CHAPTER 5 Competitiveness in the International Electronics ...

CHAPTER 5

Competitiveness in theInternational Electronics Industry

Contents

PageOverview .**O. ..** .**. ... *.*. **. .*ma*** *.** e.. **. .*** *. .*0.*...*.*.*** 163

Comparative Advantage and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164The Economics of Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164Market Distortions and Nonmarket Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168The Role of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

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

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

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

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

Computers ..*.**.. .*..*.,.* ● 9* . * . * . * . * * . * . . * * ● . * * . * * * * ● ** . . * . * . ● . * * . * * 200The Environment for U.S. Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Summary and Conclusions .....*O .,.,.0.. .*.*.... . . . . . . . . . . . . . . . . .0..0.. 212

List of Tables

Table No, