocket calculators, or electronic watches. More

important for the future, the United States has

lagged in the development of new products

such as video cassette recorders (VCRs). At

every step, Japanese manufacturers lead in

product development or are working in parallel

or in cooperation with American firms, the

primary exceptions being electronic toys and

games and home computers. If products like

video disk players achieve mass-market success, the Japanese will be early and formidable

competitors.

Under such circumstances, protection for

American manufacturers would have to come

through legal provisions that have not in the

past been exercised. When applying the injury

standard in antidumping proceedings, ITC examines whether imports are harming a domestic industry, are likely to damage it, or are

preventing such an industry from being established. The last of the three possibilities has

seldom been relevant because existing industries have normally sought dumping investigations. But in principle, the clause could be a

basis for relief–if imports were priced at less

than fair value—for products that are not even

being made in the United States, such as VCRs.

On the other hand, the escape clause injury

standard would have to be considerably

stretched. Here, there are only two possibilities:

an existing industry must be seriously injured

or threatened. Given product leadership overseas, with imports achieving a sizable market

share from the outset, serious injury to an existing industry probably could not be demonstrated (assuming new types of products) unless the standard was applied in a novel and

unintended way. Given the general ineffectiveness of antidumping and countervailing duty

remedies, it therefore appears unlikely that existing U.S. trade policies could shield domestic

firms producing the consumer electronic products of the foreseeable future. Indeed, cost

pressures will probably continue to drive a

good deal of production by American entrants

offshore.

Semiconductors

Unlike consumer electronics, where the efforts of U.S. manufacturers have been largely

confined to the domestic market, production

and sale of semiconductors is carried out on

a global basis by the major U.S. merchant

firms, as well as by Japanese and—to a far

lesser extent—European producers. U.S. leadership has meant that domestic manufacturers

have not, as yet, sought direct Government assistance in combating imports. For many years,

sales expanded rapidly; American suppliers

were often hard pressed just to keep pace. The

number of domestic companies serving the

market tripled during the 1960’s, while imports

were until recently almost entirely the interdivisional shipments of U.S. multinationals

(ch. 4).

The picture began to change at the end of the

1970’s. Aggressive competitive tactics and market successes by Japanese firms have had impacts in many parts of the world, but from the

perspective of U.S. policy makers the domestic

market has been the focus, Japanese companies

are providing the first real competition from

abroad in the experience of most of the American industry—competition that has driven

them to seek the attention of the Federal Government. The most publicized examples of Japanese inroads have been the 16K and 64K

RAMs sold in large numbers to manufacturers

of computers and microprocessor-based systems. In 1980, Japanese manufacturers captured about 40 percent of the U.S. and world

market for 16K chips, partly because of inadequate capacity in American plants, By 1982,

the Japanese share of next-generation 64K

RAM sales was running at about 70 percent.

More than any other event, the rapid inroads

of Japanese RAMs have led the American industry to seek counters.
The tempest over 64K RAMs in the spring

of 1982 may prefigure future trade disputes in

the high-technology products of this and other

industries. As publicity mounted over inroads

by Japanese imports, the Departments of Commerce and Defense began examining the implications for national security. At the time,

only Texas Instruments and Motorola among

U.S. merchant firms were producing 64K chips

in quantity. prices had been dropping rapidly, driven not only by declining manufacturing costs, but by recessionary pressures leading

to price cutting in the Japanese market as well

as here. Worldwide production capacity for

64K RAMs may have exceeded demand for a

time,

When the Semiconductor Industry Association—and Motorola specifically—accused the

Japanese of dumping, though without filing

complaints, the Japanese responded by announcing plans to move some production to

the United States. Meanwhile, the Commerce/

Defense study had begun, evidently at the instigation of the latter agency. Among the possible outcomes of the Commerce/Defense study,

three appeared at the time to be among the

most likely:

1.

2.

3.

A dumping complaint against the Japanese, self-initiated by Commerce.

A section 232 investigation, based on the

national security implications of U.S. dependence on Japanese ICs.

A complaint through GATT, probably concerning issues of reciprocal market access.

The section 232 alternative is noteworthy for

illustrating the variety of instruments that

governments can bring to bear in trade-related

matters. Part of the Trade Expansion Act of

1962, this rarely used statute permits the President to limit imports—e.g., by tariffs or quotas

—where such shipments “threaten to impair

the national security. ” No section 232 proceeding was started in this case, but a recent

investigation of ferroalloy imports by the Commerce Department, which recommended restrictions, may point to greater use of this proCh. 11—U.S. Trade Policies and Their Effects . 453

vision by industries suffering from foreign

competition. 42 Nor were antidumping proceedings initiated for 64K RAMs. Later in the year,

growing demand caused prices to firm, defusing allegations of dumping and redirecting lobbying by domestic semiconductor firms toward

reciprocity legislation. Nonetheless, following

this turn of events, Japan got another unpleasant surprise: the Justice Department began an

investigation of six Japanese semiconductor

manufacturers, premised not on price-cutting

but on restricting shipments to the United

States in order to raise prices .

43 To considerable extent, such episodes illustrate the inability of the traditional tools of trade policy

to deal with events in a fast-moving, technologically based industry like microelectronics;

they also illustrate the multiplicity of actors

populating U.S. trade policy and enforcement—a multiplicity that some would characterize as leading to confusion and disarray .44

In any case, the U.S. merchant semiconductor industry has not thus far sought direct protection. Rather, American firms and their trade

association(s) have continued pointing to features of Japanese industrial policies and business practices they feel are unfair, urging the

U.S. Government to exert pressures aimed at

ending them.45 In addition, industry executives

have sought Federal actions that would improve their own ability to compete—lobbying

in favor of R&D tax incentives and reductions

in capital gains taxes, as well as calling attention to engineering manpower shortages. Many

tzsee “Specia]ty StW] Industr~, Attac Ks Draft l{eport hj’ (~onlmerce on Fermalloy Study, ” U.S. ~rnport WeeAl~’, ]UIJ 21, 1982,

p. 478. Ferroalloys are used in making steels. The lnkestigation

was requested by a trade association of U.S. suppliers. Past applications of sec. 232 have been restricted to petroleum imports.

43A, po]]ack, “]nquir}, puzzles Chip Makers, ” New’ l’or~ Time.%

July 7, 1982, p. D9. “

44 Two dozen ormoreFederal agencies exerc i SP some degree

of responsibility over foreign trade and investment pol i c ies—

“Opening Statement of Senator Roth, ” Go~ernment Organization for Trade, hearing, Committee on Governmental Affairs,

[~.S, Senate, June 4, 1981, p 2.

tssee, for example, “The Effect of Government Targeting on

World Semiconductor Competition, ” Semiconductor Industry

Association, Cupertino, Calif., Januar\r 1983.
454 ● International Competitiveness in Electronics

of the tax changes advocated by semiconductor firms were in fact implemented by the Economic Recovery Tax Act of 1981 (ch. 7). Industry leaders have also asked the Federal Government to negotiate for easier access to the Japanese market, claiming that sales in Japan are

virtually impossible except for products that

local companies do not make. The U.S. industry’s position is that asymmetries vis a vis Japan

result in a competition in which the two sides

are playing by different rules, with the advantage to the Japanese.

As in earlier export thrusts, Japan’s semiconductor shipments have been concentrated in

a few product types. The choice has been memory circuits—particularly dynamic MOS RAMs

—in part because of the close coupling between

Japanese efforts in microelectronics and computers. Worldwide, Japan’s RAM sales have increased more rapidly than those of American

firms, with European manufacturers the big

losers. At the end of 1979, just four companies—two Japanese, two American—produced

nearly two-thirds of the total world merchant

output of 16K RAMs. Two years later, a pair

of U.S. firms confronted six Japan producers

in the battle for worldwide market share in 64K

RAMs; while other American manufacturers

were ramping up production or preparing to

enter with their own designs, Japanese companies were investing heavily in additional production capacity.

Still, except for Mostek–-which is rapidly

diversifying its product line–RAMs have not

dominated the sales mix of any American company. Thus, while Japanese incursions have

had drastic impacts on the RAM market-–affecting prices and profits, as well as market

shares—similar shocks have not yet been felt

in other products. A major concern of U.S. producers is that this experience will be repeated

elsewhere, denying them the learning and scale

economies so important for competitiveness,

and cutting into the profits they need to generate cash for expansion. Moreover, MITIsponsored R&D efforts like the VLSI project are

seen as, first, activities that would be illegal

here, and second, major subsidies. This program—and the difficulty American firms have

faced in gaining access to patents and other

technical results—is viewed as further evidence

of asymmetries favoring the Japanese. In sum,

U.S. semiconductor manufacturers believe that

a closed market shelters Japanese competitors,

leading to economies of large-scale production

that translate into low prices. Investments in

production facilities within Japan are one way

the U.S. industry sees to counter the threat.

As the discussion above implies, trade outcomes depend on complex sets of competitive

relationships. Consider, as an example, the

question of scale economies—a matter more

complicated than sometimes implied. A portion of the cost savings associated with production scale come via learning curve effects; he

who gains an early edge in market share enjoys lower costs—perhaps permanently. The

Japanese, in the simplest view, “learn” by producing for the domestic market, then penetrate

foreign markets based on low costs and low

prices. But learning economies are not quite

so straightforward. Some cost reductions are

functions of cumulative production volume;

others depend on time as well.46 In the latter

case, obtaining a large early market share

would not confer the same cost advantages.

The extent to which market penetration results

in lower costs, therefore, may be productspecific; for some types of ICs, cumulative

volume might matter much more than for

others. The limited evidence available suggests

that costs for logic circuits depend more heavily on time, memory costs more on scale. 47 A s

a consequence, the advantages of access to the

U.S. market could be considerably greater for

products such as RAMs than for at least some

other types of ICs—perhaps one reason Japan’s

exports have been so heavily weighted toward

memory devices (the comparatively straightfor-

~D. W. Webbink, The Semiconductor Industry: A Survey of

Structure, Conduct and Performance (Washington, D. C.: Federal

Trade Commission, Bureau of Economics, January 1977), pp.

49ff,

47’’ Management Committee Report to the Management Review

Committee-CD Assessment Report, IBM, October 25, 1971 (PX

391 AZ-142 ),” cited in G. Brock, The United States Computer

Industry A Study of M2rket Power (Cambridge, Mass,: Ballinger,

1975), p. 3.
Ch. 11—U.S. Trade Policies and Their Effects ● 455 —— .- ——

ward design of RAMs and other memory circuits is also a major factor).

Even so, patterns linking design and development, manufacturing, and marketing tend to

repeat fairly consistently from product to product (see app. C on the 4K RAM). Technology

dominates production and marketing strategies

in the early phases, because the first to offer

a new chip design may possess a near-monopoly—whether the chip is an innovative product

or simply an incremental advance. After introduction, prices decline slowly as firms recoup

R&D costs by selling to customers willing to

pay premium prices for leading edge devices.

Eventually, other manufacturers enter the market, forcing prices down—sometimes to a point

below production costs. The final phase in the

product cycle finds prices low, with many of

the earlier participants unable or unwilling to

compete; as a consequence, prices may even

begin to rise once more.

The competitive dynamics of the industry revolve around such factors, Some companies attempt to be leaders, bringing innovative products to market early and capitalizing on the

higher prices they command; in the United

States, Intel has become known for this strategy, which depends on heavy expenditures for

design and development—as well as abandoning products when they begin to mature and

margins fall. Other firms manufacture a diversified line of more mature devices, concentrating on process technologies as a route to

low costs. For such companies—National Semiconductor has been an example—market penetration is vital; as a result, they are particularly

vulnerable to import strategies that also emphasize market position, Still other entrants participate largely as a byproduct of internal operations. Semiconductors may account for only

a small fraction of their business, but if they

use substantial quantities in their other end

products—as do Japanese manufacturers such

as Fujitsu or Hitachi—they may be able to sell

outside at low prices. Net revenue gained by

putting otherwise idle capacity to work then

makes a contribution to profits.

The vulnerability of the U.S. semiconductor

industry to foreign competition is therefore a

function first and foremost of technology.

American firms with the ability to be consistently early to market with new products have

generally had less to worry about. Thus far,

most imports have been standard circuits—a

situation that could certainly change if semiconductor manufacturers in Japan or elsewhere begin to design more innovative devices.

At the same time, there are real limits to a technology-based strategy. Incremental payoffs

from R&D may diminish over time. Although

new types of microelectronics products could

still open new mass markets, signs of technological slowdown have begun to appear. Inevitably, the industry will mature, with greater

competition from imports a predictable consequence: slower rates of technological change

make it easier for foreign firms to catch up and

keep up.

Industry structure is also important, The

high-volume merchant manufacturers in the

United States have coexisted with a fairly large

number of small firms for many years, the latter typically specialists filling market niches of

less interest to bigger companies, Structural

changes are underway in the domestic industry, partly in consequence of heightened international competition, partly because the capital

requirements of advanced circuits make pursuit of VLSI difficult for small companies. The

changes are of two types, as discussed in previous chapters, First, diversified American corporations are purchasing or merging with

formerly independent semiconductor firms.

Second, foreign enterprises are continuing to

take ownership positions in U.S. manufacturers, Such marriages have occurred, on the one

hand, because foreign electronics manufacturers want quick access to evolving technologies, and on the other hand, because the

U.S. partners have needed infusions of capital,

How will these structural shifts affect competition? As American semiconductor manufacturers become larger and more diversified–

in the extreme, merely divisions of powerful

multinational corporations—they will be less

vulnerable to price competition in particular
456 ● International Competitiveness in Electronics

lines of business. Such companies have the

flexibility to shift resources internally, to meet

the competition on a price basis, to invest more

heavily in R&D and in production equipment.

To the extent that American semiconductor

firms have had difficulty in financing expansion, with possibly harmful effects for U.S.

competitiveness, consolidation should help,

Multinationals also tend to have “free trade”

perspectives because they depend on doing

business overseas, and are less likely to press

trade complaints. On the other hand, some

observers believe large firms to be less entrepreneurial and more cautious, and that consolidation will reduce the probability of innovation, making technical leadership more difficult to maintain. While small firms will continue to exist—many new ones have been

started recently—structural shifts of the type

visible in semiconductors have characterized

the maturation of many industries; rather than

focusing on the supposed virtues and liabilities

of small and large firms, it is perhaps more pertinent simply to observe that they have different strengths and weaknesses in a given

competitive context.

More to the point in terms of trade policy,

what are the implications of greater numbers

of foreign manufacturers with active semiconductor design and production facilities in the

United States? This tendency—particularly evident in recent investments by Japanese firms

to mitigate trade frictions-combined with universal foreign involvement by the larger American producers, has made semiconductor manufacture one of the more international of the

world’s industries. Attitudes toward trade and

investment shaped by the traditional concerns

of domestic firms and their workers may not

fit the realities of such an industry. In microelectronics and computers, the notion of “our”

firms versus “theirs” is an oversimplification

when so many companies operate on a global

scale. Corporations engaged in bitter trade disputes in one part of the world may establish

joint ventures elsewhere; cross-licensing is the

rule; firms cooperate with one another where

they see advantages to be gained, compete

fiercely under other circumstances. Such factors have no doubt contributed to the reluctance of American semiconductor manufacturers to press formal trade complaints against

Japanese exporters.

The old ways—erecting trade barriers to

shield domestic industries—can damage U, S,-

based companies quite aside from any possibility of retaliation by foreign governments.

Texas Instruments produces 64K RAMs in Japan for export to the United States. In consumer electronics, the OMA on color TVs from

Taiwan restricted shipments by RCA and Zenith, both of which had substantial investments

there. Japanese semiconductor manufacturers

would quickly shift production to export platforms—in many cases, the same offshore sites

favored by American firms—in the event of restrictions on shipments of ICs from Japan.

They would also move more production here.

When those affected include U.S.-based multinationals along with foreign firms having

significant interests in the United States, traditional protective measures become less practical, Such dilemmas have arisen, or are likely

to, in other industries as well—automobiles,

computers, possibly aircraft, chemicals,

energy, pharmaceuticals. Increasingly, firms

in such industries are tied by a multitude of

co-production and joint venture agreements,

irrespective of the locations of their headquarters, As a consequence, the “inside-outside” or “good guy-bad guy” distinction becomes a difficult one for policy makers to draw;

in such a world, trade policies directed to an

older order may simply be overrun by events.

In any event, the American semiconductor

industry has not attempted direct action to

staunch the flow of imports, much less withdrawn to a protected position in the United

States. Instead, while continuing to lobby the

Federal Government, U.S. merchant firms have

moved boldly to maintain their competitiveness worldwide. This is one reason the industry’s leaders have been more vociferous

over what they view as unfair domestic subsidies by the Japanese Government—and over

impediments to their own attempts to sell or

to manufacture in Japan—than over purely

trade matters, such as dumping.
From the viewpoint of American companies

that purchase semiconductors, the outcomes

of intensified competition have been beneficial:

a wide range of product offerings, low prices,

high quality. Would these benefits have followed even if U.S. producers had chosen strategies of trade protection? This must remain an

open question—but to the extent that other industries offer parallels, the benefits would have

been smaller and slower to arrive.

As the technological leads of U.S. microelectronics firms narrow, and competition continues to mount, the industry’s support for

open trading relationships may diminish. Yet

American semiconductor producers cannot

back too far away from a free trade stance

without jeopardizing their own overseas interests. Formulating equitable trade policies

will continue to be difficult, with a wide range

of interests to be balanced. A large fraction of

Ch. 11 —U.S. Trade Policies and Their Effects ● 457

U.S. exports and imports of semiconductor

products will continue to be transfers between

divisions of multinational corporations. Links

among U.S. and foreign firms will certainly

persist and may well strengthen. Trade policies

dealing with dumping or countervailing duties

are unlikely to be very relevant, if only because

of the pace of technological change—which

can render the products in question obsolete

before the proceedings have run their course.

Computers

The picture is similar in the computer industry. U.S. firms have been undisputed leaders, with subsidiaries engaged in manufacturing and marketing around the world. Imports

have been at low levels, even for personal computers and peripherals-although this could

i

.

, :-

. .

\

Photo credit N(ppon E/ecfrlc Co

Desktop computer made in Japan

, ,.
458 ● International Competitiveness in Electronics —————— —.- ——.—— — ——.

certainly change. The consequence has been,

until quite recently, a virtual absence of concern by executives of American computer

firms with U.S. trade policy except as it supports an open international trading environment or affects transfers of components and

subassemblies among subsidiaries. American

manufacturers wish to see items 806.30 and

807,00 of the Tariff Schedules preserved, but

dumping or escape clause provisions have seldom attracted their attention.

Yet here too the competitive picture is changing. Foreign governments, viewing information

processing as vital to national interests, have

found a variety of methods for subsidizing local

firms, as well as an array of carrots and sticks

for encouraging American corporations to

transfer technology to local computer manufacturers. 48 And again as in semiconductors,

foreign manufacturers have taken equity positions in American computer companies, in part

to acquire technical knowledge, The technology gap between U.S. and foreign firms has

diminished in both hardware and software,

with several Japanese manufacturers beginning

to ship mainframe machines to the United

States either directly or in partnership with

American firms.

What impact will such developments have

on trade flows and on U.S. trade policy? Given

that competition depends on much more than

fast, reliable hardware, it is too early to make

predictions. Manufacturers must be closely attuned to user needs; foreign computer firms

lag well behind American companies in their

ability to seek out and satisfy customer applications (ch. 5). This deficiency has not gone unrecognized; other nations are devoting substantial efforts to software, often aided by government subsidies. Furthermore, countries like

Britain have always been good at software and

may provide a resource that firms elsewhere

can tap. The U.S. lead in software seems bound

—————

qeoverseas governments have used investment incentives to

attract American firms more actively in electronics and electrical machinery than in any other industry. See The Use oflnvestment incentives and Performance Requirements b~r Foreign

Governments (Washington, D. C.: Department of Commerce, Office of International Investment, October 1981), p. 6.

to narrow, following that in hardware. The fluidity of market structures emphasized in chapter 5 will leave room for aggressive foreign

competitors.

As a result of the subsidies for computer technology that virtually all industrialized countries

have employed, it is not hard to envision a scenario in which these subsidies—as well as the

preferential treatment many governments have

extended to local producers—become the targets of countervailing duty complaints. If a

foreign firm benefiting from government largess were to establish a significant market position in the United States, can there be much

doubt that American manufacturers would

seek remedies under U.S. law? After all, the

subsidies extended to foreign computer industries—albeit often rationalized on national

security grounds—have been even more visible than in microelectronics. What, then, might

be an appropriate response on the part of the

U.S. Government?

The issue raised—and repeated in semiconductors, communications equipment, and

other high-technology products—is that the existing structure of national and international

trade laws and agreements evolved in another

era; it was not designed with current varieties

of national industrial policies and subsidies in

mind. Countervailing duties were intended to

offset export subsidies such as rebates or other

payments contingent on sales to overseas customers, Subsidized financing via export-import

banks has strained the system, Domestic subsidies with indirect effects on exports scarcely fit it. Indeed, U.S.-based companies maybe

among those benefiting from industrial policies in other nations. Antidumping laws were

drafted to counter explicit price discrimination

by foreign monopolists, often involving governments and/or cartels that encouraged exports

by charging higher prices to domestic than to

foreign customers. Until recently, antidumping legislation was seldom called on where

price-cutting was extended to all customers,

domestic as well as foreign. Today, when

France subsidizes the development of commercial aircraft, is it “unfair” if an American carrier selects such planes over those made by
Boeing? Or, more subtly, is U.S. support of research into solid-state electronics as part of

military and space programs unfair—research

that, after privately funded follow-ens, eventually results in commercial applications?

Many other examples, in any number of countries, could be cited.

For computers or communications, governments have seldom proffered financial assistance simply to foster exports, although this has

been one motive–a strong one in Japan. Rather, governments have targeted the information

industry as vital to a multiplicity of national

interests. Subsidies have been generalized,

directed at industrial development over the

Ch. 11—U.S. Trade Policies and Their Effects ● 459

longer term. The question for trade policy

becomes: As governments increase their involvement in economic affairs—and indeed in

the actual operation of business enterprises—

what types of trade policies and agreements

will be needed so that participants can agree

that the terms of competition are reasonably

fair? This will remain a central matter for international trade negotiations over the current

decade and beyond, While the Tokyo Round

trade negotiations addressed such questions,

the substantive changes in procedures embodied in the new subsidies code are small, and

unlikely to have much effect.

Summary and Conclusions

U.S. trade policy has been rather consistently

oriented toward open international trade and

investment over the last half-century, In the

postwar period especially, the United States

took the lead in eliminating both tariff and nontariff barriers—by reducing its own restrictive

measures and pressing its trading partners to

do the same. Some parts of the electronics industry, notably manufacturers of consumer

goods like TVs and CB radios, have suffered

as a result. But if import competition has hurt

the manufacturers of such products, other sectors of the U.S. economy benefited from freedom to export and invest overseas. U.S. trade

policy has helped American semiconductor

and computer firms become leaders in markets

all over the world. The exception has been

Japan; barriers imposed by European nations

have proved far less substantial, On the whole,

the open trading environment resulting from

successive rounds of multilateral negotiations

has helped the competitiveness of the U.S. electronics industry.

More narrowly, trade policy impacts in consumer electronics have centered on longstanding complaints over unfair practices brought

by American firms against competitors in the

Far East, primarily Japan. The response of the

Federal Government has been marked by delays and interagency conflicts. Fifteen years

after the initial antidumping actions, the situation remains unresolved, duties uncollected.

The uncertainty created by this long and convoluted history has made life difficult for both

domestic firms and importers. To considerable

extent, as the shape of the industry has altered,

complaints over trading practices have become

moot. Orderly Marketing Agreements—negotiated as an upshot of escape clause proceedings

unrelated to unfair trade practices-accelerated what would probably have been widespread eventual movement by foreign firms toward assembly here. Plants owned by foreign

interests have replaced failing domestic TV

manufacturers. Meanwhile, the remaining U.S.

producers have moved some of their assembly

operations to low-wage offshore locations,

helped by provisions of items 806.30 and 807,00

of the U.S. Tariff Schedules. These provisions

—which allow tariffs on re-imports to be computed only on foreign value added—have been

a target of labor interests. But if in some cases

offshore assembly can be considered equiva-
460 . International Competitiveness in Electronics — . — .—

lent to the export of jobs, in others transfers

offshore have been necessary to retain any

domestic jobs,

As tariff walls in many parts of the world

have slowly come down, the attention of both

private firms and governments has turned to

indirect and nontariff barriers. Ranging from

implicit subsidies for domestic firms to uncooperative customs inspectors, such barriers

pose much more complex subjects for international negotiations—as the Tokyo Round demonstrated. Some progress has been made, but

it is too early to tell how trade in electronics

may be affected over the longer term.

Among nontariff and indirect measures, subsidies for economic and industrial development ostensibly aimed at domestic objectives

are perhaps the most difficult case, along with

government procurement. As discussed in the

previous chapter, many nations have used both

types of measures consistently and aggressively

as elements of industrial policy—especially in

electronics. While progress has begun in opening up government procurements, subsidies

will remain thorny issues for years. More and

more governments, for example, are resorting

to R&D incentives to support local electronics

manufacturers; inevitably, these function t o

some extent as export subsidies, even if this is

not the primary or avowed intent. While direct

impacts on international trade tend to be small,

the visibility of programs such as Japan’s joint

R&D efforts, or West Germany’s spending on

computer technology, draws frequent attacks

by businessmen and political leaders in other

parts of the world. The nations mounting these

programs consider them vital for economic development; they will not disappear. As has

been the case with complaints over unfair trade

practices in consumer electronics, negotiations

concerning indirect supports and subsidies are

being overtaken by events; subsidies may in

some respects function like other nontariff and

indirect barriers to trade, but governments

seldom institute them for such purposes. Nor

do they view them as elements of trade policy.

They are seen as vital tools of industrial policy—policies developed in response to an economic environment in which domestic and international dimensions can seldom be isolated,

Negotiations aimed at reducing such subsidies will make slow progress at best—indeed,

although necessary, they may finally be rather

beside the point. So long as governments regard high-technology industries like electronics

as essential to industrial development and economic growth, supports and subsidies seem

more likely to increase than decrease.
CHAPTER 12

Federal Policies Affecting

Electronics: Options for

the United States
Contents

Page

Overview o.o. ... .*. .*. ,o**, *.o. .,o*. **. .*. *,** **.   ** ** .*o, .*. ,oa o*. 463

The Current Policy Environment ● **** .*** **** *.** 0*** *. *..0..******** 464

Alternative Perspectives on Industrial Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467

Ensure the Domestic Market Base for U.S. Industries . . . . . . . . . . . . . . . . . . . . . . . . . 468

Support for Critical Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475

Infrastructural and Adjustment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485

Promoting the Global Competitiveness of American Industries . . . . . . . . . . . . . . . . . 491

An Industrial Policy Centered in the Private Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . 496

Summary and Conclusions ● , *..**.*****..,******.**.*..****.**,***.*,*** 500

List of Tables

Table No. Page

82. Measures Likely to be Emphasized Under Alternative Approaches

to Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468
CHAPTER 12

Federal Policies Affecting Electronics:

Options for the United States

Overview

In 1982 electronics accounted for 10 percent

of U.S. merchandise exports; manufacturers of

electronic products contributed 4 percent of

U.S. gross domestic product and 9 percent of

total goods output; the industry employed more

than a million and a half Americans. Beyond

this, the electronics industry produces goods

and knowledge that are vital for much of the

rest of the economy and for society as a whole.

Banks, insurance companies, and many other

service sector enterprises could hardly conduct

their businesses without electronic data processing. Entertainment industries like television

broadcasting developed in conjunction with

the manufacture of consumer electronic products. Before too long, prosthetic devices for the

handicapped will routinely be built around

“smart” microelectronic devices. Modern commercial aircraft depend as heavily on radar,

computerized flight control systems, and electronic navigation aids as do military planes.

Over the rest of the century, computer-aided

manufacturing—shop floor management systems, automatic warehouses, smart robots—

will help increase productivity and reduce

costs throughout the Nation’s manufacturing

sector. If there is any single industry whose

technological progress and competitiveness are

critical to the economic growth and national

security of the United States, it is electronics.

Yet even the most dynamic portions of the

U.S. electronics industry—semiconductor production, where innovation is a way of life, computers, where markets seem to expand nearly

as rapidly in bad times as good—find themselves increasingly challenged by foreign

manufacturers, both here and overseas.

Although few European firms have managed

to capitalize fully on their technology—because

of fragmented markets and less than inspired

translations into commercial products—determined efforts, strongly supported by national

governments, continue in countries like France

and West Germany. Japan has moved swiftly

from a position as technological laggard to being one of the leaders—not only in product development, but in the fundamentals of electronics technology. The strengths of the

Japanese industry have been described in

previous chapters: an ample supply of skilled

and motivated employees; managements that

approach markets on a global scale and have

learned to do business effectively in countries

ranging from Saudi Arabia to the United States;

an economic system in which the tradeoffs between competitive rivalry and cooperation aimed at advancing common goals are well-managed; a government whose industrial policies

consistently support and encourage the private

sector. In the language of sports, the Japanese

electronics industry has momentum. Elsewhere in Asia, developing countries can already make many consumer electronic products and components at less cost than Japan

or the United States; these countries will continue to move into more sophisticated goods—

though at first continuing to focus on consumer

markets—supported by export-oriented industrial policies. Hong Kong, for one, has already

made the transition from discrete transistors

to integrated circuits (ICs)—computer chips as

well as those for consumer products. This is

not to say the American electronics industry

risks overnight decline, It does mean that competition will be difficult in the years ahead, and

neither the technological leads that the United

States still maintains nor the size and affluence

of our domestic market will suffice to guarantee American primacy.

Intensifying competition worldwide—in electronics, as in industries ranging from steel to

biotechnology—is one reason the United States

463
464 ● International Competitiveness in Electronics

—

might choose to move toward a more explicit

industrial policy of its own. If other countries

are adopting policies in support of industries

like electronics—and having some success, or,

more tellingly, moving down learning curves

leading to more consistently productive efforts–then it makes sense to ask whether such

an approach could also work here. Such questions need to be addressed in terms of concrete

policy objectives and prospective mechanisms

for achieving them—matters to which this

chapter is devoted.

The United States could afford to live without a consciously formulated industrial policy

in years past, but the realities of international

economic competition changed dramatically

during the 1970’s. The “information society”

is here; industries are no longer defined by national boundaries; new jobs are opening for

Americans who are computer-literate at a time

when employment of other types is in decline.

If new approaches to industrial policy are to

be considered, what is the range of possibilities?

After a brief review of the ad hoc nature of

past U.S. industrial policies, the chapter outlines five options for a more focused approach:

protection of, domestic markets;

a “critical industries” policy;

an orientation toward infrastructural support—primarily for technological development—and adjustment;

promotion of competitive U.S. firms on a

worldwide basis; and

Federal withdrawal, where possible, in favor of the private sector.

The five are intended to span the realistic alternatives; they overlap somewhat—in several

cases specific policy measures would be similar if not identical. Still, if the five options

themselves are not exclusive, they are distinct.

Each is discussed in terms of prospective effects on electronics—and, by extension, other

high-technology sectors.

The options are discussed in terms of directions and objectives; they are intended to offer a set of alternative signposts. All start from

the same point: the patterns of worldwide competition outlined in the preceding chapters; the

increasing capital-intensity of critical sectors

of the electronics industry; its continued dependence on research and development (R&D);

needs for skilled labor and imaginative management. But each alternative implies a different route to a different destination.

The Current Policy Environment

Chapters 10 and 11 summarized U.S. industrial and trade policies as they affect competitiveness in electronics, contrasting them with

policy approaches abroad. Federal policies

have been notably ad hoc, formulated and implemented by many different agencies, no one

of which has overriding authority. Trade policies are neither very predictable nor closely

linked with domestic industrial and economic

policies.

Outside the trade arena, regulation of broadcasting and telecommunications has been a

continuing influence on consumer electronics.

Among the recent issues with potential impacts

on U.S. manufacturers, either direct or indirect, are: the rights of owners of video taping equipment to copy off the air; the fate of

AM stereo broadcasting (where the Federal

Communications Commission has avoided decisions on a standard system); regulation of

home information services and data communications (videotext and teletext may be slow

in coming, but will eventually be integrated

into home entertainment and information systems). As with regulation of cable TV and

rights to satellite transmissions, such matters

may have only indirect consequences for manufacturers of consumer electronics products,

but impacts that are no less real for this,

The U.S. semiconductor and computer industries benefited in their early years from

Government-funded R&D and procurements;
Ch. 12—Federal Policies

military and space programs drove developments in microelectronics until the 1960’s,

while both civilian and military sides of the

Government have been heavy purchasers of

computers and related equipment. Although

Federal R&D is still significant for both microelectronics and computers, particularly in

terms of more basic research—and in the case

of the Defense Department’s Very High-Speed

Integrated Circuit (VHSIC) program, process

technology and applied research as well—it is

now decidedly secondary to the industries’

own spending. Furthermore, the declining

fraction of total markets for both semiconductors and computers accounted for by Government has made Federal procurement a much

weaker force than 10 or 15 years ago.

Indirectly, a wide variety of public policies

affect U.S. semiconductor and computer firms:

support for education and training, particularly

of technical professionals; regulation of data

communications; the 1982 antitrust settlements

with IBM and AT&T; copyright and/or patent

protection for chip designs and software; tax

policies as they influence competition for funds

within U.S. capital markets. On the other hand,

Government policies directed specifically at

the semiconductor or computer industries—

either in the domestic context or in terms of

their international competitive positions—are

remarkable by their absence, the vacuum a

striking contrast with ambitious, comprehensive, and supportive (if not necessarily very

cost-effective) public policies in other countries. A major exception to the absence of policy is antitrust.

American electronics firms have often complained that antitrust enforcement hinders

cooperative R&D and joint ventures in international trade—which, if allowed, would

strengthen this country’s competitive position.

The Department of Justice—and, to the extent

that it is involved in antitrust enforcement, the

Federal Trade Commission (FTC)—reply that

such cooperative activities are, in fact, generally permitted. The dialog, which has been going on for years, is part of the problem: Justice

and the FTC have helped create a psychologiAffecting Electronics: Options for the United States 465

—

cal climate in which industry is reluctant to test

the bounds of the permissible, The two agencies generally act as if this status quo is desirable, with their public pronouncements nicely straddling the relevant issues.1 While the enforcement attitudes of the Reagan administration differ somewhat from those of its immediate predecessors, the more relevant concern—at least from the viewpoint of Congress—

might be: Do the antitrust statutes need reconsideration in light of changes in the character

of international trade and competition since

the Clayton and Sherman acts were passed in

the early decades of the century? Where would

antitrust fit within a more coherent U.S. industrial policy?

Beyond the intangible effects of Federal antitrust enforcement—beginning with their force

in restraining clearly undesirable forms of anticompetitive behavior—chapter 10 mentioned

the two recent and major antitrust actions directly involving the electronics industry—suits

against IBM and AT&T, both recently settled,

In both cases, critics of U.S. antitrust enforcement had claimed, with some validity, that the

Government was trying in the name of competition to break up enterprises that were mainstays of U.S. competitiveness.

Regardless of possible rewrites of communications legislation by Congress, the AT&T settlement will change the form and function of

Bell Laboratories. A weakening of the basic research foundation that Bell Laboratories helped

Y Consider this quotation from the “Statement of tl’illiam F.

Baxter, Assistant Attorney General, Antitrust Ili\ision, Before

The Subcommittee on Employment and Product i\itj, Committee on Labor and Human Resources, [Jnited States Senate, Concerning Antitrust Policy and Producti\’it}, Apr. 16, 1982, ” pp.

12-13, “Joint ventures may foster efficien(:ies not a~’ailable to

individual firms, and may promote tcchnf)loxi[al progress and

enhance producti~’ity. Such joint ~wntures should not be deterred

by rigid or overly-broad applications of the antitrust laws, The

Department’s recently published Guide Concerning Research

]oint Ventures is intended to assist businesses considering joint

ventures by clarifying our enforcement policies in this regard,

For example, as the Guide indicates, an important factor is

whether a joint venture leaves a significant number of nonparticipating firms free to engage independently in research. [f

there are not a significant number of such non-participating

firms, and the joint venture’s research could be done indi~idually

by the participating firms, antitrust problems could arise. ” Much

of the lore of antitrust resides in such pronouncements.
466 . International Competitiveness in Electronics

lay for so much of the U.S.–and world–electronics industry seems inevitable. The reason

is straightforward: Western Electric—the parent and main customer of Bell Labs—will be

operating in a more competitive environment,

It will lose some of its “guaranteed” markets,

as well as implicit subsidies paid for in the past

by all telephone subscribers. Western Electric

and Bell Laboratories will have to learn to deal

with a less predictable set of market conditions;

basic research is likely to appear more in the

nature of a luxury—and hence be deemphasized. Unless alternative mechanisms for performing basic research and diffusing the results evolve and thrive, one of the great sources

of strength for the entire U.S. electronics industry will atrophy. The potential void is not

restricted to microelectronics, but extends to

communications and computer technologies as

well; Bell Labs spawned the Unix operating

system now so popular in small computers, as

well as the transistor,

Leaving aside the special case of antitrust—

and perhaps trade policies also, where activity has remained at high levels if without much

sense of direction—Federal policies affecting

electronics have been marginal, indirect, often

simply absent. To those who regard Government involvement in the affairs of industry as

a usually unnecessary evil, this may seem a

blessing. But the reasons for the absence of

policy are not so much conscious decisions that

Federal initiatives would be counterproductive

as a lack of agreement about what Government

can and should do. The subject has been discussed—at considerable length, and in contexts

ranging from trade reorganization to the Federal role in productivity improvement and the

quality of working life. But the various parties

disagree—beginning with the question of

whether the U.S. Government should develop

policies aimed at affecting the competitive position of American industries, and extending to

questions of how the electronics industry, in

particular, might fit into a more general framework for industrial policy.

On the one hand, some argue that the United

States needs to search for new engines of

growth to drive the economy into the 21st century. Others focus on organization, some advocating that the Department of Commerce be

transformed into a more powerful agency—

even a “Department of International Trade and

Industry” modeled after Japan’s MITI and responsible for coordinating and implementing

policies on a sectoral basis. Another view,

while agreeing that new mechanisms are

needed if the Nation’s de facto industrial policy

is to be replaced by a more systematic approach, takes dispersal of responsibility for

making and implementing policies to be a hallmark of the U.S. system, and sees a single centralized agency as impractical, if not dangerous. Still others, focusing on financial issues,

argue that the first priority of the Federal Government should be to channel investment capital to speed “reindustrialization’’--for example, through a publicly operated investment or

development bank, In any of these views, electronics would plainly be an early subject of

attention,

The dominant attitude within the executive

branch since the election of President Reagan

has run counter to the more activist positions.

The Reagan administration has held that the

proper role of Government is to stay far removed from the affairs of industry. Those of

such persuasion believe that businessmen,

rather than Government officials, have both the

right and the ability to make decisions affecting the futures of their firms—and thus the futures of the industries of which they are members, and the competitiveness of the U.S. economy—that Government is largely incompetent

in these areas. The corollary is that decisions

made by private interests will affect local and

regional economies, as well as the interests and

livelihoods of the people who work for or otherwise depend on private industry.

Those at the extreme end of the spectrum

hold that Government should minimize its efforts at macroeconomic policymaking, claiming that the Keynesian economists—who, many

years ago, defined a government role in managing the aggregate economy through fiscal

and monetary policies—represent a bankrupt

tradition, Tax reductions and other measures

aimed at capital formation, rather than de-
Ch. 12—Federal Policies Affecting Electronics.’ Options for the United States 467

mand management, have been in vogue among

the proponents of this view. Still, even advocates of supply-side economics or monetarism commonly maintain that—while Government should stay out of the affairs of business—it can and should ensure a climate conducive to economic growth.

There is a core of truth to the claims of those

who advocate a Government pullback from micro-level involvement in economic affairs—this

truth found in the past history of public policies

that have affected U.S. industries with sometimes adverse consequences, to say nothing of

the lack of relevant expertise and analytical

capability in the executive branch. On the other

hand, it is clearly possible to devise a selfconscious industrial policy that does not depend on direct or extensive Federal intervention. Thus, even if one feels that the political

system in the United States works in such ways

—

that Government involvements will always be

riddled with mistakes and policy failures, this

is more a counterargument to proposals for a

strong, centralized industrial policy apparatus

than to the general notion of a more explicit

and coherent industrial policy,

In essence, two of the attitudes sketched

above—centralized industrial policy versus

Government pullback—represent extremes in

opinion concerning the form and character of

future industrial policies for the United States,

Industrial policies have existed for several hundred years in this country; Federal Government

actions will continue to exert influence over

private sector decisions, On questions of how

the process might be changed, as on specific

policy issues, there are many shades of opinion, a variety of perspectives that fall between

the extremes. These are illustrated in the remainder of the chapter.

Alternative Perspectives on Industrial Policies

Regardless of one’s attitude toward Government involvement in economic affairs—when

and where appropriate, for what reasons—policy choices will flow in part from analyses of

the position of American industry, and the interpretations placed on these analyses, Each

of OTA’s five alternatives has as its foundation a somewhat different interpretation of the

competitive situation of American electronics

firms; while the discussion that follows takes

its context from this industry, the policy options are not specific to electronics, or even to

high-technology industries as a class. The five

alternatives—which overlap to some extent

while representing fundamentally different

viewpoints—are:

1.

2.

policies intended to ensure a strong domestic market base for U.S. industries—

without particular reference to the nature

of the industries—along with preservation

of existing jobs and job opportunities.

Policy measures designed to protect and/or

support a limited number of industries

3.

4.

5.

judged critical on national security or

other grounds.

Policies that will support the technological

base and institutional infrastructure for

American industries, particularly those

undergoing structural change.

Policies designed to promote the global

competitiveness of U.S. firms and industries.

A policy that defers if possible to the private sector when choices concerning industrial development are to be made.

All of these, even the last, accept at least implicitly that Government involvement in industry and the economy is inevitable—the questions being when, where, how, for what purpose. In each case, different sets of assumptions and goals underlie the policy orientation.

From the repertory of policy tools available—

outlined in chapter 10 and summarized in table

82—each of the five would call for a different

mix and emphasis, The table is schematic, but

gives an idea of the types of measures that
468 ● International Competitiveness in Electronics

——

Table 82.—Measures Likely To Be Emphasized Under Alternative Approaches to Industrial Policya

Alternative

Critical Infrastructure Global Minimum

Protection industries & adjustment promotion Government

Trade, foreign investment . . . . . . . . . . . . . # / #

Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Y / @

Competition (antitrust, merger) . . . . . . . . / @

Human resources (education, retraining) @ /

Technology (R&D, innovation,

diffusion) . . . . . . . . . . . . . . . . . . . . . . . . . / /

Investment (capital) . . . . . . . . . . . . . . . . . . /

Government procurement . . . . . . . . . . . . . /

?iThl~ table i ~ f“tended Only to be suggestive, many possibilities exist under each alternative.

SOURCE Off Ice of Technology Assessment

would be emphasized under each of the alternatives; a “critical industries” orientation, for

instance, would entail a strong presence by

Government compared to the other four.

Regardless of which of the five alternatives

were chosen, a new approach to industrial policy for the United States would bring pitfalls

as well as opportunities; experience in other

countries shows that there is no substitute for

good judgment in selecting and implementing

individual policy measures. Table 82 stresses

that it is not so much the individual policy tools

but the way they are put together—the objectives pursued—that matters most, The remainder of the chapter treats the five alternatives

in detail.

Ensure the Domestic Market Base

for U.S. Industries

Protectionism is a loaded word. Not only

does it imply reversal of the primary thrust of

postwar U.S. foreign economic policy, but the

arguments in support of open international

trade are strong and widely accepted. Protecting domestic industries from import competition via tariffs, quotas, or other barriers distorts

market mechanisms, decreases economic efficiency, and—by raising prices—results in a net

loss in standard of living.’ Hardly anyone disputes these general tenets; the issues more

commonly raised concern the specific cir-

———

‘For a brief review, see US. industrial Competitiveness: A

Comparison of Steel, Electronics, and Automobiles (Washington,

D. C.: Office of Technology Assessment, OTA-ISC-135, July 1981),

pp. 181-182.

cumstances under which trade restraints might

be justified to prevent or ameliorate greater

harm to a few—vulnerable firms and their employees, communities and regions—at the expense of net benefits that, when spread over

the Nation as a whole, are small.

Leave aside for a moment the political questions, as well as the use of protection to

countervails the industrial policies of other nations, or unfair trade practices by foreign enterprises. The question is then an internal one:

What are the impacts within the larger domestic economy of protection granted a particular

industry? This is not only a matter of presentday costs and benefits—e.g., to consumers, to

owners, managers, and other employees—but

of the future prospects of industries granted

protection. Some such industries may be in

temporary decline, with reversal possible—

others unequivocal victims of shifting comparative advantage. For example, long-term

prospects for specialty steel manufacturers in

the United States appear brighter than for

makers of carbon steel. Not only do the technical demands of specialty alloys favor American firms, but the diversified, high-technology

industries of the United States provide large

and varied markets for alloy steels. Nonetheless, both specialty and carbon steel producers face short- as well as long-term problems. It is possible to argue on the one hand

that trade protection will benefit specialty

steelmaker by permitting them to rebuild their

competitiveness so as to take advantage of

longer term opportunities, while on the other

that protection for carbon steel producers will
Ch. 12—Federal Policies Affecting Electronics: Options for the United States . 469

———— ———

Photo credit RCA

American consumer electronic plant complex

only retard the inevitable contractions. At the

same time, for domestic industries as large as

steel or automobiles, the adjustment problems

stemming from long-term shifts in competitiveness can be so severe that strong arguments

for temporary trade protection can be constructed on this basis alone, This is one of the

reasons escape clause actions are sanctioned

under GATT (the General Agreement on Tariffs and Trade),

Bilateralism in Trade

Protective actions other than tariffs, involving—as they generally do-bilateral discussions

with exporting nations, represent something

of a turn away from the postwar U.S. emphasis

on multilateral trade negotiations. Persistent

trade friction between the United States and

Japan has led to bilateral negotiations covering goods ranging from cigarettes to telecommunications equipment. Similar bargaining

has taken place with European nations exporting steel, among other products, to the United

States, as well as between Japan and the European Community—e.g., in the case of video cassette recorders (VCRS). S To some, this revival

of a bilateral rather than multilateral approach

to trade is a sign of possible return to the

prewar era of widespread protectionism.

Bilateral negotiations between the United

States and Japan first found a prominent place

in U.S. trade policy during the early 1970’s,

when market penetration by Japanese textile

imports became severe; in one of the more re-

?}ra(;f!~] ~~,it]l [~llrnpi n~ ~Om IJla ints and informal Import restff[-

tion~ iIl Fran( (, ].i}]iit)hai ~ofuntari]}’ agreed to ]im]t \’(JR

shl preen t \ t I) t hc fiu roppa n ( :{)rn m ~1 n it \, ‘1’he ceiling will he LI,ss

million annual]}, E, J, I)l{)n rl(~. Jr,, “]aI~an L’ideo Accord [.caies

Eur[)peaIls 1l’(iry’ tmt }Iop[’[ul, ’” NfJ\* } f)r~ ‘i’imes, F’(3I). 22, 1983,

[). 1)5
470 International Competitiveness in Electronics

cent cases, after a push from the U.S. side, the

Japanese agreed in 1981 to accelerate tariff

reductions on semiconductors (ch. 11). Further

negotiations led to similar concessions on data

processing equipment. Japan’s continued reliance on tariff walls to protect domestic industries—whether or not they remain infants—and

on an array of slowly crumbling and largely

informal nontariff barriers, contrasts sharply

with duties on imports into the United States

that for many years have been low; as pointed

out in the previous chapter, this country has

only rarely imposed tariffs to protect domestic

industries, preferring to negotiate quotas. 4

Recently, those concerned with Japanese

penetration into U.S. markets for products

ranging from semiconductors to machine tools

have been urging a variety of essentially protectionist responses. The mirror image of concern with imports lies in the persisting difficulties many American firms have faced in

exporting to Japan, or investing there—even

when the exports are goods in which the Japanese economy is uncompetitive. The paramount

example has been agricultural products.5 The

perceived asymmetry has been a major force

behind calls for reciprocity in trade.

While to some, trade reciprocity need not

carry the implication of sector-specific bilateral

concerns, to others it means just that: if nations

such as Japan discriminate against U.S. exports

or investment, we should retaliate swiftly and

directly, During 1982, 20 or more bills related

to trade reciprocity—and covering many

shades of meaning—were introduced, with

many re-introduced in the 98th Congress. 6 I n

April 1983, S. 144—the Trade and Investment

Act of 1983, intended to strengthen the hand

4An outstanding exception has been the levies of 45 percent,

declining over a 5-year period, placed on large Japanese motorcycles early in 1983. These were imposed as the result of an

escape clause action. See “President Imposes Sharp Tariff Increase on Motorcycles, Japan Criticizes Act ion,” [J..!. Import

Weekl.1, Apr. 6, 1983, p. 5.

U.See, for insta rice, Report on Trade Mission to Far East, Subcommittee on Trade, Committee on Ways and Means, U.S.

House of Representatives, Dec. 21, 1981.

%ee A. Reifman and R. Ahearn, ‘‘Reciprocity y in Foreign

Trade, ” Issue Brief No. 1B82043, Congressional Research Service, Mar. 31, 1983. Most of these bills were intended to give the

President added authority to impose restrictions on Imports;

se~’e ral were (ii rected largely at trade i n ser~’ices.

of the President in dealing with other nations—

passed the Senate unanimously. House bills

have made less progress.

Most broadly, reciprocity is a call for equal

treatment, hence would entail measures to restrict imports originating in nations that themselves block the entry of American firms—particularly through indirect barriers. Spokesmen

for the U.S. semiconductor industry, to take an

example from electronics, object to unlimited

imports of Japanese ICs at a time when they

see themselves confronting a formidable array

of obstacles to doing business in Japan—obstacles ranging from uncooperative customs inspectors to hidden controls on foreign investment.

7

Pros and Cons of a Protected Market

Base Strategy

Arguments for temporary as opposed to longer term or permanent trade protection turn on

quite different points. Proponents of temporary

protection for troubled industries often judge

sharp upturns in import shipments, as for color televisions during the 1970’s, to be particularly serious. Once lost, whatever the

reasons, market share can be difficult to regain.

Thus, a sudden penetration of U.S. markets—

perhaps as a result of unfair trade practices—

might devastate an industry, leaving it without

the ability to recover. The remedy is to protect

the industry. Whether the causes are lower

costs for labor or other factors of production

abroad, unfair trade practices such as dumping, or problems internal to the U.S. industry—which could range from outdated plant facilities to misjudgments of the market—the objective of Federal policy, in this view, should

be to limit import penetration with the expectation that, after a limited period of relief,

domestic firms will again be able to compete.

Preferred measures to achieve such goals depend on the circumstances of the import-affected sector. Examples from the recent past

include tariffs, unilaterally imposed quotas,

‘On the latter, see [J. C, Lehner, “Japan’s Aversion to Selling

Companies May Be Ultimate Barrier to [J. S. Trade, ” Wall Street

journal, Mar. 23, 1982, p. 38; also, S. Lohr, “Japan’s Capital

Market Has [J, S, Critics, ” IVeWF Yor~ Times, June 1, 1982, p D3.
Ch. 12—Federal Policies Affecting Electronics: Options for the United States . 471

negotiated Orderly Marketing Agreements

(OMAs), and voluntary restraint on the part of

exporters. In industries where allegations of

dumping have been common—consumer electronics, and, though there have been no formal

complaints in recent years, semiconductors—

alternatives to antidumping proceedings might

be sought because legal redress has proven

slow, notably in the case of television imports.

The Trigger Price Mechanism for steel illustrates a more novel mechanism.

Beyond temporary protection, the notion that

the Federal Government should provide a

haven for U.S. industry appeals to many interests, Ostensible goals might be to help the

American economy grow, to protect jobs, to

maintain the prosperity of cities, States, and

regions. What are the arguments for more comprehensive or longer term import restraints?

Policies designed to ensure a domestic market base for American industries might be justified on the assumption that a certain level of

sales at home provide the necessary foundation

for international competitiveness. In essence

a variant of infant industry, senescent industry,

and critical mass arguments, at root this perspective views import penetration as inherently

dangerous, hence worthy of Government attention. Keeping out imports permits domestic

manufacturers to achieve scale economies and

to earn the profits necessary for investments

in new production facilities and R&D. A protected home market would also insulate them

from sudden and unexpected competitive

threats, originating not only in profit-seeking

overseas firms, but in government-controlled

enterprises seeking to create jobs, earn foreign

exchange, build industries that can support

military adventures. In short, this strategy

would insulate the Nation from the disarrays

of a world economy that is simultaneously

more open to all comers and more susceptible to

manipulation by organizations seeking ends

other than those of private corporations in the

American mold.

If industrial piracy is too strong a term to

describe foreign tactics, it is nonetheless true

that nationalized enterprises can with considerable impunity set goals quite different

from those of firms that must live off their own

profits, And if not all countries have nationalized sectors the size of that in France, in many

economies the incidence of government subsidy and control is such that market signals

become distinctly secondary. The preceding

chapter stressed the relative impotence of the

traditional roster of trade laws—and of international negotiations—for countervailing the

wide range of supports and subsidies that some

governments now resort to. Those who see

world trade as moving toward a no-win situation for the United States sometimes urge that

we shut our own borders to imports, accepting

the consequences in terms of reduced exports

while relying on the size and diversity of the

U.S. economy to keep productivity—more generally, the gross domestic product—high

enough to maintain living standards acceptable

to most Americans.

A related justification for trade restraints

starts with international differences in wage

rates—a point emphasized in chapter 4 (see

table 27), Low-wage countries, many with huge

and mounting labor surpluses, can now produce many types of goods at costs below those

in advanced nations. Increasingly, this is true

over a range from primary metals to manufactures like automobiles or the simpler electronics products that were mainstays of countries

industrializing earlier. Although labor productivity in developing countries is often very low,

if wages are also low, costs of production can

be less than elsewhere. Even Japan–with pay

scales in manufacturing industries little more

than half those here, and labor productivities

in some cases better—faces competitive difficulties in sectors like consumer electronics or

steel.

How can the United States hope to compete

under such circumstances? One answer is to

offer products that are beyond the technological capabilities of low-wage countries. In

more conventional products, it may be possible to improve labor productivity-through

automation or other advanced manufacturing

technologies-enough to offset existing wage

differentials. Advocates of trade protection
472 . International Competitiveness in Electronics

.—

point out that these avenues may not guarantee

enough jobs to keep the American labor force

employed. The alternatives are then to let

wages in the United States drop, helping to

maintain competitiveness across a broader

range of production, or to keep out imports

from low-wage countries. Given the levels to

which U.S. wages might have to fall—depending on how swiftly developing countries can

improve their own labor productivities—the

first alternative is far from acceptable, The

plight of unemployed auto and steelworkers in

California, where plants in both industries have

been shut down, illustrates the difficulty. Some

if not all of the laid-off workers—many of

whom had been making $12 to $15 an hour exclusive of fringe benefits—could find employment in Silicon Valley electronics firms. However, unskilled or semiskilled electronics work

pays in the range of $6 per hour; and even at

this level, Atari, for one, is moving some 1,700

jobs overseas. Given such a picture, trade protection and industrial self-sufficiency begin to

seem attractive.

What is the other side of this scenario—the

argument against either temporary or longer

term trade restrictions? First, import restraints

almost always result in higher prices for American consumers, Witness the automobile price

increases following Japan’s voluntary limits on

exports in 1981. Indeed, under such circumstances price increases are generally intended;

the common rationale is that import-affected

U.S. firms must be temporarily shielded so that

they can raise prices, generating increased

profits to be invested in restoring their competitiveness. Of course, rising prices often ripple through the economy—causing inflationary

pressures. To the extent that protection for

domestic steelmaker has raised steel prices,

costs have gone up for automobiles, consumer

durables, roads, bridges and buildings, military

hardware—everywhere steel is used.

Should these higher prices be considered the

necessary costs for reviving import-affected industries? Where there is good reason to expect

revival, the answer might be yes. Unfortunately, experience—e.g., in the case of color television—provides little evidence in support of

trade protection as a road to recovery for sectors that have lost competitiveness internationally (which is not to say that protection

might not serve other objectives, or be a

necessary if not sufficient prelude to recovery).

Industries and/or their employees may claim

that import penetration stems from unfair trade

practices, dubious management decisions,

adverse effects of Government regulations, or

other transient problems. If so, the argument

runs, recovery is possible, given time. The reality is generally more tangled. Complaints of unfair competition or adverse regulations maybe

well-founded but nonetheless only secondary

factors; decline may result more fundamentally

from long-term trends in the world economy—

i.e., shifting comparative advantage, Where this

is the case, trade protection will be ineffective

if temporary, costly if permanent.

When a good argument can be made that revival is possible—that longer term trends favor

the United States or at least do not run too

strongly the other way—the question remains:

How long will protection be necessary? Where

the Government has imposed or negotiated import quotas, these have typically been for 3- or

4-year periods—with renewals not unheard of.

Fixed periods are desirable so that domestic

as well as foreign producers face a relatively

predictable situation. Protection granted for an

indefinite period risks de facto permanency,

decreasing incentives for domestic firms to

make new investments or alter their business

strategies.

To illustrate some of the factors involved in

decisions on protective mechanisms, consider

the situation in early 1982 as concern mounted

over imports of 64K RAM (random access

memory) chips, Japanese penetration of the

U.S. market—running at about 70 percent—

was the outcome of a complex of factors: rapid

capacity expansion in Japan facilitated by ample supplies of capital for investment; production problems at the plants of several prospective U.S. suppliers; price-cutting by both Japanese and American firms striving to build

market share (accompanied by accusations of

dumping leveled at the Japanese). At a time

when only two American merchant firms—
Ch. 12—Federal Policies Affecting Electronics: Options for the United States ● 473 — —

Texas Instruments and Motorola—were able

to produce 64K RAMs in large quantities, as

opposed to six Japanese manufacturers, the

first question from the standpoint of competitive dynamics became: How long would it

be before other U.S. suppliers entered the

arena? Given the learning and scale effects

characteristic of RAM production, too great a

head start might be virtually impossible to overcome. On the other hand, if American companies came in later but with superior designs,

would they be able to turn the tables? These

are nontraditional kinds of questions for U.S.

policy makers, indeed difficult for governments

anywhere to deal with; as emphasized in the

previous chapter, the fast moving events characteristic of high-technology industries do not

fit very comfortably into the existing framework of international trade policy. But effective Government action depends on grasping

such facets of competition.

To return to the question of the costs associated with trade protection, note first that—

regardless of rationale—import restrictions

function as implicit subsidies for protected industries and their employees. The costs are

paid by other sectors of the economy—i.e., by

the public at large. Beyond direct costs in the

form of higher prices, a protected industry may

be able to attract resources such as capital

away from other parts of the economy; in attempting to help one industry, Government

policies can harm others.

These are not the only indirect effects for

policy makers to worry about. Foreign competitors often pursue inward investment as a way

around trade barriers—the pattern in color television, now also taking place in industries as

different as microelectronics and automobiles.

In contrast, foreign investment in U.S. steelmaking capacity has been small—no doubt because overseas investors do not see long-term

trends favoring the production of iron and steel

here. Direct investment is particularly attractive where companies feel they have competitive advantages that can be exploited regardless

of location. American semiconductor and computer manufacturers invest overseas in part

because their technological advantages are

easily transportable.

. —

At about the time Texas Instruments announced it was transferring all of its 64K RAM

production to Japan, Hitachi, Nippon Electric,

and Fujitsu revealed plans to move—or speed

up previous timetables for moving—some of

their own 64K RAM assembly here.8 One motive was to dampen trade frictions; despite the

absence of constraints or even formal complaints concerning RAM shipments, the color

TV case appears to prefigure that in semiconductors. Is this an outcome that U.S. policymakers—whose actions accelerated onshore investments in consumer electronics—should

welcome? Certainly there are major differences

between the two industries. Competition in

television manufacture is cost-driven, with

technology playing a relatively minor role. In

microelectronics, moving closer to markets is

one way a company can capitalize on its technology to meet customer demands. Although

decisions by Japanese semiconductor manufacturers were spurred by concern over trade,

they see many other advantages to their presence here. For instance, they can learn from

American technical expertise more easily—one

way is to hire American engineers—if they

have bases in this country, especially now that

U.S. companies are guarding their own technology more closely. In the same way, technology acquisition has been one of the motives behind efforts by U.S. firms to set up R&D and

manufacturing facilities in Japan.

When foreign firms invest in U.S. plants,

they employ American workers—unskilled as

well as skilled—although a substantial fraction

of value added tends to remain overseas. But

from the perspective of U.S. semiconductor

firms, sales by Japanese-owned competitors—

regardless of where the products are manufactured—represent a loss to the domestic industry. The numerous joint venture and technology exchange agreements that U.S. and Japanese electronics firms have entered into complicate matters further. With Hewlett-Packard

getting RAM technology from Hitachi, National Semiconductor sharing with Oki, the computer firm Amdahl joined to Fujitsu, easy national distinctions vanish. Such trends are still

-—

BM. Kanabayashi, “64K Ram Chips At Plants in [J. S.,” L1’all

Street ~ourna], Mar. 2, 1982, p. 35.
474 . International Competitiveness in Electronics

.

more advanced in consumer markets; “American” consumer electronics products contain

many parts and subassemblies produced overseas—in the extreme, VCRs made entirely in

Japan are sold under leading American brand

names. The U.S. workers who benefit are primarily those in distribution and servicing; sales

of such products—even TVs, where foreign value added may be 50 percent—can hardly be

counted as simple gains for the domestic economy. More such agreements can be expected

in high-technology electronics, adding to the

ambiguity facing policy makers.

Could a Market-Protection Strategy Work?

The patterns described above create a fundamental dilemma for an industrial policy

founded on trade restrictions. How does one

ensure a domestic market base when the boundaries between U.S. and foreign industries and

interests blur, even disappear? In a given and

narrow circumstance, it may be possible to

turn trade policies to the strengthening of U.S.

industry through protection. In the general

case, the result might become less a policy than

a collection of case-by-case decisions (such as

we have now in the trade area) with decidedly

mixed impacts. As industries and markets become more international in character, an industrial policy oriented toward preserving

domestic markets rests on assumptions that are

increasingly difficult to sustain.

More broadly still, attempting to ensure domestic markets for some types of goods may

work against underlying shifts in comparative

advantage; industrial policies that attempt this

are seldom very successful. To the extent that

a domestic market strategy attempts to freeze

patterns of sectoral rise and decline, it may

conflict with powerful forces outside the control of Government—in the end, a losing battle.

Most advocates—including those in organized labor—of a strategy that would emphasize the U.S. position in traditional markets

focus on tangible goods, particularly manufactures. Trade in services—more generally still,

international flows of capital—is often left out

of account. Yet while the U.S. trade deficit on

merchandise came to $36.3 billion in 1982, this

figure was almost precisely balanced by a surplus on trade in services; the Nation’s net

deficit on goods and services in 1982 was but

$225 million. Moreover, this follows a year in

which the U.S. surplus on goods and services

totaled $11 billion, the 1981 surplus on services

far exceeding the merchandise deficit.9 Stressing bilateral imbalances such as that between

the United States and Japan—even more so particular products, whether semiconductors or

automobiles—obscures these broad patterns

still further. While the aggregate picture does

nothing to blunt adjustment problems created

by shifts in trade—nor the political dimensions

of a merchandise deficit with Japan totaling

$17 billion in 1982—that dislocations are severe

and potentially long-lasting does not mean that

protection is the best or even a viable remedy.

Finally, the reasons that trading nations have

for many years been moving away from protectionism and toward an open system of world

trade—albeit haltingly and with many counterexamples—should give pause to those who

would advocate a market protection stance for

the United States. This country led the movement for open trade in the belief that everyone

would benefit, at least in the longer run. Historically, restrictions on trade flows have often

led to retaliatory measures; in the 1930’s, these

contributed to both the depth and the length

of the Depression. Retaliation need not be direct and obvious to have genuine impacts on

U.S. interests. International negotiations may

involve tariff concessions on computers in exchange for concessions on wheat; one outcome

may be tariffs that differ among nations on a

product-by-product basis, giving the appearance—and often the reality—of asymmetries.

But if industrial policies intended to preserve

domestic markets begin to provoke strong retaliatory measures, the entire system of international trade agreements, imperfect as it is,

could be weakened.

‘C. L. Bach, “U.S. I n ~ernational Transactions, Fourth Quarter

and Year 1982, ” Survey of Current Business, March 1983, p. 42.

Including financial flows reduces the surplus for 1981 and increases the deficit for 1982.
Ch 12—Federal Policies Affecting Electronics Options for the United States ● 475

Fear of retaliation has been a very real factor in the choices made by the United States—

e.g., concerning trade in steel, particularly imports from Europe. If the United States makes

it too difficult for European steel to enter the

American market, it risks restrictions on [J. S.

exports of electronics products, or financial

services—even military goods. Trade wars seldom benefit those involved so much as those

in position to pick up the spoils.

Support for Critical Industries

Rather than attempting to preserve domestic

markets in general-which would in large

measure reward those able to build the

strongest political constituencies—the Federal

Government could decide to support and if

necessary protect only those industries judged

critical to national security. Security might be

broadly or narrowly defined. Either way, such

a policy would find deep historical roots. Governments support transportation technologies

and systems—canals, railroads, highways, aviation—in part for reasons of national mobilization and defense; other examples range from

armories and shipbuilding to telecommunications regulations and space exploration. A national security criterion—restricted to military

security or extended to “economic security”--

would narrow the focus compared to the market preservation alternative, helping to control

the political pressures that will always bedevil

efforts at industrial policy in a country like the

United States.

Manufacturing sectors suffering from import

competition frequently argue for Government

remedies on the basis that their products—or

their plant and equipment—contribute to national security. Some clearly have better cases

than others. The end products of some companies and some industries consist of military

hardware: armaments, communications systems. In other cases, end products may be used

only indirectly for national defense, though no

less critical for that. This is true of supercomputers, needed in the design of some types of

military systems. In still other cases, the goods

produced by an industry may be vital, but only

some fraction of the industry’s production capacity would ever be consumed in meeting military needs. Examples include the steel and machine tool industries.

The assumption underlying a critical or strategic industries alternative is that only a subset

of the economy—perhaps relatively small-is

indispensable for national defense; unless the

list is kept short, this approach would differ little from the first option discussed above. Critical industries would begin with, but not be restricted to, the traditional defense sector: aerospace, suppliers of armaments, military electronics firms, R&D contractors—enterprises

that, along with large numbers of suppliers and

subcontractors, sell to the Department of Defense (DOD). Beyond this, other portions of the

electronics industry would be obvious candidates for any critical industries list--computer

hardware and software, integrated circuits,

communications equipment. Indeed, numerous manufacturers of computer systems and

semiconductor products have divisions devoted exclusively to military sales. In contrast,

consumer electronics, as a sector, would have

a weak case despite the fact that firms like RCA

and GE are major defense contractors. Just as

Chrysler’s tank business was largely divorced

from the automobile side of the corporation,

so electronics suppliers that engage in military

production generally do so through separate

divisions or subsidiaries.

What is Critical?

The difficult questions in identifying “critical” firms and industries involve those that do

not engage directly in defense-related research

or production, but whose products or R&D

might still have vital military applications

under some circumstances. Synthetic fibers

like nylon and Kevlar provide an example.

Used in clothing, parachutes, body armor, and

fiber-reinforced composite materials for structures ranging from missile casings to stealth

aircraft, these materials are obviously critical

to the defense base. But would this have been

predicted when synthetic fiber technology was

in its infancy? That is the nexus of the problem

if the Federal Government is to support critical

industries—identifying those that will be vital

in the future,
476 ● International Competitiveness in Electronics

If the criteria are to be extended to embrace

economic strength, then the matter of identifying critical industries—without being so inclusive that support and protection go to

everyone who asks—becomes still more perplexing. One reason is simply that terms like

“economic strength” are not very meaningful.

In practice, virtually any industry threatened

by foreign competition would attempt to declare itself critical. The difficulty in recognizing industries that will be critical in the future

would arise here as well—where it is a variant

of the “sunrise industry” problem. Once the

sun is up, and everyone knows it, Federal policy may not be especially important; opportunities will be evident, investors will be attracted. Although Government might be able

to nurture the growing industry, its role could

well be peripheral—more so in an economy like

that of the United States than in Japan or

France. But when an industry is truly an infant, its prospects for the future uncertain, then

Government may be no better able to recognize

its potential than the private sector (some

would say less); the primary difference will be

that Government’s time horizons need not be

constrained by the desire for quick returns on

investments as for private suppliers of funds.

In any event, a strategic or critical industries

approach implies that the Federal Government

can and should identify such industries, then

adopt policies to:

1.

2.

3.

Ensure that the United States maintains an

indigenous production capability sufficient to meet direct military needs, particularly in the event of national mobilization or crisis.

Support industries and technologies that

have a substantial role in providing the underlying base—either in terms of R&D or

production—for U.S. military strength,

Optionally, support industries and technologies that clearly and unambiguously

contribute to economic strength.

In a context of growing East-West tension,

advocates of such an approach—particularly

those who emphasize direct military production—contend that the U.S. Government should

take a more active role in ensuring the wellbeing of strategic industries.’” A primary strand

in the argument is that if the United States

comes to depend too heavily on foreign products or technologies the Nation’s defensive

capabilities could be impaired—not only in the

event of war, but even in a rapidly escalating

arms race. 11

As table 82 indicated, a wide variety of policy

instruments could be used to provide for the

continued strength of critical industries, going

well beyond tariffs or quotas for protecting domestic manufacturers and beyond the wellestablished relationships that already link DOD

and the community of military contractors and

suppliers, Multiyear procurements have been

suggested as a means to strengthen the defense

industrial base. DOD is also paying a good deal

of attention to manufacturing technologies as

one way of getting more for our money, as well

as shortening procurement cycles. The attention to manufacturing will have spillover effects in the civilian economy that could be significant. Beyond such steps, sectoral policies

could provide targeted supports and subsidies

in much the same way that the American farmer has been given special consideration. Procurement could be steered to particular firms.

DOD-sponsored R&D efforts like the VHSIC

program and the other research and engineering activities of the services and the Defense

Advanced Research Projects Agency—many of

them related to electronics—might be enlarged

and broadened still further, with the aim of

strengthening the U.S. technological base and

infrastructure, Manpower and education policies could channel institutional support toward engineering and relevant sciences, fund

IOFOr a detailed presentation of this view, see “statement of

Gen. Alton D, Slay, Former Commander, Air Force Systems

Command,” Revitalization and the U.S. Economy, hearings, Part

I, Subcommittee on Economic Stabilization, Committee on Banking, Finance, and Urban Affairs, House of Representatives, Feb.

25; Mar. 25, 26, 1981, pp. 258-479.

IiSuch arguments were advanced by opponents of the award

of contracts to Fujitsu for a Boston-Washington fiber-optic communications link, After intense lobbying by the DOD and others,

AT&T gave the contract to its own subsidiary, Western Electric. See E. Meadows, “Japan Runs Into America, Inc., ” Fortune, Mar. 22, 1982, p. 56.
Ch. 12—Federal Policies Affecting Electronics: Options for the United States ● 477 —

students majoring in these fields, reward people who choose to work in defense industries,

provide incentives for retraining and continuing education in advanced technical subjects.

The services have recently argued that, in the

years ahead, they may be unable to meet requirements for skilled workers—electronics

technicians, aerospace fabricators, aircraft

maintenance specialists—as well as engineers;

a strategic industries policy would aim to rectify such problems.

Critical Industries for National Defense

Nations traditionally give special attention

to economic sectors on which military strength

and security depend. Shipyards and armories

are obvious examples; for many years, historians and economists have probed the symbiosis

between military and civilian production, exemplified by the evolution of precision manufacturing and interchangeable parts. If 19th

century production technologies were driven

in part by military needs, certainly the relationship between military and civilian sides of the

economy has altered greatly since. The pervasiveness and complexity of modern technology

makes identification and support of strategic

industries more problematic—ships, arms,

even missiles and planes, hardly exhaust the

requirements of modern warfare. During

World War II, automobile plants could be retooled to make weapons, but in the past four

decades, military and civilian technologies

have diverged. As for commercial technologies,

new demands and applications come in rapid

sequence—chemical and biological warfare,

terrain-following cruise missiles, surveillance

satellites, war in space, cryptology, computerized translation of foreign languages. One need

not stop here. Economic warfare, in various

forms, has a long history. Wheat, cobalt and

chromium supplies, energy—all can be weapons. Ultimately, a nation’s military potential is

a function of the size and composition of its

economy, the fraction of gross national product

it is willing to spend on defense.

Sooner or later, then, any policy based on a

critical industries approach will face a series

of decisions on what is really essential. Lines

— — .

will have to be drawn—in some cases fairly arbitrarily—because in the most general sense

nearly all industries and technologies contribute in some way to defense readiness. Corporations may produce the boots that soldiers

wear, the food they eat, or small computers for

battlefield command and control, When only

a portion of an industry’s output goes to the

military—whether the industry be steel or semiconductors—how might the Government allocate its support?

The struggles of DOD with the “militarily

critical technologies list” recommended by the

well-known Bucy report and endorsed by Congress in the late 1970’s shed light on the practical difficulties of a defense-centered industrial

policy. The first list of 15 militarily critical

technology categories was published in 1980. 12

Included were computer networking, large

computer systems, software, design and manufacture of very large-scale ICs, and a number

of others related to electronics—of the 15 categories, only 3 had little or no electronics content. The thrust of the exercise was to develop

a systematic approach to export controls; as a

result, it was narrowly focused on military applications, Despite the well-defined purpose—

in essence to update and supplant the Commodity Control List—progress has been painfully slow, Once the 15 general areas had been

determined, the effort bogged down in details.

Critics doubt that it will ever be possible to

agree on procedures for reducing the case-bycase reviews of export licenses that are now

necessary. If nothing else, the continuing

debate over militarily critical technologies—

which in principle seem relatively straightforward to define—indicates how difficult it

would be to devise criteria for entire industries.

After all, these industries would be rewarded—

not with export licenses that might add a few

percent to revenues—but in at least some cases

with substantial subsidies and other Government favors.

——— — llT~Chno]og\, and East-west Trade, An Update (Washington,

DC,: Office o~Technology Assessment, May 1983), p. 37. A detailed critical technologies list published in classified form at

the end of 1981 ran to 800 pages. Also see Technology and EastWest Trade (Washington, D. C,: Office of Technology Assessment, OTA-I SC-1O1, November 1979), pp. 92-94,
478 ● International Competitiveness in Electronics

Looking more narrowly at the electronics industry, consider again the situation created by

imports of 64K RAMs from Japan and the resulting flurry of activity in the Federal

bureaucracy. In December 1981, the Cabinet

Council on Commerce and Trade authorized

an interagency study of high-technology industries—carried out largely by the Department of

Commerce. 13 Several months later, the Departments of Defense and Commerce began their

joint examination of the national security consequences of 64K RAM imports, considering

the advisibility of a more formal section 232

proceeding. l4 As pointed out in chapter 11, this

section of the Trade Expansion Act of 1962 empowers the President to restrict imports in the

event of harmful implications for national

security; the remedies available include quotas

or higher tariffs. At the time, domestic manufacturers were accusing the Japanese of

dumping 64K chips–in fact, industry lobbying

appeared responsible for much of the concern

over national security .15 Simultaneously, DOD

was trying to convince the same group of Japanese firms to transfer some of their technology to the United States, as well as to produce

components and equipment that would help

meet American military needs. This was also

the period when Texas Instruments was moving its 64K RAM production to Japan and Japanese firms were announcing plans to make

these parts in the United States. A little later,

the Justice Department announced its price-fixing probe of Japanese importers—investigating

prices that might be too high instead of too low

(ch. 11). Meanwhile, Congress was flooded

with trade reciprocity bills, some motivated by

trade friction in semiconductors.

—. .—

laAn Assessment of U.S. Competitiveness in High Technolog~’

Industries (Washington, D, C.: Department of Commerce, February 1983]. The first paragraph of the summary states: “This

study is being released as a Department of Commerce document.

The methodology, findings and conclusions do not necessarily

represent the views of other Executive Branch agencies” (p. iii).

‘%. H. Farnsworth, “Japanese Chip Sales Studied, ” New York

Times, Mar, 4, 1982, p. D1. Also see ch. 11.

Wln lobbying efforts by the industry, see “Horror Story, ” ,!Hectronic News, Feb. 8, 1982, p. 12. One of the reasons nothing came

of the Section 232 study was simply that 64K RAMs—new products in the marketplace-had not yet been incorporated into any

U.S. weapons systems, thus, the national security implications of a supply interruption remained matters of speculation

concerning future weapons needs and designs.

——

Such is the circus for which a critical industries policy would provide the rings. Despite the concern generated by 64K RAM imports, the underlying national security question

remains unanswered—a question which is in

fact much broader than that of RAM chips or

semiconductors in general. One way to frame

the question—in the context of microelectronics—is as follows. As technologies become

more complex and industries expand, opportunities for different countries to specialize in

certain kinds of products grow; Japan’s semiconductor manufacturers, at the moment, are

specializing in RAMs. As a consequence, U.S.

production might decline, with the result that

the Nation could find it difficult to meet future

defense needs, particularly in a situation calling for rapid mobilization. 16 Again, the point

is that the ongoing dynamics of international

competition hold one of the keys to policy

choices.

So long as questions such as these remain

narrowly defined—concerned with particular

products or with classes of technology—it

should be possible for policy makers to agree

on priorities and make the necessary choices.

In its recommendations for the fiscal 1984

defense budget, for example, the Defense Science Board ranked the following technologies

in order of importance for future U.S. military

systems :

1.

2,

3.

4.

5.

—..—

Very high-speed integrated circuits, exemplified by the DOD R&D program

(VHSIC) mentioned elsewhere,

Stealth aircraft.

Computer software.

Microprocessor-based teaching aids.

Fail-safe and fault-tolerant design methods for electronic systems.

.—

Iopart of the reason is simply that the military market does not

attract that many manufacturers. The 20 percent of U.S. electronics sales that go to the military are unevenly distributed; in

some product categories, defense needs account for only a small

fraction of output–l?]ectronics, Jan. 13, 1983, pp. 128-140. In

semiconductors, the military market is perhaps 10 percent of

the total (fig. 34, ch. 5), and heavily weighted toward less sophisticated devices; during 1982, any 64K RAMs going to DOD would

have been embodied in commercially available hardward for use

in offices or laboratories, not weapons.

17 See R. Connolly, “The Big 17 Future Technologies, ” Electronics, May 5, 1982, p, 98.
Ch 12—Federal Policies Affecting Electronics: Options for the United States ● 479

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

Photo cred(( GCA Corp

Direct-step-on-wafer system for lithographic

fabrication of integrated circuits

Rapidly solidified materials–-e.g., amorphous metals with high strength and resistance to corrosion.

Computer programs for artificial intelligence.

Supercomputers for nuclear weapons design and computational fluid dynamics,

Composite materials.

High-density focal-plane arrays for infrared imaging.

Radiation-hardening techniques for electronic systems.

Space nuclear powerplants.

High-power microwave generators.

Technologies for erecting large structures

in space.

Optoelectronics.

Space-based radar.

— —

17. Short-wavelength lasers.

As many as a dozen of these are electronics

technologies, or systems for which electronics

is a vital element.

Given some agreement on priorities--of

which lists such as that above might form one

starting point—and recognizing that priorities

would have to be reexamined and updated

more or less continuously, what policy measures, beyond decisions on R&D funding levels,

might then be called for to ensure that military

needs were met? Almost certainly, such questions would have to be approached much as

for those dealing with research priorities--i.e.,

on a case-by-case basis; given past experience

in trying to define critical technologies for export control, formulating general criteria for

an industrial policy based on national security would seem a hopeless task, one compounded by uncertainties surrounding mobilization scenarios. Furthermore, quite apart

from debates over the needs of high-technology sectors like electronics versus basic industries like steel or machine tools, an industrial policy that set defense priorities consistently above civilian needs would be politically painful, Like all sectorally based policies,

such an approach is susceptible to the criticism

that other industries—and economic welfare

as a whole—would suffer relative t o sectors

chosen for support.

One of the underlying questions—for this and

other industrial policy alternatives-becomes:

Given the policymaking environment in the

United States, would this framework contribute to good decisions at the level of individual

policy instruments, or would it simply confuse

matters further? The Nation’s policymaking

system is not likely to change very quickly or

very dramatically. As a result, one of the primary objectives of a more focused industrial

policy for the United States can be viewed

simply as a movement of the system toward

better decisionmaking on the average. From

such a perspective, it would seem more desirable to regard national security-particularly

direct military procurement and production—

as one factor to be weighed when making industrial policy decisions, but not the center-
480 . International Competitiveness in Electronics

———

piece. Where military security is genuinely at

stake, DOD and the defense community generally prove more than capable of marshaling

strong and effective arguments,

Critical Industries for the U.S. Economy

Could the United States profitably adopt a

broader interpretation of critical industries,

taking a leaf from the books of Japan or France

—countries that have consciously tried to pick

industries that will drive economic growth?

This would be akin to an industrial policy built

around support for “sunrise” industries, whose

products or technologies will stimulate and

support other sectors of the economy.

Such an alternative has its attractions. In

principle, the Government could steer resources to sectors that would have a multiplier

effect on the rest of the economy—or simply

to those expected to grow rapidly, increasing

employment and exports. In essence, an i n -

dustrial policy that aimed at targeting such industries would be based on the premise that

Government can do a reasonable job of predicting where the Nation’s comparative advantages

will lie in the future. This is part of what Japan

attempts.

To pursue such an industrial policy successfully demands:

1.

2.

3.

The

the gross level. When the ability of Government

Prediction of the sectors that will be vital

for future growth and competitiveness.

The design and implementation of Federal

policies that will effectively support these

sectors—strengthening their competitiveness in ways that markets alone could not

or would not—but without creating unacceptable distortions or misallocation of

resources elsewhere in the economy.

The political will to pursue such policies

in the ordinary circumstance—when the

pressures generated by declining firms

and industries and their employees outweigh public perceptions of rewards for

encouraging nascent industries.

first of these is relatively easy, at least on

to “pick winners” is questioned, the second

and third points are generally at issue.

It is only a slight exaggeration to say that

everyone knows where the winners will come

from, For the United States and other advanced

industrial economies, the current list includes,

to take the most obvious:

●

●

●

●

computers and semiconductors, along

with related “information” technologies;

programmable automated manufacturing;

applications of biotechnology and genetic

engineering;

materials whose properties can be tailored

for desired applications, especially polymers and composites.

Electronics has been at the top in many countries for years. Robotics and other forms of programmable automation are getting government

attention in Western Europe and Japan, as well

as through the U.S. Defense Department. Biotechnology is everyone’s favorite example of

an industry that should be supported now to

reap dividends later. New materials—those

with origins in both military and civilian applications—are steadily expanding in production volume. Such lists can be expanded or amplified upon almost ad infinitum, Places could

be found for medical technologies, energy conversion devices, agriculture,

Once past the gross selection of winning industries, good policy decisions require careful

analysis—but defining candidates for support

is not, in principle, an intractable problem, If

the chief objective is to stimulate economi c

growth, comprehensive support would not be

needed (as it might be for militarily critical

technologies). In electronics, good cases could

be made for examples like the following:

● continued development of device technologies for high-speed, high-density ICs (gallium arsenide circuits and Josephson junctions as well as silicon-based devices);

Ž processes for submicron lithography;

● computer-aided circuit design methods;

● automated inspection of ICs and printed

circuits based on computerized pattern-recognition;

● automated generation of computer programs, together with other methods for en-
Ch. 12—Federal Policies Affecting Electronics: Options for the United States 481

hancing productivity in software generation;

Ž natural language programing and related

topics in artificial intelligence;

• fiber-optics and, more broadly, integrated

optics.

Such a list, still quite general, would eventually have to be refined further, as is normal when

planning R&D. At finer levels, uncertainties

will mount, technical judgments diverge. From

the Government perspective, this means primarily that payoffs in a number of areas might

be possible, leading to strong arguments for

supporting competing technologies. Several approaches to submicron lithography look promising—ion beams, X-rays, electron beams; it

would be foolish for Government to “pick” one

of these.

One of the implications of the discussion

above is that the Federal role might be primarily a matter of technology development. How

might the Government design and implement

programs in support of commercial technologies? The United States has extensive experience in funding military research and engineering, but little background in civilian sectors; the principal exceptions are agriculture

and energy, and the record in the latter is hardly flawless. One possibility is simply to find

companies with expertise and good track records, then give them Government aid, This

could be research funding (including further

initiatives such as the Defense Department’s

internal R&D program, which sets aside money

for industry-performed R&D on a “no-strings”

basis to encourage innovation), a protected

market, Federal procurements, loan guarantees, direct grants of investment capital—the

list of possibilities comes from chapter 10 (see

also table 82).

From time to time, a number of European nations, as well as Japan, have followed policies

that select companies for support. One example is CII-Honeywell Bull in France. The

French have also built their integrated circuit

program around chosen firms rather than competitive grants, although West Germany has

taken the latter approach, Great Britain has

channeled funds and procurements to ICL,

capitalized the semiconductor firm Inmos. In

Japan, a good deal of political jostling goes into

the selection of participants for joint research

projects such as the VLSI program or the fifthgeneration computer effort. Experience in all

these countries illustrates the pitfalls of

company-centered support schemes. The European record, in particular, has been poor.

Siemens has garnered the lion’s share of funding in West Germany, with little evidence of

significant returns in the form of enhanced

competitiveness to the German electronics industry as a whole. Britain has recently been

forced to bail out ICL. Although Le Plan Circuits Integres seems to be faring better,

France’s earlier Plan Calcul must be judged a

failure.

Still, as in most of the countries experimenting with industrial policies, France appears to

be learning from its experience: Le Plan Calcul

supported a single company, while the microelectronics program has been structured to include an element of competition among several

participants. In Japan, the record is rather different, MITI excluded Oki Electric from the

VLSI project, believing that the company could

not compete in advanced integrated circuits,

Oki prevailed on Nippon Telegraph and Telephone (NTT) for help, and managed to enter

the 64K RAM market. Given the multiplicity

of competitive semiconductor manufacturers

in Japan, this can hardly be judged a policy

failure—but might have been in a country with

a thinner array of prospective entrants.

In any event, direct aid for selected firms

would not be an attractive option for the

United States, going as it does against so many

of our traditional attitudes, It is a big step from

dropping the Government’s long-running antitrust suit against IBM to making that company—or any other—the Nation’s annointed

champion. Precompetitive support, the a p -

proach taken by the European Community’s

Esprit program—which falls more naturally

under the next alternative for a U.S. industrial

policy—would fit the American system better.
482 International Competitiveness in Electronics

—

Nonetheless, an industrial policy that focused on R&D—and perhaps technology demonstration, for mature industries as well as

growth sectors—would begin with technical

questions that can in principle be evaluated in

relatively straightforward fashion. DOD experience with R&D contracts and procurements offers a model, at least for the case in which Government is the ultimate customer. This last is

a major difference between supporting a defense industry and a commercial industry–

and one of the chief reasons for sticking to

technology; product development for civilian

markets is a much riskier and less certain undertaking. Nevertheless, DOD’s record–if littered with failures or partial failures in individual programs—does show that in an overall way the Federal Government can support

and develop industries, particularly given procurement authority. On its results, the U.S.

space program must also be judged a clear-cut

success. Of course, that the Nation is militarily strong, or that the space shuttle flies, does

not mean that the processes involved in reaching these objectives have been efficient, For an

industrial policy aiming at economic development, however, efficiency is more urgent. If the

ultimate goals include raising the standard of

living—and this will always be one of the principal arguments in favor of an explicit industrial policy for a country like the United

States—then improving productivity, economic

efficiency, and international competitiveness

become vital. As a spur to efficiency, competition for Government largess is a poor substitute

for the marketplace. This does not imply that

targeted R&D support for growth industries—

where judgments can be made largely on technical grounds—might be counterproductive so

much as that supports and subsidies going

beyond technology could be.

Capital for Investment

Of the variants of supports and subsidies,

channeling investment capital to selected industries has attracted a good deal of attention

in the United States. The goal would be to enhance the competitiveness of industries that

might be either growing or in decline. Advocates of such an approach—in essence, urging

programs that would function as development

banks or a Reconstruction Finance Corp.—

focus on the cost and supply of funds as a bottleneck for critical or growing industries. Investments in ironmaking or integrated steelmaking, for example, have not been attractive

in recent years; prospective investors can expect higher returns elsewhere. If the steel industry were judged critical, the Government

could step in—as indeed it has in a very limited

way—with loan guarantees or other forms of

subsidized capital. Conversely, firms in some

industries might be expanding so rapidly that

they have difficulty in financing expansion—

the case described in chapter 7 for portions of

electronics. Venture capital markets tend to be

spotty; at some stages in their development, entrants in high-risk sunrise industries may find

themselves starved for capital because investors judge returns to be uncertain or too far in

the future.

If capital constraints pose genuine problems

for industries judged vital to U.S. interests, the

Federal Government might indeed choose to

respond with mechanisms such as a Reconstruction Finance Corp. or a publicly backed

institutional supplier of risk capital. But are

critical industries starved for funds? In countries where capital markets are less developed

than in the United States, they may be—particularly where venture financing is hard to

come by or simply unavailable, West Germany—even Japan—has experimented with

government-financed venture capital programs, as has Great Britain with its National

Enterprise Board.

That governments in some countries intervene in capital markets does not imply that

public sector decisionmakers can do a better

job of balancing risks and rewards than those

in the private sector, but that the government

has different criteria—namely, that the public

welfare is paramount for government, rather

than private returns to capital. Indeed, governments can set priorities ranging from maintenance of the defense base to employment

stability or calming political turmoil. National
Ch. 12—Federal Policies Affecting Electronics: Options for the United States ● 483 —

defense and employment have been particularly strong motives in Europe,

In the United States, too, Federal assistance

to troubled firms has occasionally taken the

form of loan guarantees or similar forms of

capital subsidy, An overextended corporation

in competitive difficulty will sooner or later

find its access to financing cut off: examples

include Lockheed, Chrysler, McLouth Steel,

Braniff, International Harvester, The Federal

Government aided the first two; McLouth has

been rescued, at least temporarily, by a private

investor; part of Braniffs aircraft fleet has been

repossessed; International Harvester’s fate remains in its own hands, If the Federal Government decides—on whatever grounds—that established enterprises which have fallen on hard

times are indeed essential, precedents exist for

bail-outs on a case-by-case basis. Should it

regularize procedures for bail-outs? What about

the more general situation? Should the Government take steps to make capital cheaper or

more easily available?

If the Government were to channel investment funds to growth sectors, one reason

would surely be to interject criteria other than

those applied in capital markets—e.g., some

broader notion of the public interest, rather

than simply financial returns; where this is the

case, capital subsidies are but one among many

policy tools that Government might choose. On

the other hand, it might be that the market does

not do a good job of evaluating long-term opportunities where rewards are far in the future,

risks high.18 In many instances of new technologies or entire new industries, social returns

have exceeded private returns, creating a particularly potent argument for Government action where the developments in question would

have a multiplier effect on productivity or competitiveness elsewhere in the economy—e.g.,

microelectronics or biotechnology. Innovating

—

~aThe m a rket fa ill] re a rgu men t fur govern mf!nt inter k’ent ion

in capital (and other) markets is outlined in LJ..$. lndustria] Competiti~reness: A Comparison of .Steel, Electronics, and

Automobiles, op. cit., 1)1), 176- I 77. Basic research—where virtually by de fin it iun the rewards cannot he fully captured hy the

performing entcrpris[>-is perhaps the plainest case.

—

firms in growth technologies or growth industries may not, for a variety of reasons, be able

to capture all the rewards of their work. In the

extreme, they may go out of business; economic history is littered with examples of early innovators who have failed, but whose ideas have

later been picked up by others. This is one of

the ways in which markets work—some innovators are a few years ahead of their time. In

other cases, a business failure may be quite unrelated to new technology. Many of the pioneering semiconductor firms have disappeared;

while typically absorbed by other companies,

the circumstances have occasionally been such

that financial rewards were slim.

The case for an industrial policy that channels capital toward long-range technology

development or growth industries–especially

to sectors where the effects will spill broadly

over into the economy at large, giving social

returns in excess of private returns—is then

quite different from that for subsidizing sectors having trouble competing for investment

funds because of stagnation or apparent

decline. In the end, this second class—decisions on bail-outs—hinges, not on questions of

capital markets, but on the justification for

Government aid of any sort. If troubled industries are judged critical, and deserving of support, then capital preferences are one of several

tools Government can chose from. The highrisk, growth industry case depends largely on

the ability of Government decisionmakers to

evaluate social returns and spillover effects,

and to determine when innovators are likely

to go unrewarded because the nature of their

activities makes full capture of returns unlikely.

Such analyses must be made on a case-by-case

basis. Given recent examples of venture funding in microelectronics, computer software,

robotics, and biotechnology, it is hard to argue

in general that money for new and promising

startups is not available; as pointed out in

chapter 7, some observers have concluded that

risk capital has been going even to projects

with rather slim prospects. The cyclicality of

venture capital markets is another question, as

is that of gaps at stages such as pre-startup.
484 ● International Competitiveness in Electronics

— — .

In electronics, costs of capital—more fundamentally, sources of capital to sustain

growth at high rates in the face of rising capital

intensity—are matters of concern primarily for

established companies that have already demonstrated their competitive ability. It would be

difficult for Government to justify subsidies in

the form of capital allocations, low-interest

loans, or loan guarantees for such firms.

In essence, that brings back one of the points

raised initially—the political context for selecting critical industries. Even for an industrial

policy that devolved into a support scheme restricted to R&D and technology development,

politics will perturb decisionmaking—decisions made by business as well as Government.

As the experience of the Defense Department

shows, company-funded R&D will tilt toward

areas where eventual Federal support is more

probable.

So long as the goal is relatively clear to all–

i.e., military security—the political dimensions

can be managed. National defense as an objective of public policy generates little controversy; disagreements center on the means. On the

other hand, if the objective is competitiveness

or economic efficiency—particularly in some

nebulous future—then the less-than-concrete

nature of this goal, and the intrinsic complexity of the supporting analysis, can easily contribute to obfuscation, confusion, and conflict.

If the stakes are high, not only may politically

powerful industries, if in decline, oppose programs that reward industries judged critical,

but they will try to show that they are critical

too. Growth industries might find themselves

fighting among one other for the biggest slices

of the pie. Can a board of experts inside the

Government—or an advisory body including

representatives of industry, labor, the financial

community, the public at large—make decisions that will stick in such an environment?

An “industrial policy advisory board” or

“reconstruction finance board’’—retired industry executives, leaders of Government and

labor, well-known academics–might have the

ability to make good decisions, particularly if

backed by a competent staff.19 They would have

to be politically sensitive simply to keep the effort alive and pointed in the right direction. But

is it realistic to expect that, even if good decisions were made, they could be implemented—

given the political pressures—with any consistency? If not, such a process would be a poor

substitute or supplement for U.S. capital markets. On the other hand, if Government support is modest enough to avoid conflicts, will

not any positive impacts be equally modest?

Alternatively, the Government might choose

simply to protect critical industries from trade

pressures—adopting an essentially passive policy, rather than active support; one result might

be to shift the risk/reward expectations of

private investors. Protection for infant industries is a common element in the industrial

policies of many countries, some of whom—

notably Japan—have been accused of overdoing it. But in the end this is simply a variant

on the more active approach, with most of the

same pitfalls. It assumes, first, that protection

will be—if not essential—at least a positive factor. Others would argue that exposure to foreign competition stimulates a nation’s own industries, at least over the longer term. A country attempting to develop an industry where

foreign enterprises are already strong may have

a good case for protection. Even the United

States—which is in a position to enter new industries at the same time as its competitors if

not ahead of them—might choose to protect infants if competing nations try to protect their

own. Absent this motive—and granting that it

is counterproductive, if not impossible, to

shield all industries—picking sectors to be protected would create much the same set of problems as picking some to receive capital preferences.

IQFor a typical suggestion, see L. C. Thurow, ‘{ So\ving the Productivity Problem,” Strengthening the Economy: Studies in Productivity (Washington, D. C.: Center for Democratic Policy, 1981),

p. 18.
Ch. 12—Federal Policies Affecting Electronics: Options for the United States 485

lnfrastructural and Adjustment Policies

The thrust of this policy alternative—of the

five, perhaps the hardest to summarize concisely—would be to create an environment that

would aid private firms in strengthening their

own competitive ability. As table 82 indicated,

it would do so by relying preferentially on

measures that support the infrastructure for

industry—technology development (including

R&D, incentives for innovation, diffusion of

technology within the domestic economy),

human resources (education and training, particularly in technical fields and including continuing education and retraining), and structural adjustment (measures that encourage mobility of capital and labor, investments in

growth industries, competition domestically

and internationally).

By designing policy instruments that target

particular industrial sectors only under special

circumstances, instead relying preferentially

on measures that affect the economy in more

aggregate fashion—often policies that fall in the

category of market promotion—the United

States might avoid the pitfalls of an industrial

policy with a strong sectoral thrust. 20 Aiming

to build future competitiveness, the role of the

Government under this alternative would be

to encourage beneficial change, while smoothing the negative impacts of adjustment.

Central to such an industrial policy is a sense

of dynamics—the reality of change over time

in national economies, in the world economy.

Government policies that run counter to ongoing shifts in patterns of trade, competition, or

technology are seldom effective in more than

a marginal sense; they rarely succeed in reversing ongoing transformations, although perhaps slowing them. They can aggravate the associated dislocations. In contrast, policies that

work in parallel with—even reinforce—procz~~~ark~t ~Jrr)mOtiOn p~licies are defined and discussed in U.S.

Industrial Competitiveness; A Comparison of SteeJ, Electronics,

and,4 utomobiles, op. cit. , pp. 155 ff; also pp. 175-182. Examples

in{. 1 ude ant it ru st, support for R&[) ii n d i n nf)t’ation, plus poli(: ies

directe(i at labor and capital market s—e. g., for enhan{. ing the

mobilitj’ of capital and labor in response to changing economic

(;ond it ions. The latter ar(: (,om monly referred to as a(l just ment

policies.

esses of economic and technological change,

or that aim at smoothing adjustment and easing dislocations, are more likely to have positive effects. This third alternative for a U.S. industrial policy flows from recognition that

comparative advantages shift over time, with

the result that some industries in some countries will thrive while others decline. Often the

arc of growth or contraction is obscured by

short-term fluctuations; sometimes declines

prove temporary, expansion resumes. The U.S.

textile industry is a case in point; the emergence of synthetic fibers provided an opportunity for revitalization through new investments that greatly increased productivity.

As the textile example illustrates, new technologies are one of the forces that can spark

renewal. Rather than trying either to anticipate

or counter them, governments can accept the

reality of such shifts and work toward maximizing their positive impacts, minimizing the

negative, Public policies that function in this

fashion include:

●

●

●

●

●

Aid and stimulus for the development of

new technologies, which might range from

money for R&D to improvement of the patent system.

Better mechanisms for the diffusion of

technology to industry, particularly to

smaller companies; one possibility is a network of federally supported centers with

this mission.

Tax incentives or other aid for firms that

install manufacturing technologies aimed

at improving productivity and competitiveness—whether new production processes or those that are well-proven; examples range from microprocessor-controlled heat treating furnaces to robots.

Support for training and retraining of employees displaced by economic change—

those in blue- and grey-collar ranks, as well

as professionals; this might entail encouragement of company-sponsored continuing education programs, as well as policies

that would support training and retraining irrespective of the boundaries of particular companies or industrial sectors.

Improvements in vocational-technical ed-
486 International Competitiveness in Electronics

.— ——

ucation at the post-high school level, with

particular attention to skills that will be

needed as a result of predictable changes

in the composition of U.S. industry—e.g.,

computer-aided drafting and manufacturing, service and repair of electronic systems.

Continued emphasis on high-quality engineering education—backed by renewed

Federal resource commitments—in fields

such as electrical and computer engineering, materials science and engineering, design for automated production, and the

wide range of other specialties that will be

needed for continued growth in high-technology industries.

In particular, renewed emphasis in universities, supported by Federal funds, on engineering design and on manufacturing

engineering—aimed at upgrading the quality of the work force in these professions

and bringing them more fully into the

mainstream of the engineering sciences.

Tax and other policies aimed at increasing the rate of capital formation, mor e

especially at encouraging investments in

emerging or rapidly expanding industries,

as well as investments in R&D and in manufacturing technologies that will increase

productivity in industries already well established.

Depending on the design of the instruments,

such a list could also-fit quite

under several of the other policy

discussed in this chapter.

Infrastructural Support

comfortably

orientations

Human resources—defined broadly to include management styles and techniques that

maximize the contributions of individual employees—are crucial for competitiveness. Any

industry depends on the skills and abilities of

the people it employs; chapter 8 outlined the

current problems in technical education in the

United States, as well as the general decline

in technical literacy among the public at large,

Education and training are traditional domains

of public policy. Declining emphasis on technical and scientific training in American

schools—as well as high unemployment alongside unmet demand for those with skills—point

directly to problems calling for Federal action,

Among the questions to be faced are: What

should people be trained in, beyond the obvious

needs for at least minimal competence in reading, writing, and mathematics? How can retraining best be accomplished? Within industry? Through community colleges and vocational educational programs? Whatever the response, it must incorporate a foundation for

continuing learning—on the job and off—if people are to keep pace with advancing technology. Widespread public attention focused on

such matters over the past year or two, together

with new initiatives emerging from Congress

and the executive branch, are positive signs;

the danger remains of a response that will

prove too little and too late.

Tax policies can create incentives for private

industry to train or retrain workers, engage in

R&D, invest in new production facilities. Still,

incentives alone do not always suffice—one example being long-term basic research of the .

sort that undergirds industries like electronics.

Only the larger firms find it in their self-interest

to support much basic research; the foundation

for the semiconductor industry, for instance,

came in considerable measure from Bell Laboratories. However, the unique circumstances

that caused Bell Labs, first, to perform a good

deal of basic research, and, second, to help diffuse the results, seem bound to change as

AT&T restructures and adapts to its new circumstances. Other large electronics companies

—IBM, Texas Instruments, General Electric—

also perform substantial amounts of basic

work, although it has been less accessible to

the R&D community at large. At various times,

Government laboratories and Governmentfunded research have made significant contributions—currently, the more basic elements

in the Defense Department’s VHSIC program,

as well as the $20 million per year that the Defense Advanced Research Projects Agency is

funneling into gallium arsenide.

Despite these examples, the level of research

that supports the U.S. electronics industry is

less than adequate. This is shown most graph-
Ch. 12—Federal Policies Affecting Electronics: Options for the United States 487

ically by plans, originating within the industry

itself, for joint R&D. Both the Semiconductor

Research Cooperative, organized by the Semiconductor Industry Association to fund university projects, and Microelectronics & Computer

Technology Corp. (MCC), an independent

profit-seeking venture, are aimed at similar

needs—technology development that will benefit a range of firms. The aims are to avoid excessive duplication, help diffuse research results, and undertake projects with longer time

horizons than individual companies feel they

can afford. Still, it is not at all clear that such

efforts will fill the research—as opposed to advanced development—vacuum. For example,

MCC will concentrate initially on four areas:

computer-aided integrated circuit design; computer architectures, especially those designed

with artificial intelligence in mind; productivity improvement techniques for software generation; and interconnections and packaging

for microelectronics devices.21 Three of these,

if not all four, are well removed from the basic

end of the spectrum. Likewise, the Semiconductor Research Cooperative has announced

plans to develop prototype large-scale RAMS–

an effort quite divorced from basic research.

In any event, as part of its industrial policy the

Federal Government could find positive ways

to aid such joint research efforts; if direct assistance were not forthcoming, at least the Government could takes steps to see that public

policies—e.g., antitrust enforcement—do not

hinder R&D that could be vital for the competitiveness of U.S. industry.

Antitrust, one of the fundamental varieties

of market promotion policy, is indeed showing signs of strain in the United States. As good

an example as any is the seemingly pervasive

concern of business executives that behavior

they regard as innocuous—for instance, multifirm R&D efforts such as MCC proposes to

undertake—will be subject to antitrust complaints. More fundamentally, when U.S. antitrust laws were drafted, most economic competition was a purely national affair; now in

many industries it is worldwide. When Amer-

—

2’(:, Ilarne\, “R&I] (;[J-()[1 (;ets Set ‘1’o open [ lp Sho[), ” L’/mtror]lc..s, Nlar. 24, 1983, [), 89.

ican firms seek to cooperate in R&D, what

weight should be placed on cooperation as a

response to foreign joint R&D activities--

sanctioned by governments and often funded

by them as well? The case for trying to reduce

the duplication of effort accompanying simultaneous pursuit of similar R&D objectives is,

of course, strongest at the basic research end,

fading as development is approached. In industries like semiconductors and computers, companies typically want to compete at the

development end of the spectrum, and Government in the United States has encouraged this;

in these highly competitive fields, American

companies find it difficult to cooperate and

probably always will (Japanese firms are not

dissimilar). Nonetheless, antitrust enforcement

seems to be a constant in business complaints

over Government regulation, and a real barrier—although perhaps as much psychological

as legal—even when firms desire to cooperate

only in basic research, The guidelines on joint

R&D published by the Justice Department in

1980 have done little to lower this barrier, ”

Moreover, the point at which cooperation in

R&D moves from being efficient and productive to inefficient and counterproductive will

be industry- and technology-specific. Neither

the Department of Justice nor the Federal

Trade Commission seems very well prepared

to deal with such questions.

The Federal Government can also play an important role in stimulating industrial development by helping ensure an open trading environment—something individual firms are ill-

-equipped to do on their own. Open trade would

complement this policy alternative as well as

the last two to be discussed. Indeed, for the

next alternative—support for U.S. firms exporting or operating on a worldwide basis—it

would be the centerpiece. In contrast, for the

policy approach under discussion here, export

——-

22S[,[, [ ‘,,$, ]~](/~jqfrj,j] (~{)~r]~)(~fj(il (If](lss ,4 Cornpsri.son of <$f[?~?l,

I+J/fl[tr[)Ili[;\, aIf~i .4 rltf)mf)l)i)es, {)~). I It., }Ip 184-185, for a re~it;w

of ant it rust l;im’ a n(i enf or[; cmcnt, I n(:l uding the joint resear(. h

gII i(le] I n~~~ .~~ ])ointtwl out earlier in th it chapter insight into

cxfx.utike branch i ntcnt ions {:(]n[:ern ing ant i trust enforcement

rn ust often t]e glea net] from sources ~~’h ich H() unpublishwI;. H., sj}~f’c hcs at ha r a SSO(, iat I o n m r(’t I n ~ \.
488 ● International Competitiveness in Electronics

— . —

success would be ranked as but one among a

number of goals.

Government efforts to reduce trade barriers

—direct and indirect—contribute in immediate

fashion to structural adjustment. An industrial

policy intending to promote competitiveness

should press for fair treatment of U.S. firms

that export or invest overseas, as well as for

vigorous competition within domestic markets.

Thus, trade policies could take their place

along with adjustment measures aimed at facilitating flows of capital and labor from static

or contracting industries to those with good

prospects for expansion and future competitiveness.

Adjustment

In many ways, facilitating structural adjustment lies, together with technology development, at the heart of this alternative, Adjustment policies are those that encourage movement of resources within the economy in response to market signals, as well as mitigating

negative impacts—on sectors in decline, groups

of workers affected by shifting competitiveness

or technological change, particular communities or regions. While the United States has experimented with a variety of such measures in

the past—ranging from Trade Adjustment Assistance (TAA) for employees who lose their

jobs because of import competition to the many

local and State development programs aimed

at attracting new industry—few of these have

functioned well. In particular, measures intended to aid workers or communities suffering from adjustment woes—TAA, administered

by the Department of Labor, the Commerce

Department’s Economic Development Agency—have come to be widely regarded as failures. 23 This is one reason the current administration has turned away from Federal efforts

at adjustment, arguing that markets—and those

affected by them—should be left to their own

devices.

——.

ZsEconomic adjustment programs in the United States are briefly reviewed in U.S. Industrial Competitiveness: A Comparison

of Steel, Electronics, and Automobiles, op. cit., pp. 155-156.

There is no question that many Federal initiatives aimed at easing adjustment—including

TAA, which functioned largely as a form of

supplemental unemployment insurance rather

than a positive aid to those seeking new skills

and new jobs—have been less than successful.

But the argument for falling back on the market, leaving those affected to shift for themselves, is weak; the people involved have little

control over economic events or impacts, The

plight of the individual is far different from that

of the corporation. Rationales for adjustment

assistance are well-accepted; they are grounded

both in improved economic efficiency and in

social equity. 24 It is true that market mechanisms will suffice for economic adjustment—

in the long run and in an overall sense. However, the problems that adjustment policies are

intended to remedy exist on a micro-level

rather than in the aggregate. While U.S. experience with job training and retraining has

not always been positive, the experiences of

other countries (ch. 8) demonstrate that manpower policies can function effectively, If

overall employment levels are a major objective, adjustment policies can play a mediating

role between growing and declining sectors.

Consider the situation of an assembly worker

in a color TV plant. As figures 57 and 59 in

chapter 9 indicated, while employment levels

have been declining in color TV, they have continued to rise in semiconductor production.

But while the consumer electronics industry

is concentrated in States like Illinois and Indiana, semiconductor firms have tended to locate in California. Since assembly labor in both

industries is essentially unskilled, employers

draw on local labor pools. It would make little

sense for someone in Chicago who has been

put out of work because of automation or foreign competition to move to Silicon Valley

Z4]b1d., pp~l 77- I 79. The efficiency argument is based largely

on barriers to mobility that keep people from moving to seek

work, also on the friction that retards wage declines in response

to changing market conditions. The equity argument, in simplest

form, holds that those who bear the brunt of adjustment suffer

from causes outside their control while others prosper–also for

reasons quite independent of their own decisions; under such

circumstances, society as a whole has good reasons for easing

the burden.
Ch. 12—Federal Policies Affecting Electronics: Options for the United States 489

.—— —— ———-————

Photo credit Cincinnati Mtlacron

Robot transferring refrigerator compressors

from one assembly conveyor to another

unless that person has specific skills that are

in demand in the California labor market. Even

then, relocation is a major hurdle, What sorts

of assistance might Federal policies provide in

this case? The obvious possibility is training

in skills for which there is current need; even

in the absence of relocation assistance, people

would then have greater incentives to move to

locations where jobs were available, The Government might operate the training program

or simply provide financial assistance to those

who could not finance schooling on their own.

Such programs can aid adjustment without

introducing economic distortions. Much the

same is true of supports for technology development and diffusion, Targeting the base and

infrastructure for competitive industries—

rather than targeting industries themselves—

can contribute to economic efficiency without

explicitly favoring some sectors of the economy, In this view, technology development and

diffusion encompasses much more than simply

R&D support. Indeed, diffusion—encouraging

firms to utilize available technologies, particularly manufacturing processes that improve

productivity—may, for many parts of the economy, be more vital than support for the development of new technologies.

Driving forces for technology diffusion and

utilization vary dramatically across industries.

Sectors at the forefront of technological change

and international competition—semiconductors or commercial aircraft rather than consumer durables—must and do take advantage

of the latest technical knowledge, There is less

impetus in industries that are growing slowly

or contracting; in the steel industry, American

firms have often failed to install the latest production equipment, although this would save

energy, improve labor productivity, and cut

costs. One reason is simply that alternative investments promise higher returns. Yet it may

not be wise, from the viewpoint of the economy

as a whole, to wait until the need for more efficient production equipment mounts to very

high levels—i.e., until payback periods are

short. Manufacturing firms that lag in moving

toward programmable automation or computer-aided design—perhaps because pressures to

improve productivity and competitiveness

build slowly at first—may at some point find

themselves overwhelmed before they are able

to react.

From a Government perspective, then, the

primary objective of structural adjustment

policies is to encourage resource flows-technological, human, material, capital—to the

more productive and dynamic sectors of the

economy, while providing assistance to workers and regions suffering from deteriorating

competitiveness. For the United States, market

promotion policies seem best suited to filling

this role, but other countries have sometimes

emphasized sectoral measures—picking winners and promoting them, for example—as a

means to “positive adjustment. ” This is much

easier in simple economies, such as those of

the newly industrializing countries.

Design and Implementation

What would be the likely effects on the U.S.

electronics industry of an industrial policy

oriented toward adjustment and infrastructural

support? If one intent of such a policy is to en-
490 ● International Competitiveness in Electronics

courage growing industries, the more dynamic

sectors of electronics—computers (particularly smaller systems and software), semiconductors, instrumentation, robotics—would be logical beneficiaries. Electronics typifies ongoing

structural shifts in the U.S. economy:

● growth in services, ranging from electronic banking and electronic mail to the

production of computer software itself,

many of these services made possible by

cheap computing power;

● increasing relative demand for skilled

workers—those with manual skills, as required for building, maintaining, and repairing advanced production equipment,

and those with mental skills, as required

of integrated circuit designers; and

● greater capital and R&D intensity associated with high technology.

Other growth sectors share similar characteristics.

The major assumption underlying an industrial policy oriented toward adjustment and infrastructural strengthening is that Government

is capable in a general way of identifying the

sources and impacts of economic change and

designing policy measures that will speed the

positive consequences while ameliorating the

negatives. Government need not depend on

sector-specific policies to accomplish this;

much can be done with market promotion

measures and other policies with aggregate

objectives.

Industrial policies that call on Government

to pick and choose among the sectors of the

economy risk political defeat or deflection; furthermore, they depend on the ability of policymakers to devise programs tailored to particular sectors without gross sacrifices in

overall economic efficiency, There are strong

reasons for relying on market mechanisms

where possible. Nonetheless, in many circumstances market forces alone are inadequate for

achieving legitimate goals of public policy,

Several of the cases were mentioned above: national defense, long-term basic research, Other

times, Government actions may interfere with

the operations of markets. Indeed, one of the

fundamental tasks for industrial policy makers

is to determine when markets are working well

and when they are not.

The task of’ devising policy measures appropriate to this third alternative for a U.S. industrial policy—what OTA has elsewhere

termed macroindustrial policy—must therefore

start with a strengthening of the Federal Government’s analytical capability, Nowhere in

Congress or the executive branch is there now

the expertise to grapple with the evolving dynamics of industries or markets domestically,

much less internationally, As in the case of a

critical industries approach, the Government

would need to begin by improving its abilities

for identifying patterns of change, understanding the forces driving them, and formulating

policy responses that would lead to desired

policy outcomes. This is not an easy task, but

it is certainly not impossible. Such a capability will be essential if U.S. industrial policies

are to be redirected to support growth sectors,

which almost by definition evolve in unexpected directions, As many examples in the

short history of computers and microelectronics show, such industries follow paths that

are full of detours and surprises, The reactive

approach of the past, with Government policies

are mostly responses to short-term economic

and political pressures, is far from optimal.

Indeed, even if the goal were to defer as

many decisions as possible to the private sector—the last of the five alternatives to be discussed—the Federal Government would still

need a basis for deciding which responsibilities

to retain. In any economy as complex as that

of the United States, Government decisions influence business activities in many ways—

often indirectly, and sometimes inadvertently,

At the minimum, they do this through taxation,

plus monetary and fiscal policies. To the extent that policy makers grasp the probable impacts of alternative courses of action, they can

provide an environment that encourages international competitiveness. Any of the five policy

perspectives outlined in this chapter therefore

implies an improvement in the Federal Government capability for analyzing industrial com-
Ch. 12—Federal Policies Affecting Electronics: Options for the United States . 491

petitiveness and the effects of public policy on

the activities of the private sector, Otherwise,

industrial policy will be made in the future as

it has in the past—by default—and other considerations will take precedence over competitiveness, productivity, and economic efficiency. In the absence of such analysis, successful

implementation of a coherent and consistent

industrial policy of any stripe would have to

be judged something of an accident.

Promoting the Global Competitiveness

of American Industries

An industrial policy directed at building the

worldwide competitiveness of U.S. industries

might be regarded as an extension of the longstanding thrust by this country toward open

trade—a policy that would entail, not only continuing pressure to reduce tariff and nontariff

barriers in all countries, but also active encouragement of exporting and foreign investment by American firms, Such an industrial

policy would differ from the others discussed

in this chapter first in its outward rather than

domestic orientation. Drawing on past examples of industries that have expanded rapidly while marketing aggressively on a world

scale—American manufacturers of computers

or aircraft rather than steel or consumer electronics—a globally oriented approach to industrial and trade policy would be based on the

presumption that active participation in markets all over the world is a primary route to

maintaining competitiveness. Some advocates

of such a policy would contend that if the U.S.

consumer electronics and steel industries had,

in fact, moved more decisively to export and

invest overseas during the 1950’s and 1960’s,

they would have been better positioned to

maintain their competitiveness during the

1970’s. Worldwide marketing and sales, along

with multinational production, are then viewed

as central elements of this policy alternative—

which is based on the premise that the most

competitive industries and firms are those that

prepare themselves to compete in the global

marketplace,

The United States has been a leader in the

movement toward an open world trading system since the later years of the depression.

After the passage of the Smoot-Hawley Act in

1930, tariffs steadily decreased—from levels

near 50 percent, to the range of 5 percent (ch.

11). Following the war, as the Marshall Plan

helped to rebuild the Western European and

Japanese economies, U.S. international economic policy was directed at promoting ‘‘free

trade” through multilateral agreements such

as GATT. This country provided much of the

impetus for the establishment of GATT, and

has almost always supported its efforts to lower

barriers to international commerce; open markets have been viewed as an important objective of U.S. foreign policy, a vibrant world

economy as central to the postwar political system.

Product Cycles and Structural Adjustment

This approach to industrial policy would take

as a starting point the fact that some sectors

of the economy, and some firms, will be better able to compete than others. Implicit are

notions of product cycles and trade restructuring. The constant pressure of international

competition, along with other forces acting on

the world economy—particularly technological

change—creates a dynamic of shifting comparative advantage. Manufacturers in countries at

the leading edge of a technology introduce new

classes of products first. In electronics, the obvious examples include digital computers, color television, dynamic random access memory

chips, video cassette recorders—the first three

commercialized by American firms, the last in

Japan. As such products move through their

lifecycles, the technologies they embody become better understood, easier for competing

firms in other nations to duplicate, As a result,

production costs grow more important—and

manufacture spreads to economies that are not

necessarily at the forefront of the technology

Thus, terminals and small processors for computer systems are now made in many countries—although often by subsidiaries of Amer-
492 . International Competitiveness in Electronics

ican or Japanese firms; but while a nation like

Brazil may have a burgeoning minicomputer

industry, this does not mean it will manufacture larger mainframes. A few years after dynamic RAMs were introduced by American

semiconductor firms, production was underway in Europe and Japan—by foreign manufacturers, as well as the overseas subsidiaries of

U.S. multinationals; eventually, RAMs will be

produced in countries like Hong Kong, South

Korea, and Taiwan. The spread of color TV

production has followed similar patterns; here,

the comparative advantage of the United States

has slipped further than for RAMs, and American firms have been able to maintain their

competitiveness only by transferring manufacturing operations overseas, VCRs for consumer

use were developed by Japanese firms, but as

the technologies involved diffuse, production

will begin in other parts of the Far East; it has

already started in Korea,

Product cycles in most industries follow similar patterns; the common feature is specialization of production in parts of the world favored—at a given time—by comparative advantage. Thus the United States emphasizes agriculture and technology-intensive manufactured

goods among its exports—along with services.

Where wages are low, labor-intensive products

are among the more competitive; to exploit

high technology, countries need a well-trained

work force—which normally will be well paid

by world standards. An open system of international trade and investment is intended to

allow product cycles to follow their natural

course, with nations specializing in what they

do best, Adjustment problems represent the

darker side of the picture.

One rationale for an avowedly global U.S. industrial policy is simply the persistent concern

that strains in the international trading system

will undermine that system’s openness. The

most visible sign of strain is the proliferation

of national industrial policies that, among other

things, tend to protect local industries while

discriminating against efficient producers in

other countries. Another is the frequency of

recourse to bilateral trade negotiations and

—

agreements, rather than the

preach of GATT; prominent

United States have included

multilateral apexamples in the

OMAs for color

TVs, Western European nations have seldom

been as committed to open trade as the United

States, and disputes over steel, textiles,

automobiles, and consumer electronics—ailing

sectors in Europe as in this country—have led

some observers to voice concern over revivals

of protectionism, even trade war.

Slow and painful structural adjustments lie

behind many of these pressures. Industries in

advanced nations with large and complex

economies seldom respond very quickly to

change—increasing wages, escalating raw material and energy costs, technological advance,

challenges from abroad, As living standards

rise and social welfare programs proliferate,

countries facing the need for rapid adjustment

find that sudden and sharp dislocations bring

equally swift political reactions, rather than the

more or less resigned acceptance of earlier

years and more primitive economies. Trade

barriers are an easy response.

The Relation Between Open Trade and

Industrial Policy

A global approach to industrial policy by the

United States would find a natural anchor in

the GATT system of multinational agreements.

Absent special circumstances such as industries calling for protection, nations have tended

to prefer the multilateral approach over bilateral negotiations—for consistency and to

minimize discriminatory impacts on some nations, Advocates of a global approach stress the

gains that producers in all countries can make

if free to develop their own strategies, combining domestic and foreign resources in an open

market system. A common corollary is to minimize restrictions on flows of technology, with

barriers limited to those motivated by national

security and arms control. Antitrust policies

also fit naturally into an industrial policy

oriented toward open trade and competition,

Cartels and monopolies—international or domestic—are among the classic examples of

market distortions, Because an industrial policy centered on open trade is motivated ulti-
Ch. 12—Federal Policies Affecting Electronics: Options for the United States 493

-.

mately by faith in market mechanisms, antitrust would be an essential element. Domestic

antitrust policies, along with multilateral

agreements fostering competition, would complement reductions in trade barriers.

What would this fourth alternative for a U.S.

industrial policy then look like? It might

embody:

international trade agreements, on a multilateral basis, aimed at further opening of

world markets and at keeping them open;

measures intended to ensure equal treatment of firms from all nations seeking to

export or to invest beyond their borders;

standardization of customs and other national regulatory procedures—product

standards, as well as those those dealing

with exports and imports; and

competition policies aimed at preventing

monopolization and cartelization in both

domestic and world markets.

As the list implies, nontariff and indirect barriers to trade would need a good deal of attention—as indeed they will regardless of the direction of U.S. industrial policy. Measures such

as those listed would have generally favorable

impacts on the U.S. electronics industry—particularly if genuine success were achieved in

dismantling nontariff barriers. Portions of the

industry that are already highly competitive

would be helped the most.

Promoting U.S. Trade Competitiveness

What else—beyond essentially passive measures aimed at opening markets—would be

needed for an industrial policy that encouraged

the global competitiveness of American industry? Compared to the early postwar years

when GATT was organized, the environment

for international trade has changed markedly.

At that time, the economic and political

strength of the United States was literally overwhelming. The United States was able to push

its allies—some, such as Japan, rather reluctantly—into the international system. Japan’s

reaction was to establish a new set of government supports for domestic industry in anticipation of trade liberalization, but at least

that country—and many others—made a commitment to membership in the international

trading community.

Now, over 30 years later, political and economic power are more widely dispersed; the

United States is still first among trading nations, but without the preeminence it once possessed, Forging international agreements is

more difficult in a multipolar world. The electronics industry is no longer the province of

a handful of technologically advanced Western

nations, but the battleground for increasingly

intense competition involving industrializing

countries as well. With the traditional leaders

exhibiting quite understandable concern, rapidly expanding economies in the developing

world look both to invade the markets of advanced countries and to protect themselves

from those a rung or two down on the ladder

of economic advance. As nations at all levels

adopt government policies in support of their

own industries, severe trade frictions can easily

develop–particularly when overall growth

slows. In essence, the current system of international trade is suffering its own adjustment

problems—it was conceived in a different era,

and is showing unmistakable signs of age.

More concretely, negotiations of past years

covered matters on which it was easier to reach

agreement—primarily tariffs—than those of today. In the Tokyo Round, still lower duties

were achieved. In a few instances, renegotiations on a bilateral basis have hastened reductions—witness Japanese concessions on tariffs

for semiconductors and computers. While this

process could certainly be pursued further—

and might be expanded to include the European Community—many tariffs are already at

low levels. As parity is approached, attention

shifts to areas less amenable to international

agreement: government procurement policies,

R&D subsidies, indirect barriers. Here, discussions between the United States and nations

like Japan have borne less fruit.

The protracted discussions over the procurement practices of NTT illustrate some of these

complexities. After months of negotiation and

debate NTT agreed, in 1981, to open bidding

to foreign firms, but American companies have
494 ● International Competitiveness in Electronics

not had much success in selling to the corporation. While the Americans tend to ascribe this

to informal barriers, the Japanese say U.S.

firms are not trying hard enough.25 Even rough

symmetry in public sector procurement policies can be difficult to achieve when both corporate and government practices differ among

countries. AT&T’s decision, mentioned earlier,

to give the Boston-Washington fiber-optics contract to its own subsidiary, Western Electric,

is a case in point. Fujitsu, which entered the

low bid, may (or may not) have offered a quotation below its reasonably expected costs in order to gain access to a rapidly expanding market, If it did so, the tactic is hardly unknown

to firms outside Japan, AT&T’s action was

taken after intense lobbying efforts within the

U.S. Government centering on claims that giving the work to a foreign enterprise would

jeopardize national security.26 After each such

occurrence, it becomes more difficult for the

United States to convince other governments

that open trade is intended as a two-way street,

Direct military procurement is, needless to say,

an even more sensitive subject—one where national interests will necessarily remain paramount,

Given such considerations, a logical first step

might be discussions on product standards and

customs procedures, where differences tend to

be visible and political controversy less intense.

This is not to say that agreements would be

easy or reach very far; the nations of the world

have never been able to agree on standards for

television broadcasting, electric power, or

which side of the road to drive on. International discussions extending over many years

aimed at settling on common designs for electrical outlets were abandoned in 1982 when it

became clear that agreement would be impossible. Still, continuing progress in reducing nontariff barriers can be expected—albeit slow and

painful. Many of these—e.g., government purchasing policies—are perceived as largely

domestic issues; after all, people often feel that

their own industries should be favored.

Zssee R. Neff, “ NT’r’s open Door Draws NO Crowd s,” Electronics, Dec. 29, 1981, p. 58.

‘

e

’’ Japan Runs Into America, Inc.,” op. cit.

Export promotion—a recurrent theme in debates over U.S. trade policy—is another facet

of the global approach to industrial competitiveness. Export incentives offered by the

United States have often been criticized as

weak and ineffective compared to those of

other countries.27 All trading countries employ

export promotion measures of one form or another, even though these have generally been

viewed as detrimental to a free and open trading system—particularly when they involve

subsidies, as opposed to activities that function

as advertising or related marketing aids. Subsidized export credits have been particularly

controversial—e.g., the low-interest financing

that Canada’s Government offered to New

York City for the purchase of subway cars (ch.

11).

The United States has recently taken a number of positive steps to help exporting firms.

The Export Trading Company Act—easing restrictions on bank participation as well as providing protection against antitrust suits for

firms that enter export joint ventures—which

became law at the end of 1982 is one example.

Estimates of the extent to which this act will

help American exports and create new jobs

vary considerably. 28 Consideration has also

been given to finding replacements for the

DISC (Domestic International Trade Corpora-

— ZTSee, for example, Export Policy, hearings, Subcommittee on

International Finance, Committee on Banking, Housing, and Urban Affairs, U.S. Senate, especially Part 3, Foreign Government

Policies and Programs to Support Exports, Mar. 9, 1978, Part

6, U.S. Programs and Facilities Designed To Support Exports,

Apr. 5, 1978, and Part 8, Oversight on Foreign Barriers to U.S.

Exports, May 17, 1978, Also Export Stimulation Programs in

the Major Industrial Countries: The United States and Eight Major Competitors, prepared for the Committee on International

Relations, House of Representatives, by the Foreign Affairs and

National Defense and Economics Divisions, Congressional

Research Service, Library of Congress, Oct. 6, 1978; H. L.

Weisberg and C. Rauch, “A Comparative Study of Export Incentives in the United States, France, the United Kingdom, Germany and Japan, ” International Division, Chamber of Commerce

of the United States, Washington, D. C., 1979; and R. A. Flammang, “U.S. Programs That Impede U.S. Export Competitiveness: The Regulatory Environment,” Center for Strategic and

International Studies, Georgetown University, Washington, D.C.,

1980.

‘EC. H. Farnsworth, “Measure Expected To Spur Exports, ”

New York Times, Oct. 5, 1982, p. D5; R. E. Taylor, “Law To Encourage Joint Export Ventures Is Expected To Be Signed by

Reagan Today,” Wal] Street journal, Oct. 8, 1982, p, 12. A particular aim is to help smaller companies wishing to export.
Ch. 12—Federal Policies —

tion) mechanism discussed in the preceding

chapter. DISCS have been determined to violate

U.S. obligations under GATT, and tax incentives that might have comparable impacts on

export competitiveness have been proposed.29 

In the United States, as concern over apparently slackening competitiveness has mounted,

many in Congress—as well as the business

community—have also called for changes such

as modification of the Foreign Corrupt Practices Act. The resistance during 1981 to proposals for scaling back the Export-Import Bank

illustrates the importance that many place on

a more active approach to promoting U.S.

exports,

Still, export promotion is a limited tool. The

roots of international competitiveness lie in

domestic industry—in the efforts of private

firms to design, manufacture, and market

goods. How these firms adapt to the realities

of shifting comparative advantage and changing competitive circumstance outweighs government policies aimed at encouraging exports

unless these policies function as subsidies of

substantial magnitude relative to the costs of

the goods in question. Even then, no government can promote all exports all the time. In

the longer term, therefore, export promotion

seldom has major effects on trade competitiveness. Of course, in a given case it may make

all the difference: promotional measures can

help firms and industries in temporary difficulty; they can be useful as a means of equalizing

competition by matching the efforts of other

governments; they can help private industry

get a foothold in new markets. But export promotion cannot reverse the tides of competitive

change,

It is precisely this point that an industrial

policy aimed at promoting the global competitiveness of U.S. industries would have to

confront—and on which it might founder. A

nation can certainly promote its industries; but

no matter how extensively it does so, all its industries cannot export at once. There will always be winners and losers in world trade. A

strategy aimed at promoting fair and open

‘“’’ Adrninlstration’s DISC Substitute Bill Introduced in Both

House, Senatf; t’ L’.S, Export Weeh]Jz, August 9, 1983, p. 685.

Affecting Electronics: Options for the United States ● 495

global competition implies that the mix of

American firms able to take advantage of opportunities in the world marketplace would

change over time—perhaps rather swiftly. It

also implies involvement of foreign firms in

U.S. markets—through direct investment as

well as exports. More so than the other four

alternatives—and especially a domestic market

preservation strategy, which would take penetration by foreign firms to be, in and of itself,

cause for concern—a global approach placing

high priority on market access for entrants

from all nations could be politically difficult

to implement. As pointed out earlier, when

firms and their employees in declining industries combine, their influence can outweigh

that mustered by the friends of open trade. The

negative implications for some sectors of the

American economy might be difficult for an

avowedly global U.S. industrial policy to deal

with—particularly given the poorly developed

adjustment mechanisms the Nation has in

place.

The United States is already experiencing the

considerable hardships that cities, regions, and

occupational groups face when industries lose

competitiveness slowly, as happened with the

American steel industry—or, even worse, rapidly, as in the automobile industry. Whether or

not these declines are permanent or transitory,

the hardships are debilitating, and an industrial

policy encouraging open world trade could

bring such changes more quickly. The primary

argument against a global promotional strategy

then lies with these short-term negative impacts; extensive promotion of U.S. industries—

without better methods for dealing with questions of adjustment—could place a heavy burden on those sectors unable, for whatever reasons, to compete effectively. In the long term,

a global strategy might increase economic opportunities at the aggregate level, but in the

meantime the price could well be judged too

high. This will be particularly true to the extent that economic growth is slow; rapid expansion gives companies, employees, and communities adversely affected by rising foreign

competitiveness a broader array of alternatives.
496 ● International Competitiveness in Electronics

Progress toward an open environment for

world trade has never come easily; today, the

pace of change may have picked up, interdependence risen, but the basic arguments in

favor of trade between nations have not altered.

The fundamental assumption underlying this

fourth alternative for a U.S. industrial policy

is that an open world trading system is in the

long run interests of all nations. In the United

States, despite periodic bouts of protectionist

rhetoric, both parties have generally supported

the proposition—flowing directly from notions

of comparative advantage—that if each country devotes its efforts to goods for which it is,

relatively speaking, an efficient producer, net

economic welfare will be maximized. provided

that world trade is not greatly impaired by tariff

and nontariff barriers, the exchange of products and services among nations will permit

people everywhere to attain standards of living that are as high as their resource endowments and state of development permit. An industrial policy based on this premise—a premise as true today as a hundred years ago—could

be viewed as an extension and reinvigoration

of traditional U.S. attitudes.

An Industrial Policy Centered

in the Private Sector

A fundamental reason why there has been

no coherent or consistent industrial policy in

the United States has been the widespread belief that corporate executives rather than Government officials have not only the ability but

the right to make decisions that affect business

activities. While many disagree with this view,

the political power of organized labor, consumer groups, and others who advocate a stronger Government role has had more impact on

relatively narrow questions such as rules for

collective bargaining or environmental protection than on matters of trade and competitiveness,

One of the more pointed indications of the

state of Government-business relations in the

United States is the attitude of the business

community toward the Department of Commerce. Nominally the center of advocacy for

business interests within the Federal Government, the Commerce Department is a weak

sister among Cabinet agencies—not because

corporations in America are weak, but because

business and industry do not take the Department very seriously, and often bypass it.

At a time when some Federal officials join

with spokesmen for industry in anti-Government rhetoric, the feeling that public agencies

can do nothing right naturally grows. A more

positive view might acknowledge that performance varies in both private and public

sectors—that the ups and downs of an International Harvester or a Chrysler Corp. may not

be all that different from the ups and downs

of a Government agency. Nonetheless, there

are political and institutional realities—many

reviewed in earlier sections of this chapter—

that must be altered if the Federal Government

is to design and implement a more coherent

industrial policy. The most pressing need is for

a better developed understanding among Federal agencies of how industries actually function. Advocates of this fifth and concluding

policy alternative believe—at least implicitly—

that Government cannot hope to succeed at

this, and should not try; they want to “get Government off the backs of industry, ” and leave

the private sector free to compete with minimum interference .30

Of course, some Federal involvement in the

affairs of industry will always exist—a minimal level is necessary, indeed is one of the reasons governments exist. But advocates of an

approach maximizing private sector responsibility for industrial policymaking argue that the

narrower and more limited the Government’s

role the better. Beyond the posturing that afflicts such questions, the argument becomes:

Government involvement in economic affairs

30w/hen po~led, corporate managers in the United States and

Japan respond very differently on questions dealing w“ith government “planning. ” When asked whether their economy would

benefit from: 1) more Government planning; 2) about the same

amount; or, 3) less planning, 90 percent of American managers

responded that less Government planning is called for; in Japan,

the response was evenly divided among the three alternatives.

See “Perspectives on Productivity: A Global View, ” American

and Foreign Attitudes on Productivit~’, hearing, Committee on

the Budget, U.S. Senate, June 3, 1981, p. 64.
Ch. 12—Federal Policies Affecting Electronics: Options for the United States ● 497

is counterproductive because it distorts market

mechanisms; governments too often subsume

or override the economic rationales for private

choices, on both supply and demand sides. 31

Under these circumstances, economic efficiency decreases—to the presumed detriment of all.

From this perspective, an industrial policy—

whether intended to encourage economic

growth and development or, at the other

extreme, emphasizing regulations and constraints on business activity—must seem bound

to weaken U.S. competitiveness. A related

argument holds that Federal regulations cost

industry and the public treasury more than the

social gains set against them. The most extreme

view is held by those who argue that any Government action impairs market mechanisms

and hinders efficiency; a more moderate attitude grants the Government a place where market imperfections can be unequivocally demonstrated. A still more centrist perspective—the

one to which the rest of this section is directed—holds that the appropriate role for Government lies in creating a climate conducive

to economic growth, giving industry access to

the tools for its own development. In many respects, this attitude is a traditional one in the

United States, viewing macroeconomic policymaking—control of the money supply, taxation,

Federal spending—as legitimate, but otherwise

believing that Government intervention in economic affairs is to be tolerated mostly as a last

resort.

Entrepreneurship has been a driving force

for American industrial development, with

business and Government coexisting rather

uneasily, but an industrial policy that would

defer where possible to the private sector does

not, then, imply that Government plays no role

at all, Public policies aimed at promoting capital formation would be consistent with such

an approach; so would, presumably, regulation

of business practices widely considered unfair

or predatory, export promotion measures of at

Jl~ne of the more thoughtful expos it ions of this view j]oint is

Redefining Government’s Role in the Market S~stem: A Statement bJ’ the Research and PolicJ’ Committee of the Committer

for Economic [je~’e~opment (Washington, 1). (;.: Committee for

Economic I)evelopment, July 1979),

least some types, and a trade policy that otherwise supported American business interests

overseas. What this alternative rules out first

and foremost would be attempts to develop sector-specific policies targeting key industries—

be these housing or semiconductors or energy,

Such an approach to industrial policy would

be consistent with recent emphasis on reducing Federal spending and trying to control

budget deficits, scaling back regulations, and

cutting corporate taxes. This policy direction

would, ideally, expand the financing available

for dynamic and competitive firms while leaving them free to make their own business decisions. It would, at the same time, avoid subsidies for declining industries or firms, just as

it would eschew attempts by public officials to

select and support growth industries. To those

favoring such a policy, it is the best hope of

the United States for maintaining its international competitiveness into the future,

Central to this policy option might be tax and

other measures aimed at capital formation. The

rationale for the Economic Recovery Tax Act

of 1981 (ERTA) was precisely this: Government

policies aimed at promoting savings and investment were held to be the engines of growth for

reviving the U.S. economy. As discussed in

chapter 7, there is little evidence as yet that

ERTA will serve this purpose, but its passage

could be taken as a sign of movement in the

direction of an industrial policy that would

leave corporations to their own devices.

Nonetheless, such a policy direction would

have to be judged one that, rather than moving away from the fragmentation characterizing past U.S. industrial policies, reinforces this

fragmentation. The reason is simple: without

any evident justification, ERTA increases differentials in tax treatment across sectors of the

economy (ch. 7).

On the other hand, movement toward deregulation of business activities represents a shift

toward greater policy coherence to the extent

that real progress is made in cutting back the

total number of regulations, the conflicts that

may exist among these, and the number of
498 ● /international Competitiveness in Electronics —

●

-—L.I ., La

●

●

✎✎✍ ✍

●

I

Automatic

Photo credit Un/versa/ /instruments Corp

assembly machine for placing leadless carriers on ceramic substrates

agencies that administer them. Of course, to

be effective in bringing a greater degree of consistency and harmony to regulatory policy, any

move toward deregulation must proceed without creating a set of 50 differing regulatory

policies at the State level.

In years past, Government regulations gradually developed into a set of constraints on

private enterprise that—despite undeniable

positive benefits—have often been judged inefficient. While the adverse impacts of regulatory policy on the competitiveness of American

industries have frequently been overstated,

regulations have had at least a small effect in

dampening overall rates of productivity

growth.

32 Even so, when Federal regulations

are examined sector by sector, there are few

cases of large and unambiguous adverse impacts on competitiveness. More often, the effects of regulation have been of the same general magnitude as for other public policies—

having positive as well as negative effects on

different sectors, different companies. At bottom, the most cogent criticism of Federal regulatory policy is simply that individual measures have too often been implemented without

32E, F. Denisen , “Explanations of Declining Productivity

Growth, ” Surtey of Current Business, August 1979,

p. 1.
Ch. 12– Federal Policies Affecting Electronics: Options for the United States 499

any explicit attention to the consequences for

productivity, competitiveness, and economic

efficiency—i.e., lacking even a rudimentary

balancing of benefits against costs. This is

hardly surprising given that most though not

all regulatory policies are directed at objectives

quite unrelated to competitiveness: clean air

and water, safe products, minimization of

workplace hazards. It may even be true that

regulatory policy as a whole has come to be

confused as well as sometimes inefficient, and

that regulatory rulings have hindered industrial

development while not always being effective

in their avowed purpose-for instance, protecting consumers. Certainly, advocates of deregulation cast U.S. policies in an unfavorable

light compared with approaches sometimes

taken by other countries-where regulations

may even be used, on occasion, to encourage

economic development. Broadly speaking,

however, most advanced industrial economies

subject private business to regulatory requirements rather similar to those in the United

States. Japan, for example, has instituted environmental protection measures that are restrictive by any standard. Nonetheless, many

in the American business community continue

to call for a rollback of safety and environmental regulations, as well as antitrust enforcement,

To some extent, this simply mirrors traditionally adversarial relations between business and

Government in the United States—attitudes

that in some cases must share responsibility for

declining U.S. competitiveness. For instance,

the differences in response among Japanese

and American automobile firms faced by regulation of exhaust emissions and fuel economy

in the U.S. market were striking. As might be

expected from examining the corporate strategies employed by Japanese firms in other industries, automakers like Nissan, Honda, and

Toyota have looked at regulations as new opportunities for finding a competitive edge.

Within corporate headquarters, Japanese executives may regard Government regulation

just as bleakly as their counterparts in Detroit—but they attempted to make the best of

the situation, as a long string of new model introductions beginning in the 1970’s attests.

As the discussion above implies, financial,

tax, and regulatory issues would no doubt comprise the core of a business-centered industrial

policy. Tax reductions and deregulation have

been at the head of corporate agendas for years,

In the context of electronics, tax policy is much

the more important, regulations having seldom

had much impact. Chapter 7, on financial issues, shows the ability to fund expansion in the

face of rising capital intensity to be one of the

key uncertainties for rapidly growing electronics companies. Fast-paced technical change—

making manufacturing equipment obsolescent—together with high costs of design and

development and rising levels of foreign competition create new financing pressures in

computers as well as semiconductors. Other

rapidly growing sectors of American industry,

particularly where technology moves quickly,

can expect similar problems—stemming in part

from the common desire of U.S. managers to

finance growth with internally generated

funds, as well as the declining role of stock

issues as sources of financing for American

corporations.

Would an industrial policy that cut taxes and

reduced regulations, leaving other matters to

the business community, help high-technology

sectors? The answer hinges on how they would

fare compared with other portions of the U.S.

economy. In terms of taxation especially, the

issue comes back to differential affects. Tax

policies, even when designed to be neutral

across industries, will never fully achieve this.

The depreciation schedules enacted by ERTA

are only one example. These will probably help

other sectors more than electronics, simply because many electronics manufacturers were

able to depreciate production equipment quite

rapidly under the old law; their capital cost

recovery periods have sometimes been shortened, but not nearly as much as in heavy manufacturing or primary metals. Firms earlier required to depreciate newly purchased assets

over many years get much greater benefits in

terms of internally generated cash flows from

ERTA. They may also find their ability to attract capital from external sources enhanced

relative to electronics firms. Furthermore, accelerated depreciation tends to benefit com-
500 ● International Competitiveness in Electronics

panics with substantial profits rather than new

and growing concerns that may still be spending more than they take in. The larger computer firms, for example, maybe helped more than

software vendors or semiconductor manufacturers, consumer electronics, where profits

have been low for years, is not likely to gain

much,

Is the example provided by ERTA typical of

what could be expected from an industry-centered policy approach? If only because older

and larger firms and industries tend to have

more accumulated political power, the answer

is probably yes; these sectors of the economy

might be able to skew the policy process to

their advantage, with newer industries suffering—if only in a relative sense, This is a major

liability of an industrial policy that would defer

where possible to business interests. Advocates

of this policy orientation must be prepared to

accept outcomes like the altered depreciation

schedules in ERTA. Policy directions would

continue to be determined largely by the

political process, and the greatest rewards

would probably go to the sectors that—together

with their employees—could muster the greatest political strength. These are likely to be

older, well-established industries—particularly

those whose employees are unionized. Where

such industries are suffering from international

competition, they will seek to shape policy in

ways that preserve their markets, profits, and

jobs.

Of course, the electronics industry has been

active and successful in its past lobbying efforts, and would be able to look out for itself

under an industry-centered approach. ERTA

legislation included a number of measures

Summary

that

and

The competitive situations of the U.S. consumer electronics, computer, and semiconductor sectors differ greatly, but they do have common features. How then to summarize the policy implications? The technological and market

leads of American electronics firms are narelectronics firms had actively sought, including

the R&D tax credit and changes in tax treatment of income earned by Americans working

overseas, These offer direct benefits to the electronics industry, particularly the R&D provisions. In addition to the tax credit, which permits a writeoff amounting to 25 percent of

spending for R&D above a base figure, equipment used in research can be depreciated

faster, Deductions are also allowed for apparatus and equipment donated to universities.

These measures are scheduled to expire in

1985; until then, at least, they will assist firms

in portions of the industry with extensive R&D

activities.

A further point that an industrial policy following this approach would have to confront

is the extent to which firms pursuing economic

self-interest may neglect objectives important

to the Nation as a whole. Basic research—the

sort that does not promise immediate payoffs—provides one example. Nor is it likely that

the health and safety of either the labor force

or the public at large would be served by an

industrial policy that deferred product and

workplace standards to industry, Regional impacts, along with questions of adjustment assistance for displaced employees are additional

cases where an industrial policy too heavily

oriented toward the desires of the business

community might be perceived by other segments of society as inadequate.

In the end, the question comes down to this:

If other countries are developing ambitious and

comprehensive programs to support certain of

their industries, can the United States assume

that absence of Government action is the best

response?

Conclusions

rowing. Manufacturers in Japan especially

have successfully followed strategies based on

selecting particular market niches, establishing

themselves in these markets, then expanding.

This was their mode of entry into the U.S. consumer electronics market, it has allowed them
Ch. 12—Federal Policies Affecting Electronics: Options for the United States ● 501

to deeply penetrate the American market for

some types of ICs, and is the approach they will

follow in computers. It has also helped Japanese firms to compete effectively in other parts

of the world. Electronics companies in Japan

have been aided by their government, although

the form and impact of the aid has varied a

good deal across the industry; still, the programs generated in recent years to stimulate

the expansion of high-technology sectors in

Japan, Western Europe, and several of the newly industrializing countries show a degree of

concern for industrial development far outstripping that in the United States.

At this juncture, U.S. electronics firms face

not only heightened competition, but also problems in financing continued expansion and in

finding well-trained people to fill their staffs.

The industry exemplifies the structural transformations taking place in the U.S. economy:

ever-growing requirements for skilled labor

and creative management; dependence on

R&D and the commercialization of new technologies in order to establish new markets or

retain old ones; rising capital intensity in the

process technologies necessary to enhance productivity or simply to make state-of-the-art

products; foreign competitors supported by the

industrial policies of host governments. There

are a multitude of problems ahead for the U.S.

electronics industry, and for others at the forefront of economic development—biotechnology, robotics, communication and information

technologies. Congressional interest in the international competitiveness of the U.S. electronics industry stems in part from the model

it provides for other key sectors.

At the same time, it would be misleading to

overemphasize the problems faced by industries like electronics. U.S. capital markets continue to function well. American semiconductor firms have made rapid strides in improving the quality of their products. The industry

is still the world leader in technology, though

not so far—nor so consistently—ahead. policies

followed by the Federal Government have

aided American electronics firms by opening

world markets for makers of computers and

eral policies been clear and direct obstacles to

efforts by the industry to improve its competitiveness.

What is missing are the links between the bits

and pieces of Federal policy that affect the

various portions of the electronics industry.

Government policies cannot and will not transform this industry or others: the private sector has provided the driving force for past

development, a pattern that will continue. But

public policies help create the environment

within which competition takes place, they set

rules, frame decisions. industrial policy could

provide a setting conducive to capital formation, R&D, education and training, free market competition. To the extent that Government

policies support technological development

and structural adaptation, they work in the

long-term interests of American industry and

the American labor force. A more coherent and

consistent industrial policy could make a

significant contribution to the competitive position of the U.S. electronics industry.

In the United States, industrial policy still

means different things to different people. To

some, industrial policy is viewed much like

supply-side economics was several years ago—

as an untried theory. To others, it suggests

government support for “sunrise” industries

or trade protection for threatened sectors like

steel or textiles. Some have argued that the

American political scene is so disorderly that

any attempt at a more consciously developed

industrial policy would be pointless if not

counterproductive. Despite the seemingly incessant debates over the successes and failures

of industrial policies in Japan or Britain or

Taiwan, all such views miss the essential point:

industrial policymaking is a routine activity of

all governments. In the United States, we can

continue to leave industrial policy to the random play of events, or we can try to improve

the system.

Politics lies at the heart of finding a more

consistent and coherent approach to industrial

policy for the United States. The starting point

is to recognize that industrial policy decisions

are being made all the time. The problems of

semiconductors. Only infrequently have Fed- American companies in consumer-electronics,
502 International Competitiveness in Electronics —

automobiles, or clothing and apparel were not

created by Government policy, but the absence

of a coherent approach to industrial policy has

virtually guaranteed a devolution to special interest politics. Faced with seeming chaos in the

political arena, many have simply thrown up

their hands, This implies accepting as inevitable long and torturous courses of events in industries like color TV—where final outcomes

of trade complaints going back to 1968 have

yet to be determined, or steel—where claims

by the American industry of dumping by foreign enterprises go back at least to 1959. It also

implies relying on the blunt instruments of

macroeconomic policymaking. Neither supply-side economics nor public pump-priming

of years past offer plausible remedies for the

current dilemmas of American industry. It is

certainly true that deregulation, lower rates of

inflation, and higher rates of overall economic

growth will help a wide range of U.S. industries, but urgent needs such as technology

development and diffusion, education and

training for displaced workers, and seed capital

for entrepreneurial businesses also call for attention by Government.

An industrial policy response following one

of the alternatives discussed in this chapter

could represent an attempt to find concrete

solutions to particular problems. Such a

response needs to be based on careful examination of the situation of American industry at

a given point in time. Advocates of a more coherent industrial policy for the United States

understand that Government decisions affect

the activities of industry in many and often subtle ways; they would encourage policy makers

to include competitiveness and technology

development more explicitly in the objectives

of policy, more consistently in its formulation

and implementation. At the broadest level of

generality, this implies a “vision” of long-term

economic development interposed in the policy

process; it means creating political constituencies for industrial policy rather than standing

by while the myriad of interested parties attempt to promote their own typically narrow

and short-term designs.

There is no doubt that improvement is possible; policymaking can be a purposeful activity characterized by learning from past experience within a framework of empirically based

analysis, Developing a more effective industrial

policy must begin in this spirit, while recognizing that the process is inherently political and

always will be.

Although a variety of policy instruments

could be used in pursuit of industrial policy objectives, in the U.S. context, it appears that

special stress should be laid on manpower

training, R&D and technology diffusion, plus

measures aimed at stimulating investment in

new and innovative firms and an open environment for international trade and investment.

Such policy initiatives, emphasizing structural

adjustment, would help in building foundations

for international competitiveness in electronics

and other industries.

The form that such an industrial policy might

take would have to be determined by Congress,

along with the executive branch and the many

interest groups with a stake in the outcome. To

be effective over the longer term, industrial

policy must be based on practical understanding of the functioning of the economy on a

sector-by-sector basis, with forward-looking

analysis of both problems and prospects. OTA

has outlined five alternative approaches to this

task; more than anything else, an effective industrial policy for the United States requires

a clearer view of where industrial development

in this country is headed, and of the Federal

role in aiding this development.
Appendixes
APPENDIX A

Glossary*

acceptable quality level (AQL).—The fraction of

defective items permitted in a group of parts (e.g.,

integrated circuits) that pass the statistical sampling tests agreed to by manufacturer and purchaser. An AQL of 0.01 percent, for instance,

means that no more than 1 defect per 10,000

parts, on the average, is allowed.

access time.—The time required to retrieve the contents from a specified memory location in a computer system, commonly the average time to fetch

a bit from an integrated circuit memory chip.

active device.—An electronic component that can

control or regulate an electrical signal. Examples

include most kinds of vacuum tubes, as well as

transistors.

actuator.—Causes mechanical force or motion in

response to an electrical signal. Examples include hydraulic cylinders (in conjunction with

other control system components) and electric

motors.

A/D converter (analog/digital converter).—A circuit that transforms analog electrical signals into

the equivalent or proportional digital representation, commonly so that they can serve as inputs

to a computer system.

advance pricing (also termed forward pricing).—

Setting prices for manufactured goods below current costs in the expectation that these costs will

fall as production experience accumulates and

scale increases. A common pricing strategy for

integrated circuits, where advance pricing has

been used to gain early market share, sacrificing

immediate profits for those in the somewhat

longer term.

analog.—Refers to electrical signals that can vary

continuously over a range, as compared to digital

signals, which are restricted to a pair of nominally discrete values.

architecture.—The overall logic structure of a computer or computer-based system.

binary.—Number system in which all values are

represented by combinations of a pair of symbols–e.g., “0” and “l. ” In contrast, the familiar

decimal or base 10 system represents all numbers

by combinations of the 10 symbols “O” to “9. ”

bipolar.—Transistors or integrated circuits in

which electrical conduction takes place through

the motion of both negative and positive charges.

* Marry of the te[.hnl(.al terms In(.luded In this gl[)~~ary are explalnedIn

more df’ta II, often w Ith rxarn pies, I n (.hapt(>r ‘) See, In i)art i[ ular, ap[wn -

(i I xes 3 A and ) H at t}){! enci (Jf that ( hapter

The negative charges are electrons, while the

positive consist of the absence of electrons where

these negatively charged particles would ordinarily be (the electronic vacancy, or “hole, ” leads

to a net positive charge). Bipolar ICs are faster

than unipolar (MOS) chips, but not as dense.

They also dissipate more electrical power.

bit.–A binary digit, which can take on one of two

values, typically written as “O” or “1 .“

bite (byte).–A group of binary bits, usually 8.

bubble memory.—A solid-state microelectronic

device in which binary data is stored in tiny magnetic domains (bubbles) given one of two possible polarities. Bubble memories are nonvolatile

but not random access; to read or rewrite data

in a given location, a string of bubbles must be

moved past a detector to reach the desired

memory location. Thus the access time depends

on where in the string with respect to the detector that location happens to be.

bus.—Circuit path by which electrical signals move

between components (e. g., microprocessor and

memory chip) or between circuit boards.

capacitor.—Passive circuit element that stores electrical charge, creating a voltage differential. Capacitors can be fabricated within integrated circuits, as well as in the form of discrete components.

captive.—A semiconductor manufacturer w’hose

output goes primarily for intracorporate consumption.

chip.—An integrated circuit, either partially or fully

completed.

circuit board.—A card or board of insulating material on which components such as semiconductor devices, capacitors, and switches are

installed.

clock.—An electronic circuit, often an integrated

circuit, that produces high-frequency timing signals. A common application is synchronization

of the operations performed by a computer or microprocessor-based system. Typical clock rates

in microprocessor circuits are in the megahertz

range, 1 megahertz equaling 1 0

6 cycles p e r

second.

core memory.—Computer memory in the form of

magnets that can have one of two states, thus

enabling storage of binary data. Now largely

obsolescent as a result of integrated circuit

memory chips.

CPU (central processing unit).—The portion of a

505
506 International Competitiveness in Electronics

digital computer where logical operations are

performed under the direction of software—in

other words, the portion of a computer system

where the program is executed.

CRT (cathode ray tube).—Displays an image on a

screen—as in a TV set or a computer terminal—

in response to electrical signals.

D/A converter (digital/analog converter).—An

electrical circuit that changes a digital signal into

equivalent or proportional analog form. See A/D

converter.

dedicated.—A piece of equipment—e.g., a computer processor—reserved for a single function, such

as aircraft flight control or the operation of a microwave oven. Dedicated processors are often

embedded within a more complex system so that

they are invisible to casual users. This is the case,

for example, with the computers used in electronic banking terminals.

digital.–Refers to equipment or systems which

operate on electrical signals that can be represented as strings of binary bits. In electronic circuitry, a pair of nominally discrete voltage levels

commonly stand for the two possible values associated with each bit.

disk drive.—Computer peripheral in which data is

stored magnetically on a rigid or flexible (floppy)

disk, In many cases, disks can be removed and

replaced, A drive unit rotates the disk beneath

magnetic heads for reading, erasing, and writing

data; a typical drive also includes circuitry and

control mechanisms for locating data and for interfacing with the processor.

distributed processing.—Refers to computer systems in which two or more CPUs are interconnected, with processing (program execution) carried out—or distributed—among the linked CPUs

under the control of system software.

doping.—Adding to a semiconducting material

small amounts of other elements (dopants) to

change its electronic properties.

electronic.—Refers to devices, components, or

systems in which electrical signals are used primarily to convey and manipulate information.

etching.—In semiconductor fabrication, surfaces

are etched—e.g., with an acid—to selectively remove material.

European Community (EC); European Economic

Community (EEC).–The EEC, established in

1958 by the Treaty of Rome, joins Belgium, Denmark, France, West Germany, Greece, Ireland,

Italy, Luxembourg, the Netherlands, and the

United Kingdom in a Common Market. The

European Community links EEC, the European

Coal and Steel Community, and the European

Atomic Energy Community. The Commission of

the European Communities is EC’s principal

governing body.

European Free Trade Association (EFTA).–-A

common market consisting of Austria, Finland,

Iceland, Norway, Portugal, Sweden, and Switzerland.

feedback control.-–Use of a signal generated at the

output of a process to vary one or more process

inputs so that the measured output is maintained within a specified range.

fiber-optics.-–Use of glass fibers to transmit light

for communicating information as an alternative

to electrical signals. Typically, the light is

generated by lasers,

firmware.—Computer software stored in replaceable hardware components, generally integrated

circuit memory chips such as ROMs (read-only

memory circuits).

floppy disk.—A thin, flexible disk made of a plastic

such as mylar and magnetically coated to be used

for computer memory and data storage. See disk

drive.

forward pricing.—See advance pricing.

gallium arsenide.—Semiconductor devices made

from this compound promise higher speeds than

silicon-based devices,

gate.—A simple electronic circuit that can implement a specified logical operation, In essence,

gates act like switches. Computer processing

units depend on large assemblies of gates, as do

integrated circuit memory chips.

GATT (General Agreement on Tariffs and Trade).

—The nearly 90 nations which belong to GATT

have agreed to work toward reduced barriers to

international trade. The organization, the rules

of which also have the name GATT, serves as a

forum for multilateral trade negotiations and for

dispute resolution.

GDP (gross domestic product).–The value of

goods and services generated within a national

economy, generally on a yearly basis.

GNP (gross national product).–The value of GDP

adjusted for revenues that enter and leave the

economy as a result of financial flows associated

with foreign investments (payments to foreign investors are subtracted from GDP, revenues from

overseas investments added),

hard-wired.—Refers to an electrical circuit or

system the operation of which is determined by

the hardware elements—e.g,, components and

interconnections—and cannot be changed

without changing the hardware configuration. In
App. A—Glossary ● 507

contrast, the logical operations performed by a

computer or a microprocessor-based system can

be changed by loading a new software program.

input/output (1/0).—Refers to provisions for entering data into a computer system or for receiving

output from the system. I/0 devices are pieces

of peripheral equipment with this purpose,

notably terminals and printers.

instruction set.—The group of logical operations

that a microprocessor or computer can carry out.

integrated circuit (IC).—An electronic circuit manufactured on a single substrate. Most ICs are produced on small chips of silicon and are monolithic—i.e., fabricated on and within the chip

rather than assembled to it.

integrated optics.—Refers to devices in which information is manipulated in the form of light

rather than electrical signals. Such devices might

be interconnected by optical fibers (see fiberoptic] ,

interface.—Circuitry, and often software, that

allows one piece of equipment to communicate

with another, as in the interface between a pair

of computers or between a computer and a disk

drive.

Josephson junction, Josephson device.-–Made

from superconducting materials (which must be

held at very low temperatures), these offer the

possibility of logic gates with very high switching

speeds, hence very fast computers,

learning curve, experience curve.—Graphical

depiction of declines in manufacturing costs with

time or with accumulated production volume.

While often attributed to learning by factory personnel and engineers, the curves—which tend to

show rapid cost decreases for semiconductor

manufacturing, leading to competitive strategies

based on advance pricing—also depend on many

other factors, including product design changes.

lithography.-–Processes related to photography

and printing by which patterns are formed on

silicon wafers during the fabrication of integrated circuits.

LSI (large-scale integration).–Refers to integrated

circuits which contain of the order of 104 devices.

main memory, primary memory.—The portion of

computer memory that the processor can address

directly (as opposed to mass or peripheral storage

equipment such as disk drives), The main memory normally holds the program being executed

as well as the data being manipulated.

mainframe computer.—A system, normally intended for general-purpose data processing, characterized by high performance and versatility.

Mainframes have grown steadily in capability as

smaller and less expensive machines have progressed.

mask.—Stencil-like grid used in creating lithographic patterns on semiconductor chips.

mass storage.—Refers to peripheral equipment for

computer memory suitable for large amounts of

data or for archival storage. Typical mass storage

devices are disk and tape drives.

mean time to failure, mean time between failures.—The common measure of reliability—average time between malfunctions that disable a system or substantially degrade its performance.

Normally determined through statistical estimating procedures.

microcomputer.—Refers to integrated circuits that

contain a microprocessing unit plus memory, as

well as to computers designed around microprocessors or single-chip microcomputers.

microprocessor.—An integrated circuit of which

the major portion is a digital processing unit.

Microprocessor families consist of groups of

similar chips each intended for a somewhat different class of applications,

minicomputer. —A small computer system, intermediate in cost, size, and processing power

between a microcomputer and a mainframe.

MOS (metal oxide semiconductor).—Oxide layers

grown on semiconducting substrates are used to

form transistors and other circuit elements. MOS

integrated circuits are unipolar rather than bipolar—i.e., electrical currents are carried by either

positive or negative charges but not both.

packing density.—VLSI circuits are packed more

densely than LSI circuits by making the individual circuit elements and their interconnections

physically smaller. This has required steady

improvements in manufacturing equipment—

e.g., for lithography—and careful control of the

production process.

passive devices.—Circuit elements, such as resistors, whose characteristics affect electrical signals but which cannot be used to regulate or control those signals.

peripheral.—Equipment used in conjunction with

a computer processor. Typical peripherals include keyboards and terminals, mass storage

devices, and printers.

peripheral chips.—Integrated circuits designed to

be used in conjunction with particular microprocessors or single-chip microcomputers, Common types include clock circuits, A/D converters,

and keyboard interfaces.

PROM (programmable read-only memory).—An
508 International Competitiveness in Electronics

integrated circuit chip that stores data permanently, A PROM can be programed with this data

after the chip has been manufactured; in contrast, data is stored in a ROM as part of the manufacturing process.

OEM (original equipment manufacturer).--OEMs

incorporate computers and other system components into their own end products. As an OEM,

General Motors purchases microprocessors to be

used in engine control systems and dashboard

computers.

quality.—Measures the extent to which products

meet specifications dealing with performance

and other functional parameters, and often appearance as well. Quality is determined at a point

in time—generally before the product enters service—in contrast to reliability, which is a measure

of the ability to continue meeting specifications

over time. In most cases, quality is determined

by statistical sampling procedures based on data

from testing and inspection that accompany or

follow manufacturing.

RAM (random access memory).—Most commonly, an integrated circuit that stores data in such

form that it can be read, erased, and rewritten

under the control of a computer processor, Any

memory location in a RAM can be addressed directly (random access) as opposed to sequentially or serially,

real time.—Refers to computer operations that

parallel (in time) related external phenomena, as

in real time control of industrial processes (see

feedback control). Real time processing often

makes heavy demands on the hardware elements

of a system, as well as the software.

register.—Location in a computer processor where

binary information is manipulated, Programs are

executed by operating on strings of bits brought

to the registers.

reliability .-Measure of the extent to which a product or system functions satisfactorily in service,

commonly quantified as the time between

failures that impair operation or degrade

performance.

resist, photoresist.—Chemicals used in lithographic processing of integrated circuits which,

much like photographic emulsions, can be exposed by light, X-rays, or other radiation to form

patterns.

ROM (read-only memory ).-Computer memory,

typically consisting of integrated circuit chips,

the contents of which can be retrieved at any

time but which cannot be changed by erasing or

rewriting, Often used for program storage in microprocessor-based systems.

second-sourcing, alternate sourcing.—When one

firm designs and develops a product that others

begin to manufacture, the latter are referred to

as second sources or alternate sources. Both

military and commercial customers often insist

on multiple sources for critical components such

as integrated circuits, An IC produced by a second-source supplier may be identical to the original design or it may differ in detail while remaining functionally interchangeable. Popular chips

are sometimes produced by a dozen or more

firms, Second-source manufacturers commonly

negotiate licenses or purchase technology from

the originator,

semiconductors.—Materials from which semiconductor devices are made—e.g., silicon, germanium, gallium arsenide—so called because their

electrical conductivities are lower than for good

conductors such as metals but higher than for insulators such as glass. The devices themselves are

also called semiconductors. Discrete transistors

and integrated circuits are the most common

types of semiconductor devices.

sensor.—Converts a pressure, temperature, or other

physical parameter into an electrical signal, often

for use in a control system. A digital speedometer

for an automobile transforms the output of a sensor into a miles-per-hour reading, as does an

airplane’s air speed indicator. In the case of the

automobile speedometer, rotary motion is converted into an electrical signal, while an air speed

indicator depends on the pressure created by the

motion of the airplane.

smart terminal, smart machine.—In essence, a

smart terminal is a small computer intended primarily for communicating with other, more

powerful computers, It can perform some processing itself, in contrast to a dumb terminal

which can communicate with a computer but

cannot execute programs. A smart machine—

e.g., a numerically controlled lathe—contains one

or more computer processors; these might be

microprocessors or minicomputers,

software.—Computer programs. More generally,

instructions or procedural descriptions,

solid state.—Refers to electronic components such

as transistors or integrated circuits in which the

functions are carried out within a solid material

(as opposed to a vacuum tube), or to systems (e.g.,

TV receivers) made with such components,

supercomputer.—At a given time, machines at the

upper limit of computing power—as measured

by computations per second or related measures

of performance—are called supercomputers.

system development.—Software generation for
App. A—Glossary 509

microprocessor-based systems is often referred

to as system development. Commercially available microprocessor development systems are

frequently used to help in the preparation of programs that will implement the desired functions.

Software accounts for a major portion of the

engineering effort for systems that use embedded

or dedicated microprocessors or computers.

terminal.—Generally includes a keyboard for data

entry, along with a display such as a video screen

for showing the input data, as well as output from

the computer(s) that the terminal communicates

with.

transistor.—A solid-state electronic device which

can control or regulate an electrical signal in response to a second signal, thus enabling

amplification of the first signal.

TTL (transistor-transistor logic).—Most common

of the families of bipolar logic circuits.

VLSI (very large-scale integration).—Refers to integrated circuits with of the order of 105 devices.

64K RAMs are at the lower end of the VLSI

range.

VCR (video cassette recorder).—Records and plays

back TV images on magnetic tape. Common consumer models can record off the air or from video

cameras. Also called VTRs (video tape recorders).

video disk.—TV images mechanically encoded on

spinning disks can be played back using a stylus

or laser beam. Current models cannot be used for

recording.

wafer.—A disk of silicon (or other semiconducting

material) on which integrated circuit chips are

fabricated. Today, wafers may be 4 inches or

more in diameter and accommodate hundreds of

chips.

Winchester disk.—A hard disk for computer memory which rotates within a sealed enclosure and

thus cannot be removed. Compared to removable

disks of the same diameter, Winchester drives

can store more data; however, they are not suited

for archival storage.

word.—The basic unit of information—having the

form of a string of binary bits—that a computer

processor works with. Typical word lengths

range from 4 to 64 bits; more powerful machines

are generally designed to use longer words.

yield.—In the production of microelectronic

devices, the fraction that survive all tests and inspection, function correctly, and can be sold or

incorporated into the manufacturer’s own end

products. Production costs depend heavily on

yields, which themselves depend on circuit design, fabrication equipment, and control of the

manufacturing process<
APPENDIX B

Offshore Manufacturing*

During the past two decades, many American

electronics firms have moved portions of their manufacturing operations overseas in search of lower

labor costs. Offshore production has been a major

element in cost reduction strategies, particularly in

price-sensitive portions of the industry such as consumer electronics and semiconductors. Laborintensive components and subassemblies for computers and many other products are also made in

low-wage developing countries. In electronics, as

in automobiles, foreign investment has been a

major force in transforming national industries into

international industries. Transfers of technology as

well as capital contribute to internationalization.

American electronics firms invest in overseas

plants to serve foreign markets, as well as reimporting goods to the United States (ch. 4). The former

are often termed point-of-sale plants, the latter offshore manufacturing or offshore assembly plants.

It is offshore investment to serve the U.S. market

that is the primary topic of this appendix. Other

arrangements—for instance, subcontracting with

foreign firms—will not be covered. Offshore manufacturing thus implies ownership and management control by an American corporation, Virtually

all the major U.S.-owned consumer electronics and

semiconductor companies have offshore plants,

mostly in Mexico and the Far East.

In both consumer electronics and microelectronics, the driving force for offshore investment has

been cost reduction. U.S. consumer electronics

firms—principally television (TV) manufacturers—

have moved overseas to meet competitive pressures

and preserve existing markets (ch. 5). Foreign investment has been largely a defensive tactic, a reaction to import penetration at home, In microelectronics, competition among U.S. firms has led to

transfers offshore.

From the perspective of the United States, offshore production has both positive and negative impacts. Compared to the plausible alternatives, the

net effects appear to be positive in most cases,

much more so in the case of semiconductors.

*This appendix is based largely on “Effects of Offshore and Onshore

Foreign Direct Investment in Electronics: A Survey,” prepared for OTA

by R. W. Moxon under contract No. 033-1400.

Economic Impacts of Offshore

Manufacture

Offshore investments in electronics affect domestic employment, the balance of payments, national

income, and the future competitive abilities of

American industry, The many studies of U.S. foreign direct investment, while seldom focusing on

offshore manufacturing per se, yield insights into

such investments. Even so, the evaluation of costs

and benefits remains controversial, and the evidence gives no clear guide to public policy. Immediate impacts generally get the most attention,

although longer term effects often prove quite different than short-term consequences. Table B - 1

classifies the impacts.

Table B-1 .—Possible Effects of Offshore

Manufacturing Investments

Effects within the Industry making the Investments

A. Domestic employment

1. Total U.S. employment in the industry (up or down).

2. Changes in skill mix in the industry (increase or

decrease in blue-collar job opportunities, expansion in

professional categories, etc.).

3. Regional employment shifts.

B. Domestic value added by the industry

1. Changes in total wages and salaries paid to domestic

employees of the industry.

2. Profitability of companies in the industry.

3. Tax payments by firms in the industry.

C. U.S. balance of payments

1. Shifts in trade balance involving products of the

industry.

2. Other current account flows.

3. Capital account flows.

Effects In related Industries (suppliers as well as customers)

A. Domestic employment (with same subcategories as

above).

B. Domestic value added (with same subcategories as

above).

C. U.S. balance of payments (with same subcategories

as above).

Longer term effects

A. Shifts in international competitiveness of U.S. industries.

B. Changes in concentration and structure of U.S. industries.

SOURCE” “Effects of Offshore and Onshore Foreign Direct Investment in Electronics A Suwey, ” prepared for OTA by R W Moxon under contract

No 033.1400, p. 5

510
App. B—Offshore Manufacturing 511

Immediate Employment Impacts in the

Industry Making Foreign Investments

Offshore investment by U.S. firms creates jobs in

foreign countries. To what extent do such jobs replace employment opportunities in the United

States? When a U.S. TV manufacturer moves its

assembly operations offshore, some Americans lose

their jobs. But if the firm stays in business as a

result of the cost savings from offshore assembly—

and if it might have failed without this move—then

the net effect can be to preserve some U.S. jobs, In

general then, if foreign investment improves the

competitive position of the American firm, the effects on domestic employment can be positive; the

investment may create foreign jobs while saving

domestic jobs.

Demonstrating unambiguously that this has or

has not happened is, unfortunately, seldom possible. The matter turns on a counterfactual question:

What would the outcome have been if the foreign

investment had not been made? Largely because of

this, past studies of the employment impacts of the

same investment have resulted in estimates ranging from losses in employment opportunities of

more than a million to gains of half a million.1

Foreign investment may also affect the mix of

jobs available domestically. Even if net employment

increases, certain job categories may suffer. Most

of the foreign workers in offshore manufacturing

plants perform unskilled production tasks. These

are the kinds of jobs that tend to be lost in the

United States. Thus, the domestic skill mix generally shifts in the direction of the more highly skilled

and professional jobs—technicians, engineers, managers. Unfortunately, unemployment in the United

States is concentrated in the ranks of unskilled and

semiskilled workers. Moreover, since the electronics industry is geographically rather concentrated,

offshore investment can have significant local and

regional impacts.

Immediate Effects on Domestic Value Added

Closely related to employment is the impact on

U.S. national income, or value added. Value-added

effects can, in turn, be divided into several categories: wages and salaries, profits, tax payments (table

B-l). Offshore investments generally substitute foreign for domestic value added. The magnitude of

these effects depends, however, on changes in the

competitive position of the firm making the investment. In some cases value added may increase both

in the United States and abroad.

Foreign investments can also affect the distribution of income among the categories of wages and

salaries, profits, and taxes. If offshore manufacturing substitutes foreign jobs for U.S. employment,

value added will tend to move from wages and salaries toward profits and tax payments. But a sharp

enough swing toward highly paid skilled and professional workers in the United States could reverse

this effect. Offshore manufacturing may also create

opportunities for firms to reduce their U.S. tax bills.

On the other hand, if the company’s competitive

position improves sufficiently as a result of offshore

manufacturing, net tax revenues could go up.2

Effects on the Balance of Payments

Offshore investments are reflected in the U.S. balance of payments through both the current and capital accounts, Foreign manufacturing generates imports, which show up on the current account, but

these will be partially offset by exports of materials

or components to the offshore plant. In the semiconductor industry, wafer fabrication has generally

remained in the United States, with wire bonding

and other labor-intensive assembly operations moving overseas. The wafers shipped to offshore plants

by American firms later return as finished integrated circuits (ICs); the latter are counted as imports, the former as exports. A substantial fraction

of U.S. trade in semiconductor devices—roughly

three-quarters in the case of imports (ch. 4. table

28)—represents intrafirm transfers of this type.

The U.S. capital account shows outflows when

American firms invest abroad, but moneys may

gradually return in the form of profits or other payments flowing back to the United States. Once

again, the primary question is: What would have

happened in the absence of the investment? Has it

enhanced the competitive position of an American

firm? Or has U.S. competitiveness declined? These

questions are central to any evaluation of costs and

benefits.

Some of these questions are seemingly imponderable—or at least subject to widely differing answers

While overseas investment by Amw(:an firms often d I spl,iI I~\ [ I S in-

~estment, resulting in losses of domestic. output [ioo d w rea \P\ i n [ J. S

tax ~Jayments, foreign earning~ rem lttt’d to the [ ‘nitecf States can offset

t hew lo~ses The net result may he {Inl\ a ~rnall net decrease riuc to t hc

foreign Invest rnt,ot prrhall~ ~,lort, lm~)ort~nt, tilt> distrihotion of national

I rl(.n me ten(is to he S}II fte(i tou dr(i (.ctpltctl, and dway from Iahor. Set’ 1]

H hlu~gr,i~ t’, Dlrm t ln~rt~stment ,.lhroad ,Ind the Afrlltlnirtiorrak L’ffe( (S

on the [ ‘rr~tfd Sta tf~s E[. or]on]~, SUI)( IImrn Ittw on hfultlnationa] (;orpora -

tlorrs, (;omrnitttw or) Foreign Relat]nn+, [ 1.S. S[~nate, August 1975.
512 International Competitiveness in Electronics

—thus estimates of the net impacts of foreign investment on the balance of payments cover a range

just as broad as for employment effects.3 Again, the

crucial points involve the extent to which investment overseas displaces investment at home, and

the extent to which offshore production may displace or, alternatively, stimulate U.S. exports. Such

matters can seldom be addressed on other than a

case-by-case basis.

Indirect Impacts on Supplier Industries

Offshore manufacturing in consumer electronics

or semiconductors generally cuts into the sales of

U.S. firms that supply these industries. Overseas

plants normally buy expendable supplies and materials locally; they may also purchase parts, components, and subassemblies from foreign rather

than American firms. U.S. firms supplying such

components as switches, circuit boards, resistors,

and capacitors to the TV industry suffered heavy

losses in sales as American consumer electronics

manufacturers moved overseas. 4 U.S. suppliers

have seldom been able to meet price competition

in overseas markets; when they lose sales to foreign

companies, domestic employment and value added

suffer. As their customers have moved offshore,

some U.S. component manufacturers have, not surprisingly, followed.

Technology Transfer and Other

Longer Term Impacts

Most of the effects outlined above have long-term,

as well as more immediate, aspects. Beyond direct

employment or financial consequences, what possible shifts in the competitive position of U.S. industry could result from transfers of technology

through offshore plants? If U.S. investments accelerate processes of technology acquisition by other

countries, the competitive advantages of American

firms in electronics and related industries could

erode. Such a result is more likely in rapidly industrializing countries like South Korea and Taiwan,

which have already emerged as significant competitors in consumer electronics, helped to considerable extent by transferred technology.

When multinational corporations invest in developing countries, they must generally train workers,

typically drawing on the local population not only

W. C. Hufbauer and F. M. Adler, L%’erseas Manufacturing Investment

and the Balance of Payments [Washington, D. C.: Department of the Treasury, 1968).

‘I,. Marion, “TV Parts Makers Face Offshore I“hreat, ” Electronics, May

24, 1979, p. 102.

for blue- and grey-collar employees, but for foremen

and, often, middle managers. In electronics, the experience that these people get has proved to be a

substantial benefit to indigenous firms; not only

does a pool of workers, both skilled and unskilled,

become available for locally owned companies to

hire, but the managers of these companies are often

people who got their start in a foreign-owned plant.

While it is easy to point to examples of this sort,

where foreign investment has accelerated industrial

development, technology diffusion is in any case

inevitable. Offshore investments may speed the

process, but consumer electronics technology was

accessible to firms in Taiwan regardless of U.S. investments there. Technology moves internationally by multiple paths, some of which are quite independent of investment patterns. Furthermore,

American electronics firms are not the only ones

to invest in developing countries, Japanese companies have been quite active in moving electronics

operations—particularly those that are lower technology and/or more labor intensive—to other Asian

nations. In consumer electronics, developing countries can probably learn more from companies like

Matsushita or Toshiba than from American manufacturers, Technology transferred abroad via U.S.

investments often helps to build foreign competitiveness, but the recipients could generally get the

same technology from other sources.

Evaluating Impacts

As pointed out at several places above, the underlying difficulty in trying to evaluate the consequences of offshore investment comes in the comparison of what did happen with what would have

happened if the investment had not been made. The

answer to such a question depends on judgments

about how markets would have been served without the investment, which in turn calls for analysis

of comparative costs and other factors in the competitive environment. Reaching conclusions on

what has taken place can be difficult enough—witness the length of this report. But it is easier than

determining what would have happened if a given

investment had not been made. Still, logic and the

available information can yield some insights.

Critics of offshore manufacturing by U.S. firms

often assume, perhaps implicitly, that the products

made abroad could have been produced here instead, contributing not only to domestic sales but

to U.S. exports. If true, U.S. employment, national

income, and balance of payments would all have

benefited from continued domestic production.

Critics also tend to assume that American compa-
App. B—Offshore Manufacturing . 513 — —

nies choose foreign investment over domestic manufacturing in order to increase their own profits,

and that the company’s competitive position would

not be seriously threatened if it chose not to invest

abroad.

Most defenders of offshore investment acknowledge that jobs are transferred abroad in the short

run, but argue that the situation would in the longer

run be even worse without these investments. They

emphasize that most such investments are defensive reactions to competitive threats, domestic or

foreign. When the primary competitors are foreign,

and American firms do not respond by moving offshore, supporters of offshore manufacturing argue

that the United States would end up importing the

same goods from foreign-owned rather than U, S.-

owned plants. Offshore investment thus preserves

at least some benefits for the United States, because

exports will go to the offshore facilities, professional and skilled jobs remain here, and the balance

of payments will look better than it otherwise would

have.

The counterresponse of the critics is generally as

follows. If the primary intent of the offshore investment is to help U.S. firms meet import competition,

then the proper response is simply to restrict imports. Interest groups that accept this argument

may then combine, as they did in the Burke-Hartke

bill, a call for protection against imports with a call

for restrictions on offshore investment. As in so

many questions involving shifting comparative advantage and the consequences for industrial

policies, when the economics of the situation are

cloudy—as they are here—political considerations

tend to become dominant.

Motivations for Offshore Investments

American electronics firms establish offshore

manufacturing facilities to take advantage of lowcost foreign labor. Investing companies see cost

reductions as critical for meeting competitive

threats from foreign enterprises, or to expand output and sales in competition with other domestic

firms, or both.

Cost Savings for Products

Manufactured Offshore

American TV firms make monochrome sets offshore, as well as subassemblies and complete chassis for color receivers. Production is labor-intensive, with low skill requirements, involving such

tasks as inserting components in printed circuit

boards, assembling tuners, winding coils, and making subassemblies for picture tubes. Offshore semiconductor manufacturing has generally been limited to assembly, primarily wire-bonding and encapsulation. In recent years, some testing has been

performed overseas as well, usually as an aid to

quality control. Many U.S. semiconductor firms

also subcontract to local companies in developing

countries,

As table 18 (ch. 4) indicated, wages are much

lower in developing countries than in the United

States or even Japan. Although labor productivity

in such countries may also be low compared to domestic plants, large savings also can still result. In

1980, the average hourly compensation for American workers in the electrical and electronic equipment industry was $9.59; in the more popular locations for offshore American subsidiaries, it ranged

from $1.13 in Singapore to $2.40 in Mexico.5 Although wages have been increasing more rapidly

in offshore locations than here, offshore production

has continued to be attractive in making both TVs

and semiconductor devices. To some extent, firms

have responded to wage increases by moving on

to other countries. For instance, two American

companies have announced plans to invest in Sri

Lanka, where wage levels remain very low.6

Because costs for wafer fabrication and testing

make up a much larger percentage of the total for

complex devices, offshore manufacture yields

greater savings for discrete semiconductors and

simple ICs. Table B-2 illustrates this, based on

rough cost structures for simple and complex devices, and applying two arbitrary ratios of U.S. to

offshore wage rates. Substantial savings are possible at either a 10-to-1 or a 5-to-1 wage ratio, but the

margins are much larger for the simple device.

In TV manufacture, the net savings are smaller

as a percentage of total production costs. Nevertheless, for some kinds of subassemblies they can

be substantial, and in a highly price-competitive

market—as TVs have been—any saving can be important. Zenith estimated in its annual report for

1977 that the transfer to Mexico and Taiwan of circuit module and chassis assembly for color sets

would lower its unit costs by $10 to $15.

Strategic Implications

In consumer electronics, offshore manufacturing

was a reaction to severe import competition, pri-

——

‘Information from Bureau of Labor Stat] st]cs, Off Ice of Product l\.lty

and Technology. Hourly compensation ]n Japan averaged $5 15.

61. Antelman, “Harris to Construct $19 [SIC] IC Faclllty In Srl Lanka, ”

E)ectron}c ,Nrems, Feb 8, 1982, p. 39 h40torola is the second U.S. firm

planning a factor} there,
514 International Competitiveness in Electronics

Table B-2.—Cost Comparison for Offshore Assembly of Semiconductorsa

Discrete devices or simple integrated circuits Large-scale integrated circuits

Domestic assembly Domestic assembly

Wage ratiob Wage ratiob

Offshore assembly 10:1 5:1 Offshore assembly 10:1 5:1

Cost of chip . . . . . . . . . . . . . $0.015 $0.015 $0.015 $1.00 $1.00 $1.00

Assembly cost. . . . . . . . . . . 0.050 0.500 0.250 0.15 1.50 0.75

Packaging cost . . . . . . . . . . 0.050 0.050 0.050 0.50 0.50 0.50

Testing cost. . . . . . . . . . . . . 0.020 0.020 0.020 0.75 0.75 0.75

Reject cost. . . . . . . . . . . . . . 0.015 0.015 0.015 1.00 1.00 1.00

Total . . . . . . . . . . . . . . . . . $0.150 $0.600 $0.350 $3.40 $4.75 $4.00

‘The basic costs used In this table are from A Report on the US. Serrr/conductor kdustry (Washington, D. C.: Department of Commerce, September 1979), p. 73 These

costs do not apply to spectfic devices, nor are they necessarily current The purpose is simply to i I lustrate the magnitude of the cost savings ava!lable through offshore

bassembly

Assumed ratto of U S wages to wages In offshore plant

SOURCE “Effects of Offshore and Onshore Foreign Direct Investment in Electronics A Survey, ” prepared for OTA by R W. Moxon under contract No. 033-1400, p 29

marily from Japan. Sales had been lost, and profits

cut to low levels or to losses; a number of smaller

American TV manufacturers succumbed during

the period that RCA, Zenith, and GE were moving

offshore. The story in microelectronics is quite different. Imports—exclusive of those from subsidiaries of American firms—were not a major factor

while U.S. firms were transferring production overseas; in the 1960’s, imports from foreign-owned

companies accounted for only 1 or 2 percent of U.S.

sales.

For semiconductors, the primary motives behind

offshore assembly were:

1.

2.

3.

Cost Reduction as a Stimulus to Sales. Price

declines have led to a continuous stream of

new applications of semiconductors—in other

words, demand is highly price-elastic. As sales

mount, costs drop through learning curve effects. Offshore assembly accelerated price declines still more, opening further markets.

Capital Investment Constraints. Semiconductor firms have had to continually increase

capital spending to keep up with exploding demand and advancing technology, but have not

always generated the profits needed to fund

capital investment internally (ch. 7). Given the

need for investment in costly wafer fabrication

and testing equipment, offshore assembly offered an attractive way to expand capacity

while conserving capital.

Risks of Large Capital Investments. Especially

during the 1960’s, when many offshore plants

were established, semiconductor firms were

wary of capital investments in automated production equipment, The fear was that technological change might quickly make them obsolete, For example, semiconductor packaging

has changed a good deal, first as discrete devices gave way to ICs, later as ICs grew more

complex. Several companies suffered as a result of automating at the wrong time. Offshore

assembly offered flexibility without the risk of

technological obsolescence. When technology

and/or demand stabilizes for a given product,

automation becomes more attractive, and assembly is occasionally brought back to the

United States.

Once some American firms succeeded in cutting

costs by moving offshore, others were forced to follow; later, Japanese semiconductor manufacturers

did the same.

Alternatives to Offshore Manufacture

American firms invest overseas because to them

this seems the best course of action given their competitive situation, If this possibility were foreclosed

—e.g., by Government policy—what other avenues

are open? The following appear to be the primary

choices:

1. Maintain production in the United States,

using labor-intensive processes similar to those

that have been followed in offshore plants.

2. Maintain production in the United States, investing in automated equipment.

3. Subcontract production to an independent foreign manufacturer.

4. Discontinue production and sales of the product or products in question.

These four possibilities are briefly examined below.
— — —

App. B—Offshore Manufacturing . 515

—

Maintain U.S. Production on a

Labor-Intensive Basis

For some consumer electronics products, where

the savings from offshore sourcing have been relatively small, this would probably be the alternative

chosen. Nevertheless, the loss of the cost savings

from offshore assembly would hurt the competitive

position of U.S. firms, some of which would probably move to lower cost areas within the United

States.

This alternative has little to offer for semiconductor companies faced with increasing competition

from foreign manufacturers. Substantial cost penalties would hurt sales, especially for mature products,

Automate Domestic Production

For many products that are now assembled offshore, automat ion is technically feasible. American

TV manufacturers already use automatic component insertion to a considerable extent (ch. 6); investments in this and other automated manufacturing methods could be accelerated. Automation has

been spreading rapidly in the semiconductor industry. Although automation is not at present feasible

for all types of semiconductor products-sometimes for technical reasons, other times because

production runs are short—finding the capital required is a more central issue for many firms in the

industry. Smaller firms especially would have trouble financing extensive automation. As chapter 7

pointed out, funds are scarce and capital-intensity

increasing in semiconductor manufacturing; managers’ priorities place automation fairly low as long

as there are feasible alternatives. Investments in

automat ion would divert funds from advanced

wafer fabrication equipment, as well as from research and new product development—without

which, in this fast-moving industry, automated production equipment would be useless.

Subcontract Manufacturing to

Foreign Enterprises

Subcontracting labor-intensive production operations to foreign firms has short run consequences

for the United States not unlike those of direct foreign investment, and the U.S. semiconductor industry has in fact made considerable use of foreign subcontracting, Some American consumer electronic; s

firms do the same. Subcontracting contributes to

flexibility in responding to competitive pressures.

Disadvantages come with respect to coordination

in matters such as production schedules and cost

or quality objectives. And while subcontracting

saves capital compared to direct investment, direct

production costs will be higher because oft he profits sought by subcontractors.

Especially in the semiconductor industry, but

also in consumer electronics, this option might well

be the first choice of American companies unable

to establish their own foreign subsidiaries. The attractions are especially great for low-volume products where a foreign subcontractor with several

customers might be able to achieve scale economies.

Discontinue the Product

Unless a firm had already decided on such a step,

this would not be the first choice—but it might not

be the last. Whether American companies would

stop making some products if prevented from moving offshore depends on the extent to which their

other opt ions are practicable and cost effective.

Offshore Manufacturing Compared

to the Alternatives

Of the four options, U.S. consumer electronics

firms would probably adopt a mix of the first three,

depending on their product lines and competitive

circumstances, In particular, the smaller consumer

electronics manufacturers are much more limited

in investment possibilities—i.e., in automation--

than companies like GE or RCA. In the semiconductor industry, the cost savings from offshore production are so large—table B-Z—that most American merchant firms would no doubt subcontract to

foreign enterprises if they could not invest overseas

themselves. Some production would be transferred

back to the United States, probably high-volume

products made by larger companies.

What would be the impacts on the U.S. economy

of the four alternatives compared to offshore investment? To address this question, the effects on

domestic employment, balance of payments, and

the other categories listed in table B-1 could be compared. At least in principle, scenarios could be constructed for the alternatives, singly or i n combination, most likely to be chosen by a given company

or industry. ideally, estimates would cover a period

of years, because an offshore investment might, for

instance, initially cause an outflow of capital which

in later years could shift to an inflow. In any such

procedure, assumptions would have to be made

concerning the future competitive environment for

American firms,
516 ● International Competitiveness in Electronics —

A Case Example

Rather than pursuing an abstract analysis like

that outlined above, the methodology can be applied to a simple example, a real company which,

for purposes of the case study, has been renamed

Systek.7

Systek, in 1969, decided to build a plant in

Taiwan for assembling both complete automobile

radios and subassemblies. All production was to be

sold to Systek’s U.S. operations, where final assembly and testing would take place. The company’s

management chose to make this investment because of a deteriorating competitive position; by

moving offshore, the company felt that it could cut

its production costs and prepare for upcoming battles with Japanese producers. Automobile radios

sold largely on the basis of price, and Systek’s major customers, U.S. auto manufacturers, continually

solicited and compared price quotations from various suppliers. By the late 1960’s, the automakers

had begun to receive bids from Japanese electronics

companies; Systek’s management felt that the company would soon begin losing sales to the Japanese

unless it could significantly lower its own costs and

prices.

Systek evaluated several alternatives before building its Taiwanese plant. The company had already

automated its U.S. factories as much as it judged

practical; the only option it saw for cutting costs

7’I’he { asw wa\ orlgl nally puhl]shtxi, first I n 1969 and In rev iwi form

In 197.1, as “Systck I ntcrnatlonal ” hy tht Iiar,(lrd llusines~ S{ IItlo]

Table B-3.—U.S. Balance of Payments

while remaining in the United States was to move

production from its urban site in the north to one

of the Southern States, where costs would be lower.

Management judged this to be no more than a temporary solution. Systek also considered subcontracting the assembly of its line of auto radios to

a Japanese firm, but could see little advantage in

this choice because Systek had the resources and

expertise to establish its own foreign subsidiary,

which would have lower costs than a subcontractor could offer.

After a detailed feasibility study, the offshore alternative was chosen; Systek-Taiwan began production in late 1969. Operations went smoothly for the

first few months, but then sales began to suffer because of a decline in the U.S. economy. Production

had to be cut back in Taiwan. As sales continued

to fall, the manager of Systek’s U.S. plant placed

fewer orders with Systek-Taiwan; finally these

orders stopped entirely, and most of the workers

in Taiwan had to be laid off. At this point SystekTaiwan’s management was authorized to seek other

business, and by mid-1971 had begun doing electronic assembly work for a number of Canadian

and European companies.

Tables B-3 and B-4 examine the balance of payments and employment effects of Systek’s investment in Taiwan. The tables are based on the company’s pro-forma projections for the first 5 years

of operations to illustrate the expectations of

Systek’s management at the time the decision was

made. The actual results in terms of both employment levels and flows of funds turned out to be

Flows With and Without Systek Investment

Capital flow (thousand of dollars)’ —. ———.

U.S. exports

Capital Loan of capital U.S. exports Royalties Dividends Other payments to

Fiscal year outflow repayment equipment of components U.S. imports and fees and interest the United States Net flow

With Investment (Systek projection)

—

1969 (4 months) -$5,900 + $1,440 + $1,140 + $528 -$2,930 – + $41 + $31 9 -$5,360

1970 ......, . . . — + 850 – + 1,580 -14,000 + 238 + 147 + 1,140 -10,000

1971 . . . . . . . – + 1,010 — + 1,310 — 17,100 + 237 + 147 + 1,360 -13,000

1972 . . . . . . . . . . – 700 — + 773 -19,900 + 238 + 174 + 1,580 -16,400

1973 ....., . . . — : — + 858 -22,000 + 242 + 220 + 1,760 -18,900

1974 . . . . . . . . . . – — — + 946 -24,200 + 272 + 241 + 1,930 -20,800

Total. ... -$5,900 + $4,00 0

Without investment (estimated)

1969 (4 months) — –

1970 . . . . . . . . . . – –

1971 ... — —

1972, . . . . . — —

1973 ...., . . — –

1974 ....., . . . – —

Total . . . . . . – —

+ $1,140

—

—

—

—

—

—

—

+ $6,000

—

—

—

—

—

—

—

$1OO,OOO + $1,230 + $970 + $8,090

$5,700

13,400

- 23,000

-33,700

-45,900

-$121,700

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

+ $570

+ 1,340

+ 2,300

+ 3,370

+ 4,590

+ $12,170 —

-$84,500

$5,130

12,060

- 20,700

-30,300

-41,300

-$109,000

aplus indicates (nflow to the United States, minus indicates Outflow

SOURCE “Effects of Offshore and Onshore Foreign Direct Investment In Electronics A Survey, ” prepared for OTA by R W Moxon under contract No 033-1400, p

44, based on company records and author’s estimates
-—

App. B—Offshore Manufacturing ● 517 —

Table B-4.—U.S. Employment Levels With

and Without Systek Investment

Systek employment in the

–United States (number of workers)

Production Other –

Fiscal year workers employees Total

-—

With investment~ (Systek projection)

— -

1969 (4 months) ., . 1,480 452 1,932

1970 ..., . . . . . . . 1,283 393 1,676

1971 ., ., ... . . . 1,204 368 1,572

1972. , . . . ... 1,124 341 1,465

1973 ..., . . . . . . . . . ., 1,120 341 1,461

1974 ......, . . . . . 1,115 339 1,454

Without investment (estimated)

1969 (4 months) . . 2,021 641 2,662

1970 . . . . . . . . . . . . . . . 1,767 554 2,321

1971 . ., . 1,439 472 1,911

1972, . . ... . . . . 1,025 340 1,365

1973. , . . . . . . . . . . . 542 181 723

1974 . . ., . . ...,,..,, — — —

SOURCE ‘;ffects of Offshore and Onshore Fore!gn DtrectlnvestmentIn El;-

tron!cs A Survey, ’ prepared for OTAby R W Moxon under contract

No 033-14C0, p 44 Based on company records andauthor’s estimates

heavily influenced by the business downturn in the

United States. In tables B-3 and B-4, Systek’s projections are compared with estimates by OTA’s

contractor of the probable consequences if the investment in Taiwan had not been made. Table B-3

gives the estimated flows of funds, table B-4 the

employment comparison. The assumptions forming the basis for the estimates are discussed in detail below. The net effect of the investment in Taiwan, obtained by subtracting the ‘‘without investment’” case from the “with investment” case, appears in table B-5.

Based on the assumptions made, the initial impacts of Systek’s investment are negative—both capital and jobs are transferred to Taiwan—becoming

positive as time passes. This is typical of foreign

investments for purposes of offshore assembly; the

short-term impacts tend to be negative, but over the

longer term the trend reverses, provided the investment is assumed necessary for maintaining competitiveness.

In table B-3 the major flow of funds category is

that associated with imports; other financial flows

are much smaller. imports have been assumed to

increase much more rapidly in the absence of

Systek’s investment in Taiwan; in fact, as can be

seen in table B-4, by 1974 it has been assumed that

Systek would no longer be making automobile

radios in the United States under the “no investment” scenario, and its domestic employment

would fall to zero. How realistic is this scenario?

Table B-5.—Net Effect of the Systek Investment in

Taiwan on U.S. Balance of Payments and Employment

Employment

Balance of payments flowsa(number of

Year (thousands of dollars) employees)

1

-

969 (4 months) -$5,360 –730

1970 ..., . -4,870 645

1971 .., ... ., . -940 339

1972 .., . . . . . + 4,300 + 100

1973. , . . ... ., . . + 11,400 + 738

1974 ...., . . . . + 20,500 + 1,454

aPlus indicates inflow to the United States, minus indicates outflow.

—

SOURCE Derived from tables B-3 and B-4

Photo credit: RCA

Consumer electronics assembly

The assumptions, based on events elsewhere in the

consumer electronics industry, are as follows:

If Systek had not invested in Taiwan, it would

have moved the same manufacturing operations to a lower cost region of the United

States.

If Systek had done so, foreign manufacturers

would have had a cost advantage.

Because of Systek’s market knowledge, reputation, and established working relationships

with U.S. automakers, it would have been able
518 ● International Competitiveness in Electronics —. —

at first to hold on to part of the market even

with a cost disadvantage.

● Although foreign-owned firms suffer initial disadvantages in terms of proven ability to delivery high-quality radios on schedule, they would

manage, over time, to penetrate Systek’s market.

● Once the foreign producers gained a substantial foothold in the U.S. market, their takeover

would be swift.

Past rates of penetration in products like monochrome TVs or radios for home use indicate that

it might have taken Japanese and other foreignowned companies about 5 years to penetrate Systek’s market more-or-less completely, This is the

assumption behind the estimates in tables B-3 and

B-4, Of course, the actual rate of penetration by

foreign auto radio manufacturers might have been

somewhat faster or slower, but in the end this

would not make much difference.

As a result of these assumptions—that the Taiwan

plant helped Systek retain markets that it otherwise

would have lost completely—the long run impact

on U.S. employment and balance of payments turns

positive. The Systek investment still results in jobs

being transferred overseas; it even accelerates the

process somewhat. But job losses, and increased

imports, would most likely have occurred in any

event, and could have been much greater.

The Systek case is also an example in which U.S.

management acted to preserve American jobs by

keeping some production in the United States.

Faced with falling sales as a result of recession, and

the need to cut output and lay off workers, Systek

chose to stop production in Taiwan—where the average wage was less than one-tenth that in the

United States—rather than reduce its domestic operations still further. The plant in Taiwan was shut

down, with only the supervisors retained on the

payroll, until the company’s management found

outlets in Canada and Europe for products that

could be made in Taiwan.

Typical Impacts of Offshore

Manufacturing

The Systek case by itself cannot be generalized,

but it is suggestive; together with the earlier discussion of offshore sourcing compared to four alternatives, it points to some tentative conclusions. Table

B-6 summarizes in a qualitative way the alternatives

to offshore assembly outlined earlier, The table indicates the probable effects if alternatives other

Table B-6.—Likely Effects of Alternatives to Offshore Manufacturing

—.

Labor-intensive

production in the Automate domestic Subcontract to Discontinue

United States production foreign enterprises the product

U.S. employment in electron/es and related industries

—

Total domestic employment Positive in early years, Small positive in early years, No major change Negative

probably negative probably negative later

later

Proportion of skilled jobs Small possible Small increase likely No major change Not relevant

decrease

Geographic distribution of jobs Move to low-wage No major change No major change Not relevant

areas

U.S. value added in electronics and related industries ‘ - -

—

Wages and salaries Positive in early years, Positive in early years, No major change Negative

probably negative possibly negative later

later

Profits Negative Possibly negative Probably negative Negative

Tax payments Negative Possibly negative Probably negative Negative

U.S. balance of payments for electronics and related Industries

Trade balance (exports-imports) Positive in early years, Positive in early years, No major change Negative

probably negative in possibly negative later

later years

Other current account items Negative Negative Negative Negative

(principally investment

income)

Capital account flows Positive in early years Positive in early years Positive in early years Positive in early years

Long-term effect on competitiveness of U.S. industry due to technology transfer

Slightly positive Slightly positive Slightly negative Domestic industry

eliminated

Changes in structure of domestic electronics industry

Weaker firms Smaller firms weakened No major effect Domestic industry

threatened eliminated

SOURCE—Office of Technology Assessment, based on “Effects of Offshore and Onshore Foreign Direct Investment in Electronics A Survey, ” prepared for OTA by

R W Moxon under contract No 033-1400, p 47
App. B--Offshore Manufacturing 519

-—.—— —

than offshore assembly were chosen by a company

under pressure to reduce manufacturing costs. The

impacts follow the classification presented in table

B-1 .

As table B-6 indicates, the labor-intensive domestic manufacturing alternative would keep production and employment in the United States, and

therefore have initially positive effects, but these

would become negative in later years, the result of

a gradual decline in the ability to compete with lowwage foreign countries. This was the situation Systek anticipated. Employment would drop, profits

deteriorate, and tax payments fall. Positive effects

on the trade balance (the result of lower imports

in early years because of the absence of offshore

production] would soon be offset by shipments

from foreign competitors.

On the other hand, the domestic manufacturing

alternative(s) would probably slow the migration of

U.S. technology overseas. Developing countries get

both tangible and intangible benefits from offshore

plants, including learning and experience that

strengthens local industries, Over the longer term,

the result could be a relative weakening of the position of U. S. firms. How serious is this possibility?

For offshore plants that ship most of their production hack to the United States, labor-intensive

operations, mostly assembly, are performed overseas. Although the general skills learned by production workers and supervisors are relevant, assembly

technology itself is of little significance competitively. The situation is rather different for point-of-sale

semiconductor plants, but most of these are in

Europe, where local firms already possess much of

the technology associated with wafer fabrication

and related processing steps.

Automating domestic manufacture might have

somewhat similar results, but evaluation of this alternative is more problematic because the technology of automated production has been advancing

rapidly, Electronics firms have guessed wrong at

various times in their own evaluations, and the second column in table B-6 should be viewed tentatively. Employment would probably decline, but the

competitive positions of U.S. firms that chose to

automate might or might not improve, depending

on circumstances. Purchases of automated manufacturing equipment would stimulate the U.S.

capital goods industry to the extent that this equipment was purchased domestically.

This is a difficult alternative for smaller companies with limited capital for investment, In consumer electronics, RCA has been perhaps the most

active U.S. firm in automating; it is no accident that

this company is one of the largest and most diversified in the industry.

Most of the effects of the foreign subcontracting

option would be similar to those of offshore manufacturing, as table B-6 outlines. This choice would

harm domestic suppliers, who would have difficulty selling to overseas subcontractors.

Discontinuing production, the last alternative,

has negative consequences for the U.S. economy,

although the capital released could be invested in

other industries.

Summary and Conclusions

American manufacturers in many industries are

moving some of their production overseas. At the

same time, foreign firms—for various reasons--

have begun to invest more heavily in the United

States. In general, the advantages and disadvantages of either type of investment—from the standpoint of impacts on U.S. employment, and the U.S.

economy in general—can only be evaluated on a

case-by-case basis. In most instances, the net impacts of offshore manufacturing by U.S. electronics

firms seem to be relatively small. But even if the

net effects are small, the consequences for the individuals and firms affected can be serious—for workers who lose their jobs, for suppliers who lose sales,

for communities and regions where industrial activity has diminished. To call these short run adjustment problems does nothing to mitigate them.

Moreover, the shift of unskilled and semiskilled

jobs overseas seems in the end detrimental to U.S.

interests. This country already has a large number

of unemployed job-seekers, many of whom are realistic candidates for unskilled or semiskilled manufacturing jobs but not for work demanding high

skill levels. That overseas investment may sometimes help maintain the competitiveness of American firms and industries seems small recompense

for those who lose jobs or job opportunities. Onshore investments by Japanese and other foreign

electronics companies may provide something of

a counterweight, but thus far many more jobs have

been lost than gained. On the other hand, policies

that would restrict overseas investments by U.S.

firms seem generally counterproductive. As discussed at some length i n chapter 8, the alternative

of choice would appear to be a strong commitment

to upgrading the U.S. labor force so that transfers

of unskilled work overseas will be less damaging.
APPENDIX C

Case Studies in the Development and

Marketing of Electronics Products*

Consumer Electronics: The 700-Watt

Power Amplifier

The Product

In early 1970, Robert Carver, an engineer turned

entrepreneur with a passion for music and high fidelity sound reproduction founded a small company—Phase Linear—in Seattle to manufacture

high-power, state-of-the-art stereo amplifiers. The

firm began as a limited partnership but was incorporated later that year. Carver became the majority stockholder, while his partner and an SBIC (Small

Business Investment Corp. see ch. 7) were minority shareholders. During the early years of the company Carver made all the major decisions, Phase

Linear Corp. ’s first product was a 700-watt power

amplifier for use as a component in home audio systems. Carver tried to bring out one new product

each year, and by 1974 Phase Linear had three

amplifiers on the market.1

Stereo amplifiers range in power output from a

few watts per channel on up to 350 watts per channel—the Phase Linear 700’s capability—or more.

The main feature differentiating the Phase Linear

700 from others on the market was its great power;

one of the first advertisements touted it as “the most

powerful, most advanced high-fidelity solid state

amplifier in the world. ” In a February 1972 article

in the magazine Audio, Carver described several

of the design problems overcome in achieving this

power level. The main obstacle had been transistor

voltage breakdown, While 350 watts at 8 ohms for

each of two channels requires a power supply capability of more than 200 volts, the best existing audio

transistors had sustaining voltages of only 120 volts.

Carver solved the problem by working with a major semiconductor manufacturer to modify a 600-

volt television horizontal sweep transistor so that

it would be suitable for use in audio amplifiers. z

Crossover distortion created another barrier. In

small, low-power amplifiers, this form of distortion

can be avoided by allowing an “idling current” to

*These case studies are based on reports prepared for OTA by ]. J.

Wheatley, D. M McKee, S. R. Barnes, L. E. Hartmann, and D. ]. Keith

under contract No. 033-1190.

1 Interview w Ith Robert Carver.

‘R. Carver, “A 700 Watt Amplifier Design, ” Audio, February 1972

520

flow continuously from the output transistors. At

lower powers, the idling current does not generate

much heat, but in a 700-watt amplifier with 24 output transistors this approach is impractical. A novel

biasing circuit, eliminating crossover distortion

while operating without idling current, solved the

problem.

The Industry

Market Growth.–During its early years, the

high-fidelity industry catered to a small market consisting mostly of the wealthy. The cost of early highfidelity equipment made it a sign of status. In the

1930’s, few could afford the $3,000 to $10,000 price

of a Capehart record changer. As the price of audio

components fell during the 1940’s and 1950’s, a

new market for high-fidelity equipment grew, centered on hobbyists—audiophiles and music enthusiasts willing to spend several thousand dollars to

assemble systems built around separate tuners, amplifiers, turntables, and speakers. Sales levels remained modest, but continuing technological improvements led eventually to the present mass market. Factors contributing to the expansion of highfidelity equipment sales in the United States since

1960 include:

rising levels of disposable income;

the introduction of stereophonic sound recordings in 1959;

approval by the Federal Communications Commission of FM stereo-multiplex broadcasting

in 1962;

solid-state equipment designs beginning in the

mid-1960’s, which sharply reduced manufacturing costs as well as improving reliability;

and

progressively lower tariffs on imports, leading

to more intense price competition (duties on

speakers and amplifiers were cut from 15 to

7,5 percent, and on tuners and receivers from

12.5 to 10.4 percent, between 1968 and 1972).3

Demographic trends helped catalyze demand

during the 1960’s and 1970’s. Fifteen to thirty-five

year olds buy most high-fidelity equipment; at the

time this was the most rapidly growing segment of

‘E. Ashkenazi, ‘The Executives’ Corner, ” Wall Street Transcript, Ju~e

11, 1973.
App. C—Case Studies in the Development and Marketing of Electronics Products 521

the U.S. population. The flowering of the musicoriented youth culture in the 1960’s also boosted

sales. In the latter part of that decade, audio products became the fastest growing portion of the consumer electronics industry, with demand especially

strong in the 15 to 24 age bracket. Few American

manufacturers were able to capitalize on this

growth, as imports made major inroads into the

U.S. market. Japanese equipment often surpassed

the products of U.S. companies in performance,

while selling for less. Continued technological improvements, creative new product developments,

and lower foreign labor costs helped imports eat

away at the market shares of American firms.

Amplifier Technology.—The evolution of the

power amplifier is marked by a long series of incremental design improvements aimed at reducing

distortion in the reproduction of music. Amplifiers

create two kinds of distortion. Clipping is the most

serious; it occurs when the music being reproduced

demands a higher instantaneous power level than

the system can deliver. Normally, these extraordinary power demands are fleeting: the high C in

an aria, the climax of a thundering crescendo in

a baroque score. On an oscilloscope display, clipping appears as a flattening of the peaks and valleys

of the waveforms.

The second type, crossover distortion, occurs at

low instead of high volume levels. Crossover distortion gets its name from the small notches in waveforms seen on an oscilloscope as the polarity

crosses from plus to minus or vice versa. Resulting

from nonlinearities in transistor characteristics at

low current values, this form of distortion produces

harmonics that are approximately constant in level

regardless of output power, hence only audible during quiet passages.

Consumer Behavior.—Buyer psychology was one

of the keys to the market for the Phase Linear 700,

as illustrated by the opening paragraph of an article in a 1976 issue of Saturday Review:4

When I first got into hi-fi nearly 20 years ago,

everyone knew that you needed a minimum of 10

watts of amplifier power for good high fidelity. And

so I swapped my table radio, with the serviceman

installed phono input (one watt of power, if I was

very lucky), for a fashionable 10 watt amplifier. After

that came a 25 watter, then my first stereo amplifier

(35 watts in each of its two channels), then a 60 watt

per channel amplifier. Today I have one with two

200-watt channels. At each step of the way, I’ve been

perfectly in fashion. But what else, if anything, have

I gained from my power hunger?

41 Bcrger, ‘‘ Power Play5, ’ ,%turday ReIrJeW, Jan, 6, 1976, p. 4(I

The author goes on to point out that sound quality

did in fact improve, but in small increments and

at high cost.

The Phase Linear 700.—When” introduced, the

Phase Linear amplifier was not only more powerful than others on the market, but offered more

power for the money. In 1971, the Crown DC 300

(150 watts per channel) listed at $685, compared to

the Phase Linear’s $749. s The Phase Linear stood

out as a bargain, offering more than twice as many

watts per dollar, and helping establish a new market category. In the early 1970’s, a “super-power”

amplifier was considered to be anything delivering

more than 50 watts per channel. The entrants in

this class included, in addition to the Crown DC

300: the Pioneer SA-1000 (60 watts per channel,

$230); the Harman-Kardon Citation 12 (60 watts per

channel, $298); the SAE Mark 111 (120 watts per

channel, $700); Sony’s TA-3200F (130 watts per

channel, $359); and the C/M 911 (120 watts per

channel, $540,

6 The Phase Linear 700 surpassed all

these by a large margin. So successful was Phase

Linear in opening up a new market niche that it

faced no direct competition—from either American

or foreign firms—during its first 3 years.

The Competition.—To the extent that it provided

more power at a lower price, the Phase Linear 700

was able to capture buyers from other companies.

These competitors were mostly large or mediumlarge, and well-established. Crown—maker of the

DC 300—was a division of International Radio and

Electronics. The privately held firm sold most of

its products to professional musicians and institutional purchasers such as churches. Marantz, producer of another powerful amplifier, was a wholly

owned subsidiary of the Superscope Corp. Superscope had been incorporated in California in 1954,

and in 1966 purchased the Marantz Co., Inc., adding 50-percent interest in Marantz Japan, Inc. in

1971. Marantz products were manufactured in the

company’s Tokyo plant. Superscope had also

served as exclusive U.S. distributor of Sony products since 1957. A third maker of high-power amplifiers was the McIntosh Corp., also privately held.

A small company compared to Crown or Superscope, McIntosh produced high-end stereo equipment almost exclusively,

From an international perspective, that the Japanese presence in the super-power category was

small may seem remarkable; Japanese producers

had by 1970 captured an overwhelming share of the

U.S. audio market. The explanation appears to be

‘“ 1972 HI-F’ I Pre\lew Dlre( tory, ” ,4udI[), Septemhcr 1971.

‘[bid.
522 ● International Competitiveness in Electronics

simple: the market for separate amplifiers of all

sizes was not very large, and within it, the market

for the very largest amplifiers, with their high price

tags, was even smaller—less than 10 percent.7 The

Japanese approach had been to concentrate their

product development and marketing efforts on the

largest selling stereo components, such as integrated tuner-receivers. Japanese firms like Akai,

Hitachi, Kenwood, Nikko, Pioneer, Panasonic, and

Sansui also offered separate amplifiers in the more

popular power ranges. Many of these companies

were large and diversified. Panasonic, for example,

is a brand name of the Matsushita conglomerate,

whose export sales to the United States in 1971

totaled $358 million. Pioneer had 1970 U.S. sales

of $126 million, and was already one of the largest

high-fidelity equipment producers in the world.

These firms relied on their ability to sell equipment perceived to be of good quality at low prices.

Their strategy had been to concentrate almost exclusively on mass-market products, leaving the expensive, high-end components to smaller American

firms. Phase Linear thus faced little competition

from the major Japanese electronics firms in its

early years—primarily because of the relative smallness of the market for super-power amplifiers. But

even though Phase Linear achieved its initial success by appealing to audiophiles—and while doing

so acquired a reputation for high quality—the company soon began selling to a wider range of buyers,

largely because of its modest prices.

Distribution.—Most audio equipment manufacturers sell through networks of franchised dealers

served by regional sales representatives. Dealers

generally take delivery from the factory, although

Pioneer and some of the other large firms maintain

regional warehouses. The greatest portion of retail

sales are made through audio specialty stores—

high-volume, low-margin outlets emphasizing the

heavily advertised, low-priced Japanese brands. A

second type of retailer, the “audio salon, ” tends to

be individually owned, and to specialize in more

expensive products. In addition to the prestige lines

of the mass-market firms, these stores sell high-end

equipment made by smaller and less well-known

companies. Other major outlets include: mail order

houses; discount and department stores; appliance,

radio, and TV dealers; and catalog showrooms.

Generally, these limit themselves to the more moderately priced and popular components.

Product Development

The super-power amplifier for home stereo systems was largely the brainchild of Phase Linear’s

founder, Robert Carver. Very high power as a route

to better sound quality at all listening levels was a

novel idea when Carver began experimenting in his

home workshop, He built a series of amplifiers

whose power capability surpassed anything on the

market. The tests he ran backed up his insights;

music sounded better to him played through the

prototypes. Measurements of audio distortion supported his subjective judgments.

Convinced of the virtues of a stereo amplifier

with a wattage rating more than double anything

then available, Carver set out to create a design

suited for commercial production. Most of this

work he did himself, While Carver enlisted the aid

of several Motorola engineers to solve the transistor

voltage breakdown problem, the ideas were basically his.8

Phase Linear placed a premium on technology in

those early days. Carver, highly regarded in the

audio industry as a gifted designer, wanted to build

an amplifier of unprecedented power, but he also

wanted to build one that was affordable, This second objective, more than anything else, called for

the creative use of technology in order to reduce

production costs—the simplest possible design that

would deliver very high power levels,

Carver did not have the financial resources to do

much marketing research, but his experience told

him that a low-priced, high-power amplifier would

sell. After showing prototypes built in his home

workshop to dealers, and being assured that the y

would carry the product, he decided to go into limited production. Manufacturing began in an old

Safeway store leased for the purpose.

Marketing

At first, Phase Linear took a rather ad hoc approach to distribution and marketing. As word of

the Phase Linear 700 spread, the company accepted

direct orders from anyone—individuals, as well as

dealers large and small. In 1971, phase Linear hired

a marketing manager who set up a system of company sales representatives, but the firm still found

itself with a growing backlog of orders from an unwieldy assortment of some 600 buyers.9 Two years

later, a new marketing manager took over—Don

Prewett, a recent MBA graduate. Prewett began setting up a new distribution system,

71 nterview with Don Prewett, Phase 1,1 near Corp

‘“A 700 Watt Amplifer Design, ” op. clt

‘Prewett, op. cit.
App. C—Case Studies in the Development and Marketing of Electronics Products 523

It took 2 years to reorganize Phase Linear’s system of dealers and sales representatives. Prewett

found representatives with overlapping territories

and Phase Linear products stocked by competing

stores. The firm’s managers decided that Phase

Linear products should be sold primarily through

large chains and retailers of stereo equipment,

which at that time were growing at a phenomenal

rate, while avoiding small, specialized outlets. Two

of the highest volume stereo chains in the country

became major outlets for Phase Linear. With the demand for stereo equipment exploding in the early

1970’s, these retailers were opening many n ew

stores, By 1980, the company was selling its products through 16 sales representatives to 275 dealers

operating about twice that number of retail outlets.

Dealers and designated repair shops handled service in the field.

Phase Linear’s strategy was to dominate its

chosen market niche and expand from there, The

700 faced no real competition for more than 3

years, As it became apparent that the first part of

this strategy would be successful, the company

quickly began to extend its product line, In January

1972, it came out with the Phase Linear 400, which

offered 200 watts per channel, This amplifier

proved even more popular than the 700. By 1974,

two to three times as many 400s were being sold

as 700s, and the company’s annual sales had

reached $3.5 million.

Thanks to imaginatively simple design, production costs were low; because of the lack of competition, the Phase Linear 700 could be priced to yield

a healthy profit. As a result, the firm was able to

generate virtually all the funds needed for expansion from internal sources.

The Industry Reaction

Phase Linear’s entry into the high-fidelity industry was inconspicuous. At the time of its incorporation in early 1971, the company counted only

a few employees. Most of the industry regarded its

product as an oddity with limited appeal.

Japanese firms, which constituted the dominant

force in the audio industry worldwide, had overlooked the potential of extremely high-power amplifiers, which did not seem to fit their exportoriented approach. Efficient production technology

and effective advertising, sales, and distribution

enabled them to drive their American competitors

out of the market for mainstream products like

stereo tuner-receivers. But the Japanese manufacturers did not regard the stereo separates market

as big enough to deserve much attention. Firms

such as Kenwood, Sansui, and Pioneer maintained

separate stereo component lines, but mostly for the

sake of product mix and the lustre that high-end

components added to their image.

As a result, competitive response to Phase

Linear’s products was slow in taking shape. Only

in 1975, after the company had already secured the

largest market share of any entrant in the market

for separate amplifiers—15 to 17 percent—did several firms, both American and foreign, introduce

super-power amplifiers of their own. For the most

part, Phase Linear’s U.S. competition came from

small and relatively new companies. One of these,

the Great American Sound Co., came out with a

model called the Ampzilla aimed at the heart of

Phase Linear’s market—the 20- to 35-year-old male

hi-fi hobbyist. Bose Co., which had been primarily

a manufacturer of speakers, also introduced a

super-power amplifier. One of the largest firms to

enter at this time was Marantz, mentioned earlier.

These companies constituted the first wave of competition. A second wave came as the huge Japanese

manufacturers, including Mitsubishi and Yamaha,

finally began making super-power amplifiers.

The response of Pioneer Corp., the sales leader

in the industry, was the most belated—but most significant by far for Phase Linear. In 1978, U.S.

Pioneer, a wholly owned subsidiary of PioneerJapan, bought Phase Linear. Just prior to the acquisition, Carver had sold his stock interest back

to the corporation. At this point, U.S. Pioneer purchased the company from the remaining stockholders—Carver’s ex-wife, the SBIC, and his former

partner—for a price reported to be in the middle

seven-figure range,

How did this change of ownership affect Phase

Linear? While leaving the company’s management

team intact, Pioneer placed at Phase Linear’s disposal a wide range of new resources. The company

now had ample financing for product development

efforts, and new sources of technology. Phase

Linear’s marketing capability was strengthened

because it could use the parent company’s extensive U.S. retail network. Pioneer also became a supplier of component parts for Phase Linear’s products.

What was Pioneer’s motive in purchasing Phase

Linear? The major reason was probably a desire to

strengthen its position in a rapidly growing market

segment. Partly because of their successful strategy

of dominating the mass market, many of the Japanese brands lacked the quality image necessary for

success at the upper end. The best evidence for the

thesis that Pioneer acquired Phase Linear primarily for its prestige value is the succession of new
524 International Competitiveness in Electronics

stereo components introduced under the Phase

Linear name. Within 2 years of the acquisition,

“Phase Linear” turntables and tuners were being

exported from Japan to the United States. These

products were developed by Pioneer design engineers and manufactured at Pioneer facilities. Except for their high price tags, they did not differ

greatly from comparable Pioneer products.10 Rather

than any significant transfers of technology to or

from the United States, the effects of the takeover

seem to have been restricted to marketing and financial matters.

In recent years, Phase Linear has fared well internationally, with 30 percent of its 1979 sales coming from exports, two-thirds of these to Europe. But

Japan is one major market that Phase Linear, along

with almost all other U.S.-based audio manufacturers, has not been able to crack. Only two American

companies—McIntosh and JBL, the latter a manufacturer of speakers—have established distribution

channels in Japan. Their entries took place shortly

after the end of the war. Since then, no major American manufacturers of consumer electronics have

been able to sell their products within Japan in any

volume. This inability stems at least in part from

distribution problems. The task is not impossible,

but costs for deciphering and meeting the many

product regulations, as well as establishing marketing channels, are great. Even so, the distribution

of electronic products and household appliances in

Japan is less complex than for goods such as food

or kitchenware. A major reason is the emergence

of a few large manufacturers of consumer products

and household appliances—e.g., Matsushita—

which have taken the initiative in organizing simpler marketing channels, Still, over 80,000 retailers,

more than three-quarters quite small, handle consumer electronic products.

Phase Linear executives had their eye on the Japanese market for some time prior to the 1978 acquisition by Pioneer, but report that Pioneer’s

policy has been to refrain from encouraging efforts

by Phase Linear to export back to Japan. In particular, Pioneer apparently has no intention of making its domestic marketing channels available to its

American subsidiary. This might reflect: 1) simple

exclusion; 2) a decision that it would be too costly

to undertake a marketing program in Japan; or

3) a market-dividing strategy whereby Pioneer decided to promote Phase Linear only in the United

States and Europe.

IOInterviews with stereo dealers.

Conclusion

Within the high-fidelity industry, qualitative differences between products of similar price tend to

be small. Industry executives generally believe that

the successful firms are those that market most effectively. Phase Linear was typical; its rapid rise

to a position of leadership in one sector of the industry was largely due to effective marketing–-designing and building a product that others had overlooked but that consumers were ready to purchase.

Robert Carver began to pursue his ideas based on

intuition about the market. At the time, the notion

that real demand could exist for a super-power amplifier would probably not have gotten much of a

hearing in a large, established company.

Technology played a crucial role in the second

stage, the actual development of the product, where

Carver’s sense of design led to a simple, low-cost

amplifier. Phase Linear’s critics sometimes remarked that they were “designed to the bone, ”

meaning that they gave maximum power while offering little in the way of backup or protective circuitry. But it was apparently just this quality of

brute power that younger buyers of stereo equipment wanted. Nonetheless, the company also recognized that demand for a 700-watt amplifier would

be limited, and quickly moved to broaden their offerings.

Robert Carver later started another company; in

1982, Carver Corp. began advertising a power amplifier featuring “750 Watts/chan. Dynamic

Headroom for just $799.”

Semiconductors: The 4K Dynamic

MOS RAM

The Product

Electronic data processing, at one time solely a

matter of computers, has spread to a wide range

of products: industrial controllers, automated

machine tools, “smart” terminals, calculators, even

household appliances. These systems need memory—the ability to store and retrieve information

(see ch. 3). Random access memories (RAMs] can

retrieve or rewrite digital data stored in an arbitrary

location on command. Most integrated circuit

memory is of the random access type. Both major

transistor technologies are used in semiconductor

memories—bipolar and MOS (metal oxide semiconductor, ch. 3), with MOS now the largest seller by

far.
App. C—Case Studies in the Development and Marketing of Electronics Products ● 525

MOS RAMs can either be static or dynamic. Static RAMs hold their contents indefinitely, provided

they are supplied with power. Dynamic RAMs rely

on capacitance for storage; they must be “refreshed” every few milliseconds. Static RAMs require more complex memory cells than dynamic

RAMs, and are thus not as dense, taking up more

area on the chip and costing more.

In 1974, when the 4K dynamic RAM—which can

store 4,096 bits of information—was introduced, a

new generation of memory circuits was appearing

about every 30 months. Each design generation had

been four times larger than the previous one, the

sequence being 256 bits, 1K, 4K, then 16K, and—

in the early 1980’s—64K. By 1983, 256K RAMS

were in pilot production. One explanation for the

fourfold density increment is that, while technological capability in terms of circuit density roughly

doubled each year, design costs were high enough

so that, if new designs came out every 12 to 15

months, they would not generate enough cumulative sales to be profitable. By the end of the 1970’s,

the intervals between RAM generations had lengthened to several years.

The newly introduced 4K dynamic RAMs were

hailed in mid-1974 as far outdoing 1K types as the

cheapest way to satisfy user needs, Despite spotty

availability during that year, they were quickly designed into microcomputers, minicomputers, and

peripherals; manufacturers of mainframes waited

for price decreases and assurances of product

reliability before switching from 1 K to 4K chips.

The Industry Setting

While some captive semiconductor manufacturers—notably IBM—have designed and built their

own RAMs for internal use, this case study treats

the competition for sales in the merchant market.

Development of 4K chips for merchant sales began

in the early 1970’s, with samples available by late

1973. As the 4K RAM moved into volume production, the semiconductor industry entered the most

severe downturn in its history, the result of a

general recession in the U.S. economy beginning

in 1974. Semiconductor firms furloughed 50,000

employees, and idled $750 million in production

capacity. 11

As the 4K chip emerged and economic recovery

began, 1K RAM sales declined, The 4K RAMs accounted for only $14 million in sales during 1974,

but $45 million the next year. By 1976 1K sales had

““ ~T(!\\ I,caders In S[?mi[,[jn[i{l{, t[jrs, ” Buslncsf ~%’w,k, Nlclr 1, 197b, 1]

40

fallen to $42 million, while 4K sales soared to $161

million. 12

Intel Corp. ’s 4K RAM design was first onto the

market—via a licensee—but the competition quickly

became intense, complicated by production problems at several firms, including the industry’s

largest manufacturer, Texas Instruments (TI). Only

at the end of 1975 had firms such as Intel, TI, and

Mostek ironed out most of their processing difficulties; while earlier projections had been for

shipments of 10 million chips during the year, actual output was perhaps half this, The 4K RAM

posed the greatest difficulties the industry had

faced up to that time in moving a product into volume production; indeed, before the 4K RAM

reached high volumes, 16K RAMs had been announced.

It took several years for an industry standard 4K

RAM configuration to emerge. Three chip designs

were vying for dominance, with the situation in

considerable flux:13

Intel/TI’s 22-pin package, announced by Intel and

then modified by TI, uses TTL voltage levels for all

address, data-in, and data-out lines; it requires only

one high-voltage clock level but needs three power

supplies.

Motorola/AMI’s [American Microsystems, Inc.] 22-

pin package differs in having an extra reset pin,

which must be energized when power is first applied.

Mostek’s 16-pin package takes up less board space

than the other two, at the cost of some added system

complexity in clocking and interface logic, since the

device must be multiplexed; it is also TTL-compatible

at all inputs, including the clock input.

By the end of 1976, sales of 16-pin designs were

increasing at the expense of 22-pin devices. The

22-pin part was larger; the extra pins also led to

greater assembly cost. A second focus of technological competition was access time—the time, on

average, to retrieve a bit of information from the

memory. Access time for memory chips is normally

measured in nanoseconds, 1 nanosecond (ns) being 1 0

– 9

seconds. For RAMs, an access time of 100

ns is considered fast; 500 ns is slow.

The Competitors

Capital requirements for manufacturing 4K

RAMs were not, in the mid-1970’s, a significant barrier to entry. Many of the competing firms had
526 ● International Competitiveness in Electronics

begun operations only a few years earlier, and were

still relatively small.

Microsystems International Ltd.—The first company to bring a 4,096-bit RAM to market—in late

1972—was Microsystems International of Ottawa,

Canada, a licensee of Intel. The 22-pin, 3-transistor

memory cell chip was based on proprietary process

technology, with the company benefiting from

earlier experience as a licensee for Intel’s 1K

RAMs. Although first with a working part, Microsystems International never became a major factor

in 4K RAM sales.

Intel.—Intel’s 4K chip followed an immensely

successful 1 K product—with the possible exception

of IBM’s proprietary 1K design, the most widely

used semiconductor memory circuit up to that

time. Judging that the product lifetime for a 2K

RAM in volume production would probably be no

more than 6 or 8 months, Intel jumped to a 4K chip,

introducing-in the summer of 1973—a slow (600

ns access time) 4K device designed for small systems. The company planned to introduce a highspeed version later in the year; both were to have

a 22-pin, single-transistor memory cell design. The

higher speed chip, with maximum access time of

150 ns, would be better suited for large computers

and was projected to take over most of Intel’s 4K

production during the first half of 1975. Intel hoped

to capture as much as half the potential market,

Meanwhile, customer desire for greater circuit

board density was prompting movement away from

the 22-pin package, At the end of 1974, Intel announced plans to introduce its own 16-pin device.

The company thereafter continued to build both 22-

and 16-pin RAMs,

Mostek.—In September 1973, Mostek was sampling an innovative 16-pin RAM, one in which

some of the pins served two functions (called multiplexing). The chip enjoyed a two-to-one density

advantage over the competition. Eventually, after

a redesign reduced the size even further, it became

the de facto industry standard. However, Mostek,

along with other chipmakers, suffered through

yield and quality problems which cut into its ability to capture early market share.

Despite the pioneering features of its 16-pin design, the firm—in common with the rest of the industry–did not rely on patents to protect its technology. Mostek’s 1977 Common Stock Prospectus

stated “. . . the Company believes that success in

the semiconductor industry is not dependent upon

patent protection but is dependent upon engineering and production skills and marketing ability. It

does not anticipate that the grant of any patent application will significantly improve its competitive

position. ”

National Semiconductor.—National developed

both one- and three-transistor cell designs of its

own. By mid-1975 it was marketing 22- and 18-pin

chips—the 22-pin part faster than, but compatible

with, that of TI. National’s strategy of seeking faster

access times is part of the explanation for its decision not to build a 16-pin device; National’s engineers felt, incorrectly as it turned out, that the

Mostek approach did not lend itself to speed improvements that would prove great enough. The

18-pin choice allowed good board density and high

speed without requiring the multiplexing circuitry

of 16-pin packages. Two other firms quickly lined

up as alternate sources for National’s 18-pin part.

Texas Instruments.—TI was the first to drop its

4K RAM price below the cost to purchase four 1K

chips. By September 1974, TI was producing more

4Ks than anyone else, having solved its earlier yield

problems. At the close of the year, TI added an

18-pin package to its existing 22-pin 4K catalog;

both the 18-pin and the new 22-pin part offered access times of 200 ns. TIs’ second source for its 4K

RAMs was Advanced Micro Devices (see below).

Other U.S. Entrants.—Fairchild became Mostek’s second source, offering a pin-compatible version of Mostek’s unit while also producing another

design, with faster access times, based on the proprietary Fairchild Isoplanar processing technology.

Meanwhile, American Microsystems, Inc. (AMI)

and Motorola developed their 4K RAMs jointly,

sharing masks and processing technology. AMI

was particularly confident of its product—’ ‘even for

the chronically confident semiconductor industry’’—and expected its entry to become the industry

standard; its speed and power characteristics,

single clock design, pin configuration, and secondsource at Motorola all seemed to the company to

justify this belief.14 AMI’s partner, Motorola, was

relying on this new 4K RAM to bring volume MOS

sales to its semiconductor division, “after a couple

of false starts with, early memory products.”15 Still,

Motorola also sought other alternate sourcing

arrangements.

Japanese Firms.–-Semiconductor manufacturers

in Japan were developing their own 4K RAMs over

the same time period. Nippon Electric Co. designed

a 4K RAM described as an improved and enlarged

version of the company’s three-transistor cell, 1K

part. 16 Hitachi hoped to have a 300 ns chip on the

—

1~~] Wolff, ‘‘4 ,O~&Bit R,A hfs Arc CJII t]]c [)()[)r~tcp, fi;/tv trf)rl I( ‘I, A [Jr

12, 1973, p, 76.

15H W[)lff “~ustomers Sweat out 4,096-13 It RA NIS, ” h’/f?ctronfc.s, .\!~II’

21, 1974, p. 70

1e’’4,096-flit RANIs Are OII the [)oorstep, op (.lt
App. C—Case Studies in the Development and Marketing of Electronics Products ● 527

market by the end of 1973. Fujitsu’s 4K RAMs used

three-transistor cells, but one-transistor production

versions were anticipated. Toshiba was also developing a 4K design.

These development efforts attracted little attention in the United States. Shipments of 4K RAMs

from Japan did not begin to enter the U.S. market

until 1977, and then only in small quantities. If

Japanese competition appeared to be no more than

a m inor t hreat, European firms posed even less of

one-in part because most had neglected MOS technology, continuing to concentrate on bipolar. In

1976, U. S. firms had 90 percent of the world market

for MOS devices of all types, with the Japanese

holding most of the rest-largely as a result of sales

at home.

Initial Japanese entry into the U. S. market was

based on a combination of low prices and high quality, with special emphasis given the latter (Chs. 5

and 6). Although the Japanese were a minor factor

i n the case of the 4K RAM, they persisted in this

strategy with the 16K RAM and other semiconductor products.

The Market

Demand.—As table C-1 shows, fewer than a

million 4K RAMs--at $15 to $20 each--were sold

in 1974. Volume increased as prices broke the $10

barrier-dropping to $6 late in 1975—and mainframe computer manufacturers began to buy in

large quantities. Sales peaked in 1978, before 16K

RAMs took over.

The companies involved grew rapidly as 4K RAM

volumes jumped, Intel’s sales in 1970 totaled only

$4,2 million; by 1974 they were $134.5 million, and

by 1979 had reached $663 million, This was not all

due to the 4K RAM, but that device played a major

role.

Distribution.—Within the United States, most

semiconductor firms sell directly to large customers

Table C-1 .—Worldwide Sales of

4K Dynamic MOS RAMs

—

Sales -

Year (millions of units)

1974 ......, . . . . . . . . . . . . . . . . . . . : 0.7

1975 ....., . . . ... . . . ... . 5.0

1976. , . . . . . ... ., 28,0

1977 ......, ., ., . ., . . 57,1

1978, . . ... ... 76,5

1979. , ., . . . . : : ., . . . . . 69.2

1980 .., . . ., . . . . . . . 31.2

1981 . . . . ... . . . . . . . . . . . . 13.0

SOURCE Dataquest

as well as through independent distributors. During the mid-1970’s, many of the firms producing

4K RAMs were rather small, with little marketing

experience. However, a well-developed network of

industrial distributors such as Arrow Electronics

and Hamilton/Avnet served the many smaller customers for memory products.

Product Development

Top managers in semiconductor firms devote a

great deal of attention to product and process development—the two go together—because of the

rapidly evolving technology, Many industry executives have technical backgrounds,

Planning.—At Intel, product planning committees are organized for each of the firm’s “strategic

business segments. ” The committees—e.g., that for

RAMs—operate with a 5-year time frame. Planning

responsibilities may take a third of a committee

member’s working hours. Intel’s approach has been

to look for high-growth products where the company’s technology can provide an advantage. proposals emerging from the planning process are presented to an executive group that includes the

chairman and vice-chairman of the board, the president, and the vice presidents.

Texas Instruments—another technology leader--

emphasizes project-oriented teams for planning

future activities, while a more conventional

operating hierarchy looks after current operations.

Not all firms in the industry try to be innovators.

Instead, managements may opt to become alternate

sources for products introduced by others. This

strategy is sometimes dictated by costs—since the

extensive research and development (R& D) necessary to come up with a proprietary design may

seem too risky, particularly for a company without

a position of technical leadership. It does require

the ability to duplicate (and perhaps improve on)

the device in question, and get i n to production

quickly.

In the case of the 4K RAM, American entrants

followed one of two approaches to R&D. In the first

group were firms such as Intel and Mostek, which

attempted to take the lead, hoping that their designs

would become de facto industry standards. In the

second were companies like Advanced Micro Devices, that aimed at becoming alternate suppliers

with a competitive advantage in attributes such as

quality or performance. Technical leadership in the

semiconductor industry requires two kinds of

scarce resources: money and skilled engineers. The

choice of strategies depended on these, but even

a second-source supplier needs clever designers —
528 International Competitiveness in Electronics

and still more, competent process engineers. During the 1960’s and 1970’s, successful U.S. merchant

firms were sometimes built around the abilities of

three or four inventive circuit designers. Even so,

the R&D emphasis in many firms during development of the 4K RAM was heavily on process technology. The case of Advanced Micro Devices

(AMD) illustrates the point.

The Example of Advanced Micro Devices.—

AMD was founded in 1969 with an initial capital

investment of $1.5 million, Research, design, and

development activities began immediately; by the

end of the first year half a million dollars had been

spent, although sales had not begun. R&D played

only a limited role in the strategy adopted by the

company. The president and chairman of the board

—W. J. Sanders, III—while an engineer, had resigned a position in marketing at Fairchild to start

AMD. Sanders chose to emphasize second-sourcing

of chips developed by larger firms, Not only did

AMD have limited funds for developing new products, but initially the company had no proprietary

technology.

Product design and development throughout the

industry was almost exclusively a technical activity during these years, Marketing research was insignificant by comparison. Neither Intel nor AMD

had internal marketing research staffs. One reason

was a pervasive feeling that production capacity

would limit total sales over the foreseeable future.

During its first few years of operation, AMD followed a strategy of introducing devices that could

be put into production quickly to serve existing

markets; R&D spending remained low until 1974,

when it reached about $1.5 million. The company

tried to concentrate on high-volume chips—for example, targeting customers who might be able to

grow rapidly in their own industries, which in turn

would permit AMD to expand more rapidly than

its competitors, At first, the firm concentrated its

sales efforts on 25 to 30 customers worldwide. In

the late 1970’s, AMD began to modify its approach,

pursuing new products of its own,

The choice of integrated circuits to second-source

was critical for AMD. To fit the company’s product

development strategy, a proposed new integrated

circuit would: 1) be marketable in high volume at

a price attractive to AMD’s customers, implying;

2) that it would be complex enough to be a costeffective substitute for existing devices, but not;

3) so complex that it became, on the one hand, difficult to make, or, on the other, so specialized a s

to limit its market. The essential links are between

design engineers—those at the semiconductor firm

and those at the customer—rather than between

sales staff and purchasing department.

The three fundamental steps in producing integrated circuits—wafer fabrication, assembly, and

testing—are now all essentially mass production

processes. During the peak period of 4K RAM production, however, assembly and testing were both

quite labor-intensive. Because of this, AMD—like

its counterparts in the U.S. industry—had established offshore plants in low-wage countries.

AMD’s offshore facilities were in Manila and in

Penang, Malaysia.

AMD’s approach to the 4K RAM market typifies

its strategy during the mid-1970’s. The firm produced two 4K chips—one an 18-pin design with two

power supply voltages, the other a 22-pin part requiring three voltages. Both were interchangeable

with 4K RAMs manufactured by TI, but AMD

made a number of design changes aimed at reducing power consumption, improving noise immunity, and meeting military standards. The last h a s

been a centerpiece of AMD’s marketing approach;

by advertising that all its chips met military

specifications, the firm sought to establish an image of high quality and high reliability, AMD’s emphasis on making modest improvements in the

products they chose to manufacture, adhering to

high quality standards, and concentrating on standard devices foreshadowed the Japanese strategy of

a few years later.

Demand for AMD’s 4K RAMs came mostly from

computer companies—about 10 in number—along

with another 150 firms manufacturing systems and

equipment ranging from typesetters to computer

peripherals, and including a half-dozen telecommunications accounts as well as 10 or 12 military

contractors. Each customer was, potentially, a highvolume purchaser. A mainframe computer with 8

megabytes of memory, for instance, needed 18,000

to 20,000 4K RAMs,

Pricing and Profits

As part of its overall strategy, AMD attempted to

hold its prices somewhat above those of the competition by stressing quality. Prices for semiconductor products tend to be high at first, declining rapidly as production volumes and the number of entrants grow. Manufacturers sometimes set prices

in anticipation of future cost reductions. Eventually, product obsolescence puts still more downward

pressure on prices. At the time the 4K RAM was

coming onto the market, the semiconductor industry was in a deep recession, leading to even more

price cutting than normal.
App. C—Case Studies in the Development and Marketing of Electronics Products ● 529

Intel—one of the acknowledged technical leaders

—also charged premium prices, but on the basis of

offering the most up-to-date products; the company

continues to pursue a strategy of building unique

circuits when possible, thus maintaining healthy

profit margins. Intel has, in many years, been

among the most profitable companies in the industry—table C-2. The table lists profit levels for a

number of U.S. merchant firms in 1978, the peak

sales year for 4K RAMs and a generally good one

for the industry; profitability ran somewhat ahead

of that for U.S. industry as a whole, represented by

the Fortune 500 average.

The 4K RAM Lifecycle

Before Intel’s pioneering 1K RAM entered the

market, semiconductor firms often simply copied

each other’s products. Customer demands for alternate sourcing-more than one supplier for a given

part—provided an easy avenue into the market for

a new company. Mostek’s Executive Vice President, Berry Cash, remarked: “Everyone used to

copy everyone else. About the only thing you could

do when you got something good was run like hell

and work on new products to obsolete it.”17

This pattern changed, partly as a result of experience with the 1 K RAM. A number of firms tried

but failed to duplicate Intel’s chip; after 3 years only

two or three other companies had learned to build

it. As a consequence, companies began to negotiate

formal alternate sourcing agreements for the next

generation 4K RAM. Through these agreements,

firms could acquire design rights—and sometimes

lithographic masks. Thus, as pointed out earlier,

1“” Bourn Tlrnes Again for Semlc.unductorj, ” BusIrIes$ i$’ef?k, Apr 20,

1974, p 6fj

Table C-2.—Profit Levels for U.S.

Semiconductor Firms, 1978

After-tax earnings

As percent As percent

of sales of equity

Advanced Micro Devices . . . . 7.1 0/0 17.60/o

Fairchild Camera and Instrument 4.6 12.0

Intel ... . . . . . . . . . . . . . . . . . . 11.0 21.6

Mostek . . . . . . . . . . . . . . . . . . . . . . 7.1 15.8

Motorola . . . . . . . . . . . . . . . . . . . 5.6 16.6

National Semiconductor . . 4.6 17.1

Texas Instruments . . . . . . 5.5 17.6

Unweighed average . . . . . . . 6.50/o 16.50/o

Average for Fortune 500

industrial firms . . 4,80/o 14.3”/0

SOURCE Annual reports

Fairchild negotiated a second-source agreement

with Mostek, while Motorola and American Microsystems worked jointly on 4K RAM development.

During the early years of the 4K RAM product

cycle—1973-76—Intel enjoyed a major share of

sales, but in the end, most observers rated Mostek

the overall “winner” of the 4K RAM competition.

Many other entrants benefited in terms of profits

and demonstrated viability in the rapidly growing

memory market. Mostek’s success was due not only

to customer acceptance of its 16-pin design, but also

to the head start it got when TIs’ 22-pin device encountered production problems.

The situation in 1977, the year before output

peaked, is illustrated in table C-3. While Mostek

sold the most of any one design, TIs’ total 4K RAM

sales—spread over three designs—were slightly

greater. There were really no losers, especially

since manufacturing capacity constrained sales.

Nonetheless, Mostek’s 16-pin RAM found the greatest eventual acceptance in the marketplace; 1977—

the year covered by the table—marked the sales

peak for 22-pin units, while the 16-pin alternative

did not peak until 1979. The world market share

of 4K RAMs for Japanese firms was 18 percent in

1977, with NEC the clear leader. The Japanese were

splitting their efforts between 16- and 22-pin

designs.

Table C-4 gives market shares from 1977 to 1981.

For the first years, AMD’s second-source strategy led to an increasing proportion of a declining

market, while Intel’s share declined in part because

it began moving into new products. The market

share of Japanese firms actually fell over this period. By 1980, several manufacturers had begun to

abandon the 4K RAM market.

Conclusion

The 4K RAM reached its unit sales peak in 1978

(table C-l). Dollar volume had been greater the year

before—a common phenomenon in the industry.

While volumes have since tapered off, 4K RAMs

will continue to be widely marketed at least through

the mid-1980’s. Where a dozen companies made the

devices in 1980, the number has since been cut

perhaps in half—those who can still make a reasonable margin on sales remaining. The lifecycle of the

4K RAM proved somewhat longer than that for 1K

chips, illustrating a trend toward lengthening product cycles for RAMs that is expected to continue.

One factor in the longer lifecycle was strong price

competition; as 4K prices fell, mass acceptance of

the next-generation 16K RAM was delayed. Only

when 16K prices came down to the point where one
530 ● Intemational Competitiveness in Electronics

Table C-3.—Estimated Worldwide Sales of 4K Dynamic MOS RAMs, 1977

Shipments (millions of units)

16-pin 18-pin 22-pin Total

United States:

Advanced Micro Devices . . . . . . . . . . —

Fairchild . . . . . . . . . . . . . . . . . . . . . . . 2.08

Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0

Intersil . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5

Mostek . . . . . . . . . . . . . . . . . . . . . . . . . 11.8

Motorola . . . . . . . . . . . . . . . . . . . . . . . . 1.55

National . . . . . . . . . . . . . . . . . . . . . . . . 0.38

Signetics . . . . . . . . . . . . . . . . . . . . . . . 0.54

Texas Instruments . . . . . . . . . . . . . . . 0.9

0.55 1.84 2.39

2.08

10.4

0.9

11.8

2.74

3.68

0.87

12.4

— —

8.4

0.4

—

.

— —

1.19

3.3

0.33

5.6

—

—

—

5.9

U.S. total. . . . . . . . . . . . . . . . . . . . . . . . . . 19.8 (820/o) 6.45 (96%) 21.1 (80°/0) 47.2 (830/o)

Japan:

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . 0.45

Nippon Electric Co, (N EC).. . . . . . . . 2.15

1.1

0,46

3.7

2.9

0.91

0.25 6.1

Japan total . . . . . . . . . . . . . . . . . . . . . . . . 4.4 (18%) 0.25 (4°/0) 5.26 (20°/0) 9.91 (17%)

World total . . . . . . . . . . . . . . . . . . . . . . . . 24.2 6.7 26.4 57.1

SOURCE Dataquest

Table C-4.—World Market Shares of 4K Dynamic MOS RAMs

Share of unit sales

1977

United States:

Advanced Micro Devices . . . . . . . . . . . . . 4.1 %

Fairchild . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6

Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2

Intersil . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6

Mostek . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.7

Motorola . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8

National . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4

Signetics . . . . . . . . . . . . . . . . . . . . . . . . . 1.5

Texas Instruments . . . . . . . . . . . . . . . . . 21.7

1978 1979 1980 1981

8.6 ”/0

1.2

14.4

0.5

22.2

7.4

7.3

1,5

21.8

14.60/o —

8.7

1.4

20.1

9.2

11.3

0.7

15.3

81.3%

9.40/0 —

3.2

3.9

22.8

16.2

14.6

12.7 0/0

—

—

1.1

17.3

24.9

16.1 —

2.6

—

—

U. S. total . . . . . . . . . . . . . . . . . . . . . . . . 82.6°/0

Japan:

Fujitsu ., . . . . . . . . . . . . . . . . . . . . . . . . . 5.1%

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6

Nippon Electric Co. . . . . . . . . . . . . . . . . . 10.7

84.90/, 72.70/, 72.1% 

2.50/, 1.1 % 2.1% 1.5%

2.3 1.2 0.6 –

8.0 7.9 4,7 2.5

Japan total . . . . . . . . . . . . . . . . . . . . . . . 17.4°/0 12,80/o 10.2 ”/0 7.4 ”/0 4.0 ”/0

Europe:

ITT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –

SGS-Ates . . . . . . . . . . . . . . . . . . . . . . . . . . —

2.0% 7.4% 16.0% 18.9%

0.4 1.1 3.9 5.1

2.4”/, 8.5% 19.9% 24.0°A

SOURCES 1977—tableC-3.

1978-1981—Dataquest
App. C—Case Studies in

chip cost about the same as four 4K devices did the

new generation parts begin to take over. Similar

forces were at work during the early 1980’s as 64K

RAMs entered the marketplace.

Computers: A Machine

Smaller Businesses

The Product

for

Before 1970, the computer industry was dominated by a few relatively large manufacturers—with

IBM holding by far the greatest market share. As

the decade progressed, advances in hardware created numerous opportunities for newer firms to sell

small computers in markets as yet untapped by established mainframe-oriented companies. The new

entrants at first aimed their minicomputers at

original equipment manufacturers (OEMs) and at

sophisticated customers who could put small processors to work in science and engineering. Between

the minicomputer market and that for large, general

purpose mainframes lay a vast pool of potential customers—many of them small businesses—largely

unfamiliar with the esoterica of computer hardware

and software, and without the capability to plan

their own data processing installations. Companies

from both the mainframe and minicomputer portions of the industry began to design small business

computers (SBCs) to attract such customers.

Small business systems range in price from about

$5,000 to perhaps $100,000. Typical installations include a central processing unit, one or more terminals for input, disk storage, and a serial or line

printer for hard copy output. By the late 1970’s, 80

to 90 suppliers were marketing nearly 300 different

SBC systems.18 Among these, the IBM System/32—

the focus of this case—fell near the middle in cost

and features. When first introduced, the System/32

could be leased for $770 to $1,085 per month, or

purchased for $33,100 to $40,800. It had been designed for businesses with sales in the range of $1

million to $10 million, and as many as 200 or 300

employees. The complete system—consisting of the

central processing unit, up to 32 kilobytes of main

memory, a keyboard, display, printer, a single floppy disk drive, and a nonremovable hard disk for

mass storage—was housed in a desk-sized enclosure. Software was unbundled, with everything but

the operating system sold separately. In 1978, the

software available included three programing lanla[j~~~~)r(j Fe~~{lr(, ~~.~j[~r~. .4)1 .4 bout .~rnaj~ []u. wrlf?s? ~; OITlplJtPrs [ ~f?!rd 11.

N’ ] [)atapm Research (;orp , September 1978), p 7O(;-O1O-3OA

the Development and Marketing of Electronics Products ● 531

—

guages and a series of industry-specific applications

packages.

Hardware.—Thirty-two models of the System/3a

were available, differing mostly in the capacity of

the hard disk—3.2 to 13.75 megabytes—and printer

configuration. 19 Printer options included a serial

printer with speeds ranging from 40 to 80 characters per second, and line printers of 50 to 155 lines

per minute, The basic machine came with 16 kilobytes of memory; model changes could be made in

the field.

The System/32 could be operated in batch or interactive modes and also function as a smart terminal or a satellite processor linked to other computers. For example, a System/32 can easily be set

up to communicate with: another System/32; an

ink-jet document printer; an IBM Office System

6/430, 6/440, or 6/450; an IBM Mag Card II typewriter; IBM Systems /3, /7, /360, or /370; some of

the equipment in a 3740 Data Entry System; or a

5230 Model 2 Data Collection System.

Software.—IBM supported the System/32 by regularly offering new software. The three programming languages available were: Report Program

Generator II (RPG II), a commercially oriented language; COBOL; and FORTRAN IV. A utility program aided in file preparation and management;

other software supported the communicant ions features mentioned above—e.g., use of the System/32

as a remote work station for a 370 series mainframe. Other miscellaneous software included:

word processing; form letters; a library of mathematics subroutines; statistics; critical path analysis; and a manufacturing management package for

scheduling purchases, fabrication, and shipments.

Much more software was made available through

the 14 Industry Application Programs (IAPs) supplied on IBM-owned floppy disks and written in

RPG II; these could be customized still further if

necessary. The 1+1 IAPs handled tasks associated

with: accounting firms; medical groups; bulk mailing; construction; hospitals; manufacturing; distribution; law firms; lumber dealers; food distributors;

student administration; motor freight; financial institutions; and retailing. Typical IAP functions are

accounting, analysis or control of cost/time/i riven -

tory/sales, management of files and records, and

planning and scheduling.

Upward comparability was one of IBM’s design

goals. System/32 purchasers had two possible

growth paths: into a System/3 Model 8, 12, or 15;

IQ[]ata{}r[) R[,~l[~rfS OH ,$~ln l~ornp[ltf~r~ IRkf .SJstern/32 ( Oe]ran, N.].

Oatapm Re.war{, h (:orp , January 1c)78), p Nf 11-491-601
532 ● International Competitiveness in Electronics

— ——

or into a System/34. With minor modifications RPG

II programs from a System/32 could be run on a

System/3 or vice versa; this also meant that System/3 users could move into 32s or add 32s to their

networks. For those wanting to move into a System/34, the System/32 RPG programs were sourcecompatible with the System/34, allowing IAPs to

run without change.

Support by the manufacturer—not only new software packages, but also hardware updates and servicing—are important to most SBC customers. Those

who rented the System/32 could get service 24

hours a day, 7 days a week. Purchasers had service

available 9 hours per day, 5 days per week under

the Minimum Monthly Maintenance Charge, or

could buy 24-hour service for an additional fee.

IBM also emphasized ease of use—the minimal

training needed to run IAPs, indeed to operate the

entire system.

The Market

That the SBC market offered enormous growth

potential was a truism of the early 1970’s. The pool

of prospective customers for an SBC costing less

than $1,000 per month included as many as half a

million small organizations—virtually none of

which had prior electronic data processing experience. Besides the sheer numbers involved, this

market was important for another reason, Computer customers exhibit high loyalty to the firm

from whom they buy their initial system. By capturing first-time purchasers, a supplier gains a big

future advantage. Computer manufacturers who

chose not to compete vigorously in the SBC market

ran a real risk of seeing their future market share

and competitive position eroded. Adding to the

potential market were expanding applications in

distributed data processing, where many SBC

models could be used as remote job entry stations.

These markets brought a pair of requirements for

a competitive SBC. First, it would have to be

simple—user-friendly—so that a customer with little or no data processing background could learn

to operate it quickly. The second requirement was

compatibility with other machines in a networking

or distributed processing environment. Upward—

and for larger SBCs, downward—compatibility was

an important selling point, so that customers could

expand or upgrade their installations.

The established mainframe computer manufacturers had, at least initially, advantages in all these

areas. Their nationwide sales and service staffs

were accustomed to dealing with customers having business applications, rather than the OEMs

and technically trained users who bought minicomputers. They also had considerable software experience; mainframes were ordinarily marketed with

extensive software support compared to the minicomputers of that era. Moreover, a mainframe manufacturer could design an SBC compatible with

other parts of its product line; existing customers

then comprised a readymade market base. As a

final—and very important—weapon, the large, established firms had brand recognition. Not only

IBM, but companies like Burroughs, NCR, and Univac were familiar names. Many new purchasers,

bewildered by competing claims and fearful of the

pitfalls involved in purchasing a computer, automatically turned to one of these companies. A decade later, IBM reaped similar benefits when it

entered the personal computer market. Despite

these putative advantages, most of the established

mainframe manufacturers had a good deal of trouble adjusting to the competition for SBC sales.

Minicomputer firms—for many of whom SBCs

were upward rather than downward extensions of

their product lines—faced serious handicaps in

comparison. Unlike the mainframe companies,

minicomputer suppliers such as Digital Equipment

Corp. (DEC) had little experience selling to endusers. OEMs or engineering organizations did not

need extensive support; minicomputer firms had

neither large service networks nor large marketing

staffs. They competed most heavily on hardware

features and price. Software was less critical; most

users could write their own. Minicomputer customers who needed software or other support frequently bought from “systems houses” or other middlemen, Systems houses purchased hardware in bulk,

supplying customized software and assembling a

system to meet customer requirements. Not restricted to any one manufacturer, they could put

together processors, terminals, storage units, and

other peripherals from a variety of sources to customize a given installation. By taking advantage of

the lower hardware prices it could command, a systems house might be able to supply an entire installation, including software, for less than the hardware cost to a single-unit purchaser. Qantel and

Basic Four both had considerable success as systems houses before entering the SBC market with

equipment of their own designs.

Minicomputer makers also experimented with

other marketing channels aimed at small end-users.

An example is the “software representative” created by Datapoint to locate potential customers.

The sale was between Datapoint and the end-user,

with the representative getting a commission and

afterwards supplying software and other services

independently.
App. C—Case Studies in the Development and Marketing of Electronics Products ● 533

—

Development of the System/32

IBM had been slow compared to Burroughs and

NCR in exploiting the SBC market. Prior to the introduction of the System/32 in January 1975, IBM’s

only offering was the System/3. Originally priced

at the very top of the SBC range—although later

models cost much less—the System/3, which

reached the market in 1970, had gone on to sell

more units than any other computer in IBM’s history; by 1975, over 30,000 had been purchased

worldwide. The success of the System/3 was a

major reason for IBM's decision to expand its line

of SBC machines into the lower price ranges.

In many respects, the System/32 was a direct descendent of the System/3 Model 6. The central processing units of the two were quite similar, and

many of the software products offered for the System/32 were adaptations of those developed for the

System/3 Model 6. Changes included faster printers, simplified operation, and improved applications programs. With the System/3 Model 6, only

limited applications software had been available,

and those wishing to write their own programs had

to master a complicated operating system.

Development of the System/32—hardware, software, and the market studies leading up to these—

was the job of IBM’s General Systems Division

(GSD). The GSD emerged from a major corporate

reorganization in 1972 that split the former Data

Processing Group into three divisions. With this reorganization, the GSD was given development and

manufacturing responsibility for the System/3 and

related peripherals. Responsibility for all small

business applications within IBM followed in 1974,

at which time the GSD was given its own marketing

a r m.

By the next year, the GSD marketing and sales

force had grown to some 4,500 sales representatives

working out of 67 sales offices, plus nearly 3,000

field engineers. The System/32 entered the market

accompanied by an extensive advertising campaign, along with exhibits at trade shows, direct

mail, and in-person sales calls. These promotional

efforts were tailored to potential customers with little or no computing experience, Initial sales of the

System/32, which was made in Rochester, Minnesota and Virmercate, Italy—with components

and subassemblies coming from other IBM facilities—exceeded the company’s projections.

The System/32 offered a price-performance combination not available in other IBM systems. Heavy

demand during the first year led to extended

delivery dates. The reason for this success was not

any technological advantage with respect to the

competition, but IBM’s accurate perception of the

needs and concerns of the SBC market. Indeed,

from a hardware perspective the System/32 was a

rather limited machine. Instead of being designed

for multiprogramming, it was restricted to executing one program at a time. It had less disk storage than a number of other SBC systems. Furthermore, because the disks were hard and nonremovable, only on-line storage was available. The technology utilized in the System/32 did reflect the state

of the art in using MOS integrated circuits in both

memory and processor.

Probably the most innovative aspect of the System/32 was its software. While IBM had been accustomed to writing customized software for mainframe purchasers, such an approach was not practical given the large number of SBC customers.

Hence the Industry Application Programs, aimed

at meeting perhaps three-quarters of user needs.

The remainder could be supplied by IBM or an independent vendor at extra cost. The IAP concept

was not unique, but the design, distribution, and

support for these programs was a major undertaking, Unbundling the software was another new departure; IBM had traditionally supplied hardware

and software together at a single package price.

IAPs, in contrast, were sold for an initial one-time

payment plus a monthly support fee. The Wholesale

Food Distribution IAP, for example, carried an initial charge of $3,120, plus $147 per month for support. By emphasizing reliable hardware, minimal

maintenance, and off-the-shelf software, IBM was

able to continue its “hand-holding” approach to

marketing while supplying large numbers of machines.

The Competitive Response

Burroughs and NCR were the two companies

most affected by IBM’s entrance into the SBC

market. While both offered broad product lines,

SBCs had come to represent a significant share of

their total revenues. Both had seen the importance

of SBCs early, and sought to utilize their sales and

marketing organizations—which were much more

extensive than those of the minicomputer suppliers—to establish themselves in this part of the

market.

Burroughs, then the dominant force in SBCs, had

formed two special marketing groups–the “general

accounts force, ” and the “selected accounts

force’’—to handle smaller machines. The general

accounts force sold exclusively to small firms, while

the selected accounts force devoted its efforts to

large organizations with requirements that could
534 ● International Competitiveness in Electronics

be served by small computers. Thus Burroughs explicitly recognized the dual nature of the SBC:

stand-alone for the small enterprise, distributed

processing for larger customers.

Burroughs had originally entered the lower end

of the SBC market in 1973 with the first of its B700

series, selling more than 2,000 in the first 31⁄2 years.

When the System/32 was introduced, Burroughs responded immediately—doubling the main memory

of the B700 and bringing out six new models. In

April 1976, Burroughs announced the B80, which

was—unlike IBM’s System/32—capable of multiprograming and multiple terminal support. This machine was well received initially, but suffered from

severe software problems; it was soon replaced by

the B90. Burroughs’ share of the SBC market began

to slip, a considerable concern to a company that,

as early as 1973, got 30 percent of its revenues from

the low end of its product line. 20

NCR also made an early entry into the SBC market, In 1972 it had introduced the NCR 322, a minicomputer priced in the $15,000 range, followed by

the Century 8200, the first of a series of SBCs. These

two models represented the first results of a thoroughgoing and painful reorganization at NCR, a

company that few observers at the time believed

could survive. NCR was seen as tradition-bound,

still producing electromechanical products that

could not compete with electronic equipment.

Then, under a new president in the early 1970’s,

NCR invested nearly $300 million in product development, one thrust being interactive systems

designed specifically for business applications.21 A

turnaround followed, as the company went from

a loss of $60 million in 1972 to earnings of $72

million in 1975.

The new commitment to electronic products also

brought changes to NCR’s marketing organization.

The old system of branch offices was dismantled,

to be replaced by a “vocational sales” organization.

Under the earlier system, each salesperson had

been responsible for a group of products: sometimes two NCR representatives found themselves

competing for the same sale, Under the new arrangement, salesmen were responsible for selling

to one of four vocational groups: retail stores; financial organizations; commercial-industrial enterprises; and a residual group consisting of medical,

educational, and government organizations. In addition, the entire field engineering force—some

.—

zO’’The Burroughs Syndrome,” Business Week, Nov. 12, 1979, p. 80.

ZI’’NCR Transition Nearly Complete: Company Targets Three Markets, ” Computerworld, May 24, 1976, p. 35.

7,000 people—was retrained to service the new

electronically based product line. 22

Sperry Univac was the last of the major mainframe manufacturers to move into the SBC market,

introducing the BC/7 in 1977—a machine featuring

multiple terminal concurrent data entry capability, a great deal of available storage, and removable

disks–none of which were available on the System/

32. Sperry Univac had created fully staffed marketing organizations in 18 cities, with plans for further expansion, just for the BC/7.23 A further indication of their commitment to the SBC market was

the acquisition of Varian Data Machines, a major

manufacturer of minicomputer products. Nonetheless, the BC/7 family suffered from applications

software that did not compare favorably with the

competition, and could capture but 2 percent of the

SBC market.

Among the minicomputer firms, DEC was and

still is the largest and most successful. The company, which had developed the first commercially

successful mini—the PDP-8—probably had the most

to lose in competing for SBC sales. DEC had established itself by mass-producing “black boxes” sold

primarily to OEMs. In the 1970’s, this market was

coming under increasing pressure from other companies, including those making microcomputers,

and DEC realized its greatest growth prospects lay

in small business and other end-user markets.

When the System/32 was introduced, DEC was

the first to respond, countering—only 10 days after

IBM’s announcement—with the Datasystem 310,

which played to DEC’s own strengths. It was

slower, with less memory than the System/32, but

cost a third less. DEC retained its established

marketing practices, selling networked systems

directly while relying on independent distributors

for simple turnkey sales. These distributors bought

hardware at a discount, added software, and then

sold the systems at approximately the same price

DEC would have charged for the hardware alone.

After purchase, DEC provided hardware maintenance, with the distributors responsible for software.

Another minicomputer manufacturer, Wang Laboratories, also responded quickly, releasing a series

of computers—the WCS series—that proved quite

successful. 24 Like other minicomputer manufacturers, Wang stressed its low prices and proven

U“NCR’S New Strategy Puts It in Computers to Stay, ” Business Week,

Sept. 26, 1977, p. 104.

“’’Sperry Sets Computer for Small Business, ” Advertising Age, Apr.

25, 1977, P. 46.

14A Uerbach computerTechnolog~r Reports: Wang Laboratories, Auerbach Publishers No. 140.6856.150, 1977, p. 2.
App. C—Case Studies in the Development and Marketing of Electronics Products ● 535

hardware. However, the company realized that

price competitiveness alone would not assure success, and moved to establish a dealership and service network to provide the services that SBC customers expected. One function of Wang’s new distribution system was to provide applications software, including customized programs.

Conclusion

When IBM moved into the SBC market, other

firms rapidly cut prices on existing models and

sought to upgrade and expand their product lines.

More companies entered the fray, perhaps feeling

that IBM’s entry had legitimatized the SBC. Buyers

could choose from more sophisticated systems at

lower prices. Business Week estimated that, by

1975, IBM had captured about 28 percent of SBC

sales, with Burroughs around 12 percent and NCR

just under 5 percent. IBM’s share of this market

continued to climb; by 1978 it was put at 37 percent, with Burroughs and NCR together still accounting for less than 20 percent. 25

.

~s” ‘“[’}1(, 1~(] r rou g hs S} nfl r[j m{,, {Ip ( It

By 1980, the System/32 in its basic configuration

sold for $23,490—a reduction of $10,000 compared

to the original price 5 years earlier. While the

System/32 was more successful at the outset than

anticipated, sales declined rapidly once its successor, the System/34 was introduced. The System/

34 could handle multiple work-stations; it offered

more processing power, multiple programing capabilities, and more storage. Selling in the same price

range, the System/34 continued the trend toward

greater performance/cost ratios.

Beyond its brand recognition and “safe” image,

IBM’s immediate success with the System/32 came

from its decision to stress applications—an obvious

strategy, but one that IBM executed better than the

competition. The technology in the System/32 was

not much different from its predecessor. In the SBC

market, technical wizardry counted for little compared to cost and convenience.
Index
Index

i nt ernat io na 1 t)u si nf]ss st rat e~ies, 179

ma rkct distort ions, 168

ma rkct sham, 173

i n sern i(; onduc:tors, 13, 24, 25, 27, 28, 132, 1:13, 137,

187-200”

(;urrcnt trcn(is, 194

i nternat ion a] c1 irnensions, 192

JapaII, 196-20()

linf?ar to digital circuits, 196

strategy and st ruct u Ix;, 198

mergers, 1{)5

pr(du(,ts an(l pri(:cs, 190

IJnitwl States, 18/3-1 $)6

t c(; h nology, role of, 16[1

(,om puters

Amdahl 470-V, 8 I

applications of, 90, 91

c[!nt ra] ~)rocessi ng unit (C I}(; ), 82, 83, 85, 9~1

(:h a ract erist ics of d i ffe rf; nt (;atego rit:s, 83

(:haractt; r-ist ics of’ gt!nerat ions, 90

i n (;h i na, 387

compet it i~f;ncss, 28, 149, 200-212

(jraj-1, 93

(1 ist ributf;d pr(][; rssi ng, 85

P:nia(:, 88

i n I+:u ro])f:, 1 !52

F’airchi]d F’-8, 88

~ro~~th of com~jut ing ~)()~~f!r, HT

I H M sJ’stf!rn/32 , 531 -5:15

113 hl 370/1 (38, 9!)

IHN1 650, 87, 88

in Japan (see Japa rl ]

mainframe, 83, 84

memor~r, 99-101

m i(;r(][:orllr)~lt(:r, 83, 84

min ic(]m~)uter, 8~3, 84

~)rice trends, 89

n(; tworking, 8S

1

)

1)1)-8, 88, 146

J)rm:f;ss (;ontrol, 102

sma11 hu si ness [;orn p u te rs (S f~ C s]. 53 I -535

software, 85, 531

(: OStS, 86

(ie~’elopmentt 206

~)rocluct strategif>s, 204

reliability, 220

systems aspects, 29

ty])es Of, 82

( lni~’a(: 1, 81, 87, 101

(J. S. industry, 145-150

competitiveness, 200-212

e~’o]ution, 147

exports, 15 0

imports, 14{1, 1 5(1

i[ltf;rrl:itioll:~l tra[if~ and inl’cstrnf; nt, 149

ma nu factu rwrs, 147

]]1~1~-(:c)nl~):~ti})]t; rll:~ll~lfiI(:t\lr>(?r’s (PCMS), 148, 149,

205

539
540 International Competitiveness in Electronics

production 29

sales, 146, 149, 202

structure;, 146

world markets, 151

congressional interest, 7, 9, 36, 46, 276

consumer electronics

amplifiers, high-fidelity, 520-524

in Asia, 126, 127, 128

automat ion (see manufacturing)

cathode-ray tube (CRT), 68, 71, 102

color TV sales, 114

competitiveness, 5, 11-13, 112, 115, 180-186

employment, 114, 353

exports, 118

in Japan (see Japan)

offshore U.S. TV manufacturing plants, 118, 510

product differentiation, 23

research and development, 68, 69, 168

structure, 58, 114

TV receiver componentry, diagram of, 69

U.S. sales and imports, 112, 114, 116

U.S. TV manufacturing facilities, 114

video cassette recorders (VCRs), 68, 70, 112, 122,

156, 165, 180, 186

video disk, 70

wage rates, 127

Consumer Reports, 231, 232

Control Data Corp., 201, 206, 212, 268

Costa Rica, 185

Cray, 206, 271

Data General, 200, 205

Datapoint, 204, 205

Deming, W. E., 224

Digital Equipment Corp. (DEC), 31, 88, 111, 146, 147,

179, 201, 204, 205, 240

Domestic International Sales Corp. (DISC], 445

dumping, 42, 168, 169, 182, 439

education and training, 35, 36, 302-318

international] d inferences, 317-318

secondary school education

in Japan, 304

in United States, 303

university and continuing education, Japan, 314

company-run training programs, 316

continuing education and training, 315

engineering, 314

enrollments in colleges, 315

university and continuing education, United

States, 305, 312

community colleges and local initiatives, 311

engineering, 306-308

engineering technology, 310

industry initiatives, 309

supply and demand, 308

university-industry relations, 310

Electronic Industries Association (EIA), 114, 182,

350, 439, 441

Electronics Education Foundation, 195

employment

in computer manufacturing, 40

in consumer electronics, 39, 40

effects of import penetration and offshore

assembly, 359-363

consumer electronics, 360

foreign investment in U. S., 363

semiconductors, 362

future patterns, 366-372

impacts of technical change in electronics, 344-349

automation debate, 344

factors affecting employment levels, 347

in semiconductors, 356

trends in U.S. electronics industry, 349-358

computers, 353, 357

consumer electronics, 351, 353

semiconductors, 352, 356

European Community (EC), 43, 143, 153, 185, 411,

412, 432, 433, 434

European Economic Community (EEC), 107, 123, 124

European Free Trade Association (EFTA), 433

exports, [J. S.

color TV receivers, 119

computers, 150

semiconductors, 135, 136

Fairchild Camera and Instrument, 72, 140, 143, 191,

195, 288, 433

Federal policies affecting electronics: U.S. options,

463-502

alternative perspectives on industrial policies,

467-500

competitiveness of American industries,

promoting the, 491

open trade and industrial policy, 492

product cycles and structural adjustment, 491

critical industries, support for, 475

capital for investment, 482

national defense, 477

U.S. economy, 480

infrastructural and adjustment policies, 485

adjustment, 488

design and implementation, 489

private sector, 496-500

protecting domestic markets, 468-475

bilateralism in trade, 469

market-protection strategy, 474

pros and cons of protected market, 470

current environment, 464-467

Ferranti, 142

financing

accelerated depreciation, 32, 279, 295, 500

bankruptcy risks, 263

Chase Financial Policy study, 256, 257, 260, 261,

262

cost of capital for electronics firms in the United

States and Japan, 266-268
Index . 541

effects of financial leverage on tax payments, 262

financial structure-international comparison,

268-294

France, 289-292

Japan

continuing change, 286-289

external funding, reliance on, 281-284

government involvement, 284-286

postwar trends in financial system, 280

United States

Capital supplies and financing Costs for

electronics industry, 277-280

entry, costs of, 270

financing startups and growth, 274-276

internal and external sources of funds, 272-274

venture capital, 31, 268-270

West Germany, 292-294

inflation and banking practices, 260-261, 278

internal and external financing, 257

international differences, 32, 33, 34

R&D tax credit, 32, 168

risk, 258

aversion behaviors, 259

compensation for, 259

subsidization, 260

risk absorption in Japan, 262

savings rates, 264

size; and diversification, 263

Ford Motor Co., 110, 332

France. 46, 123, 124, 151, 175, 268, 281

CII-Honeywell Bull, 55, 107, 126, 152, 291, 382,

394, 396

Commissariat du Plan, 401

Compagnie Generale d’Electrite, 394

Compagnie; International; pour L’Informatique

(CH), 291, 395

Electronics Industry Task Force, 399

French Atomic Energy Commission, 398

Government Program for Development of

Electronics, 399

industrial policies, 394-400

Institut de Developement Industrial (IDI), 395

L.e Plan Calcul, 291, 395, 396, 397

Le Plan Circuits Integres, 481

Le Plan des Composants, 190, 396, 397

Le Plan Periinformatique, 398

Ministry of Economy and Finance, 395

Ministry of Industry, 394

Ministry of Research and Technology, 394

President Mitterrand, 394, 395, 398, 400

Prime Minister Barre, 399

Saint-Gobain-Pent-a-Mousson, 397

Fujitsu, 151, 153, 154, 158, 199, 201, 209, 211, 240,

269

GCA Corp., 110

General Agreement on Tariffs and Trade (GATT), 43,

62, 168, 169, 429, 430, 436, 438, 441, 443, 444,

445, 446, 447, 451

General Electric (GE], 12, 14, 107, 111, 122, 123, 133,

147, 181, 183, 195, 245, 277, 332

General Motors, 331, 332

Gold Star Co., 128, 384

gross domestic product (GDP), 171, 172, 175

gross national product (GNP), 346, 348, 364, 383

GTE-Sylvania, 115, 123

Hewlett-Packard, 111, 126, 148, 151, 200, 204, 205,

210, 230, 247, 248, 249, 268, 313, 322

Hitachi, 151, 153, 154, 158, 209, 211, 240, 262, 277,

317

Honda, 285

Hong Kong, 126, 127, 193

Hughes Aircraft, 313

human resources

labor, 318-325

comparison, U.S.-Japan, 325

market trends, 319

mobility, 321

in Japan, 323

in United States, 322

organization and management, 326-334

decisionmaking in Japan, 328

management styles, U.S.-Japan, 333, 336-339

Matsushita’s purchase of Quasar, 338

worker participation, 330

quality control (QC) circles, 331, 332

preparation for work, 37

quantity and quality, 34

engineering education, 35, 36

IBM, 14, 18, 27, 28, 42, 55, .59, 82, 86, 87, 95, 108,

111, 125, 126, 132, 141, 144, 145, 147, 155, 158,

179, 189, 194, 201, 205, 211, 227, 240, 271, 277,

313, 322

imports into United States

color TVs, 24, 116, 183

computers, 150

consumer electronics, 182, 435

industrial policies

comparisons, 383-422

developing countries

China, 387

others, 388

South Korea, 383

Taiwan, 385

European Community, 412

France, 394-400

finance, 395

future prospects, 400

Le Plan Calcul, 291, 395, 396, 400

Le Plan des Composants, 397, 398, 400

planning, 395

recent developments, 398-400

Japan, 413-422

cooperation in R&D, 417

effectiveness of policy, 421

government R&D projects, 417
542 . International Competitiveness in Electronics

policymaking, 416

institutional setting, 415

recent trends, 421

role of universities, 419

supports and subsidies, 419

United Kingdom, 400-405

early experiments, 401

other policies toward electronics, 403

recent context, 401

research and development, 403

United States, 389-394

antitrust, 390

policymaking, 393

procurement and R&D, 391

taxation, 392

trade and foreign economic policies, 390

West Germany

effectiveness of policies, 412

Fraunhofer Gesellschaft, 410

future policies, 411

institutional setting, 405

policies toward electronics, 407

policymaking processes, 406

R&D support, 408

congressional interest, 7, 9, 46, 47, 48, 49

critical industries, 46, 48

domestic market base, 46, 47

economic adjustment, 10

education and training, 9

Federal policies affecting, 467-500

infrastructural development, 49

lack of U.S. policy, 61

OTA definition, 7

tools of industrial policy, 381

foreign investment controls, 382

government procurement, 381

investment grants, 381

tariffs, 382

integrated circuits (ICs), 23, 24, 25, 26, 27, 29, 32, 58,

71, 101 (see also manufacturing;

semiconductors)

design, 73-74, 77

development, 72

learning curves, 76-77

manufacturing, 78-81, 96-99

microprocessors, 95

technology, 93-99

types of, 93

Intel Corp., 31, 74, 190, 323, 324, 525, 526, 527

International Brotherhood of Electrical Workers, 361

international electronics industry, 107-159

competitiveness, 163-214

Japanese industry, 119-123

development, 119, 120, 184, 185

government supports, 121

investment, 175

production and exports of color TV receivers, 120

U.S. industry, 108-118

color TV imports into U. S., 116

computers, 111, 112-129

consumer electronics, 111, 112-129

investment, 175

offshore assembly in color TV, 116 (see also

offshore manufacturing)

sales trends, 109

semiconductors, 111, 112-129

wage rates and investments, 127-128

Western Europe, 123-126

Phased Alternating Line (PAL), 123, 124

sales, European, 126

International Labour Office, 344

Intersil, 14, 33

ITT, 184

Iowa State University, 308

Ireland, 205

Japan

Agency for Industrial Science and Technology, 245

Bank of Japan, 266, 280, 285, 286

Computer Development Laboratory, 418

computers

competitiveness, 15, 151, 205, 206-212

government assistance, 208

production and exports of VCRs, 25

production, imports and exports, 18, 153, 154

sales, 156, 157

consumer electronics, 23, 119-123, 180-182

automation, 23

color TV exports to the United States, 116

competitiveness, 115, 117, 180-182

development, 119

dumping, 42, 182

foreign markets, 184

government supports, 121

industrial structure, 121

reliability, 23, 70, 229

television, 69, 70, 115, 117, 120, 121, 122, 231

VCR development, 24, 70, 122, 165

wage rates and investment, 127

Council for Science and Technology, 416

Development Bank, 155, 208, 245, 286, 415, 420

Economic Planning Agency, 415

education and training, 304, 314, 315, 316

Fair Trade Commission (FTC), 415

finance, 33, 34 (see also financing)

foreign investment, 175

Foreign Investment Council, 193

industrial policies, 413

Institute of Standards, 225

international electronics industry, 107-159

Japan Information Processing Development Center

(JIPDEC), 416, 417, 418

Kansai Electronic Industry Development Center,

181

labor (see human resources)

lower capital cost (see financing)

manufacturing approach, 224

Ministry of Education, 416

Ministry of Finance, 280, 285, 288, 415

Ministry of International Trade and Industry
Index . 5 4 3

(MITI), 119, 121, 140, 145, 154, 180, 193, 194, Smoot-Hawley Trade Bill, 429

196, 197, 198, 206, 208, 209, 245, 415, 416, 417, Tariff Act of 1930, 443, 445

418, 419, 420, 448, 449, 454

Ministry of Posts and Telecommunications, 416,

418

Pattf;rn Information Pro(;f;ssing System (PIPS)

project, 207, 417

Plant Export Poli(; y Committee, 121

Reliability (jenter for Electronic (Components, 224

Research Association for R&I) on New’ Function

Elements, 48

robotics (see manufacturing)

Scien(;e and Te(; hnology Agency (STA), 415

sf; m ico nd uct ors

cap it al i nl’est mcnts, 138

co m pet i t i~reness, 13, 132, 133, 187, 190, 193,

1 96-200”

de\’elopmf211t , 1 :j9

govf; r n m e nt ro 1 f;, 140, 193, 197

intf; mat ional tradf; , 141

rna 10 r ])rodu(:f; rs, 140, 158

manufa(; t uring f;qu ip ment, 144

~)roduction, 139

prote{; t ion ism$ 193

ratf:s of spending b} firm ~, 33

Sa]f?s, 44, 138, 1 !)(3

structu rc, 137

trade, 43, 431

(;0 m put f]rst ~58

(,onsu mer f?lectr(]ni(; s, 451

(i u m ]) i ng i n t hf: ( ~ n i tf}[i Stiitf~s, 43{1

(Ir(i(:rly Llarkf;ting Agreements, 446, 447

sf!nli(:OIl(i u(, to” rs, 452

tariffs, 432, 433$ 434

\’l,S1 proiw;t, 80, 145, 197, 1 !18. 207, 208, 238, 416,

417, 418$ 454

JaI)an Electronic Computer (;orp. (JECC), 155, 208,

209, 245, 414, 420

Japiin Robot Leasing Gompany, I,td. IJAROL), 245

J. (~. Penney, 116, 181, 440

John Fluke Manufacturing Co., 110

joran, J. hi., 224

Karatsu, Hajirne, 224

K hlart, 181

Korea Development Bank, 384

lf;~islat ion

Burkf;-Hartke bill, 513

(:la~’ton Act, 390, 465

~l(,[)nomic Reco\’er) Tax Act of 1981 (ERTA), 32,

51, 173, 276, 278, 279, 381, 392, 393, 497, 500

Employee Retirement Income Securit\r Act of 1974

IERISAJ, 269

f+:xport ‘1’ra(]in~ Company Act, 382

Foreign (;orrupt Pra[;ticcs Act, 382

Re\renue A(:t of 1916, 438

Small Business Intestmeot A~t of 1958, 269

Trade Act of 1974, 444, 446, 447, 448, 449, 450

Trade Agreements Act of 1979, 45, 430, 431, 438,

439, 441, 443

Trade Expansion Act of 1962, 184

Library of Congress, 101

Linear Technology, 189

Lucky Group, 128

Magnalox, 12, 70, 123, 181

Magnuson, 271

Malaysia, 135, 193

manufacturing

automation, 233-245

in electronics

consumer electronics, 236

reasons for, 235

semiconductors, 236

fixed and flexible, 234

robotics, 239-246

international trends, 244

in manufacturing, 240

market growth, 242

robots and jobs, 241

technology, 239

USE of, 24:3

color TV’s, quality and reliability of, 231-233

integrated circuits, 78-81, 96-99, 226

acceptable quality level (AQL), 228, 229

customer requirements, 227

failures in, 227

quality and reliability comparisons, 229

testing, 226, 228

testing and screening in Japan 228

Japanese approach, 224

organizing for quality, 225

quality consciousness, 224

standards, 225

offshore (see offshore manufacturing)

quality, 219

organizing and managing for, 221

reliability, 219, 220

importance of design, 222

in United States and Japan, 237

Matra-Harris, 291, 397

Matsushita, 24, 115, 120, 122, 126, 144, 184, 186, 21 (),

224, 225, 231, 238, 256, 262, 285, 316, 338, 451

Mexico, 13, 57, 117, 135, 149, 151, 166, 193, 206, 388,

447, 510, 513

Microelectronics & Computer Technology Corp., 195,

205

microprocessors and memory, 74-75, 95

Microsystems International Ltd., 526

MIT, 308

Mitsubishi Electric, 316

Monolithic Memories, 190

Mostek, 33, 189, 192, 195, 454, 525, 526, 529

Motorola, 59. 115, 131, 138, 199, 231, 277, 525
544 ● International Competitiveness in Electronics

National Advanced Systems, 149, 211

National Aeronautics and Space Administration, 314

National Committee to Improve the Quality of Work

Life, 331

National Science Center for Communications and

Electronics, 314

National Science Foundation, 303, 313, 314, 320, 393

National Semiconductor, 107, 108, 158, 189, 191, 211,

322, 526

National Venture Capita] Association, 269

NCR (formerly National Cash Register), 82, 111, 132,

134, 135, 147, 155, 201, 270

New York Times, 368

New York University, 312

Nippon Electric Co. (NEC), 137, 138, 151, 154, 155,

190, 209, 211, 262, 277, 387, 433, 526

Nippon Telegraph and Telephone (NTT), 107, 138,

197, 261, 381, 418, 437, 481

North American Philips, 115, 156, 451

North Carolina School of Science and Mathematics,

312

offshore manufacturing, 137, 193, 226, 510-519

alternatives to, 514, 518

balance of payments, effects on, 511

case example, 516-518

economic impacts, 510

employment impacts, 511

motivations for investments, 513

technology transfer, 512

Oki Electric, 108, 197, 481

Olivetti, 205, 311, 397

Orderly Marketing Agreements (OMAs), 13, 42, 62,

63, 112, 113, 117, 120, 121, 128, 169, 184, 356,

360, 437, 446, 447, 448

organization for Economic Cooperation and

Development (OECD), 344, 348, 430

Phase Linear, 180, 520-524

Philco, 183, 236

Philippines, 135, 193

Philips, 70, 122, 142, 153, 186

point-of-sale manufacturing, 135

Quasar, 12, 115, 231, 332

Radio Shack, 74, 148, 186

RCA, 12, 13, 55, 68, 70, 107, 108, 111, 113, 114, 128,

132, 147, 172, 181, 183, 186, 199, 277, 282, 451

RCA Institute, 312

Reagan administration, 465, 466

Remington Rand, 147, 201

research and development

in computers, 207, 208, 209

in consumer electronics, 68, 69, 168

privately funded, 179

in semiconductors, 27, 28, 29, 71, 130, 195, 197

Rockwell, 135, 199

Samsung, 385

Sanyo Manufacturing Corp., 114, 115

Saturday Review, 521

Schlumberger, 195

Scholastic Aptitude Test (SAT), 303, 304

Sears and Roebuck Co., 115, 116, 181, 440

SECOINSA, 211

semiconductors

acceptable quality level (AQL), 228, 229

American dominance, 129

analog circuits, 67, 73, 94, 230

in Asia, 143, 193

automation (see manufacturing)

bipolar, 93, 94

captive producers, 132, 133

competitiveness, 13, 24, 28, 132, 133, 137, 187-200

digital circuits, 67, 73, 94, 196

employment, 137, 356, 357

European industry, 141

sales, 142

exports, U. S., 135, 136

future developments, 81

gallium arsenide, 81

imports, U. S., 135, 136

integrated circuits (ICs), 71, 72, 73, 74, 81

design, 77, 78, 92, 130

lithography, 79, 80

manufacturing of, 78, 96-99

production levels for captive manufacturers, 134

quality and reliability of, 226, 229, 247

technology, 93-99

terminology and classification, 94

types of, 93

international positions, 26

Josephson junctions, 81

large-scale integration (LSI), 73, 74, 93

learning curves and yields, 76

major producers, U.S. and Japan, 140

major U.S. companies, 130, 131

manufacturing equipment, 144

market trends, 131

merchant manufacturers, 132, 133

metal oxide semiconductors (MOS), 27, 73, 78, 93,

94, 99, 188, 189, 397

microprocessors, 73, 74, 75, 77, 95, 132, 190, 199

military sales, 132

offshore facilities, U. S., 137, 193, 226, 514

production in the United States and Japan, 139

profits, 137

programmable read-only memory (PROM), 96

quality dumping, 230

random-access memory (RAM), 96, 99, 130, 196,

247, 248, 249

4K dynamic MOS RAM, 524-531

read-only memory (ROM), 96, 176, 190, 323

read-write memory (RWM), 96

research and development, 27, 28, 29, 71, 130, 195,

199

silicon, 71, 72

solid-state devices, 72

system design, 73

transistors, 72

U.S. growth, 130
Index . 545

U.S. firms, international operations, 134, 135

U.S. sales, 26, 130, 131, 198

in RAMs, 25, 57, 176, 187, 529-530

very large-scale integration (VLSI), 73, 76, 79, 81,

82, 92, 194, 196

Semiconductor Industry Association, 309, 313

Semiconductor Research Cooperative, 28, 195

Siemens, 142, 143, 205, 211, 269

Silicon Valley, Calif., 31, 55, 311, 313, 322, 323

Singapore, 126, 127, 135, 193, 205

Small Business Investment Corp. (SBIC), 269, 520

Sony, 12, 115, 122, 186, 231, 285

South Korea

color TV exports to the United States, 24, 112-118

competitiveness, 58, 61, 166

consumer electronics, 12, 23, 126, 128, 129

Development Bank, 384

dumping, 42

Economic Planning Board, 384

electronics production, 129, 384

Hyundai Group, 129

industrial policies, 383

Institute of Electronics Technology, 384

Ministry of Commerce and Industry, 384

Ministry of Communications, 385

semconductor manufacture, 143

Soviet Union, 108

Spain, 122, 211

Sri Lanka, 127

Standard Industrial Classification (SIC) (categories,

350, 365

Stanford University, 308, 310, 313

Sylvania, 181, 183

Taiwan, 12, 23, 24, 42, 57, 58, 61, 63, 117, 126, 135,

151, 166, 513

Electronics Research and Service Organization

(ERSO), 386

industrial policies, 385-386

Industry Technology Research Institute (ITRI), 386

Tandy Corp., 148, 179, 186, 205, 212

tariffs (see trade)

Tata Elxsi, 388

Taylor, Frederick W., 221, 326

Texas Instruments (TI), 72, 111, 131, 136, 138, 140,

144, 179, 186, 189, 191, 193, 194, 197, 199. 205,

240, 277, 322, 525, 526, 527

Thomson-Brandt, 126

Three Mile Island, 103

Tokyo Round Multilateral Trade Negotiations, 45,

169, 430, 432, 436, 437, 438, 443, 451

Toshiba, 158, 185, 210

Toyota, 317, 436

trade

policies and their effects, 429-460

dumping, 438-443

color TV case, 439

other actions, 441-442

U.S. law, 438

electronics industry, 450-459

computers, 457

consumer electronics, 451

semiconductors, 452

quantitative restrictions and the escape clause,

446-450

escape clause proceedings in color TV, 447

OMAs for color TV imports, 446

quotas and other nontariff restrictions, 449

the escape clause, 449-450

subsidies and countervailing duties, 442-446

indirect taxes, 444

unfair practices, 445

tariffs, 43, 45, 430-438

agreements from Tokyo Round, 436-437

changes in Tokyo Round MTN. 432-433

effects, 431, 433, 434

offshore manufacturing, 434-435

Trilogy Systems, 205, 271

TRW, 211

Underwood, 147

Unidata, 205

Unimation, 240, 242

Union of Japanese Scientists and Engineers (JUSE),

224

United Auto Workers, 331

United Kingdom

Advisory Council for Applied Research and

Development, 402

Central Computer Agency, 402

computer development, 81

consumer electronics, 124

Department of Trade and Industry, 401

government subsidies, 268

industrial policies, 400-405

Industrial Reorganization Corp., 401

International Computers Ltd. (ICI,), 55, 200, 205,

211, 400, 403

Microelectronic Industry Support Programme. 403

Microprocessor Applications Project (MAP), 403

Ministry of Technology, 401

National Economic Development Council (NEDC),

401

National Enterprise Board (NE B), 381, 402, 404,

409

Science Research Council, 402

Thatcher administration, 403

United Nations Council on Trade and Development,

388

United Technologies, 133

Univac, 82

University of California, Berkeley, 313

Unix, 29

U.S. Bureau of Census, 81

U.S., Bureau of Labor Statistics (BLS), 320, 321, 350,

364, 365

U.S. Department of Commerce, 393, 438, 439, 441,

443

Foreign Commercial Service, 431

U.S. Department of Defense, 27, 79, 168, 314, 391
546 International Competitiveness in Electronics

Ada-computer language, 107

Ultrasmall Electronics Research, 391

Very High-Speed Integrated Circuit (VHSIC)

program, 15, 79, 80, 209, 381, 391, 393, 465

U.S. Department of Education, 303, 313

U.S. Department of Energy, 314

U.S. Department of Justice, 55, 390, 465

U.S. Department of Labor, 320, 356

U.S. Department of State, 431

U.S. Department of the Treasury, 438, 439, 443, 444,

445

Customs Service, 440, 441

U.S. Federal Communications Commission, 464, 520

U.S. Federal Trade Commission, 187, 390, 465

U.S. General Services Administration, 436

U.S. International Trade Commission (ITC), 133, 361,

439, 440, 443, 445, 448, 449, 451

U.S. Small Business Administration, 381

U.S. Steel, 110

U.S. Supreme Court, 441, 444, 448

U.S. Tariff Schedules, 117, 118, 136, 434

U.S. Trade Representative, 431

value-added tax (VAT), 444, 445

Visicorp, 110

Wang, 204, 205, 387

Wang Institute, 309

Warwick Electronics, 115, 183, 223

Western Electric, 14, 33, 59, 130, 132, 144, 196, 227,

277, 366

West Germany

Act for the Promotion of Stability and Economic

Growth, 405

AEG-Telefunken, 123, 407, 408, 411

Association of German Engineers, 412

Commerzbank, 293

Council of Economic Advisers, 406

Deutsche Bank, 293

Deutsche Bundesbank, 406

Dresdner Bank, 293

Fraunhofer Gesellschaft (Association of Institutes of

Applied Research, FhG), 28, 381, 410

gross national product, 408

Grundig AG, 411

industrial policies, 405

Institute for Solid State Technology, 410

Japanese TV manufacturing in, 122

Labor Market Office, 349

Ministry of Economics, 406, 410

Ministry of Finance, 406

Ministry of Labour and Social Affairs, 331, 407

Ministry of Research and Technology, 331, 406

Nixdorf, 148, 152, 201, 408, 411

secondary schooling, 304

Technical University of Munich, 410

Xerox Corp., 125, 196

Zenith, 12, 13, 55, 68, 107, 111, 113, 114, 117, 128,

172, 181, 183, 186, 444, 448, 451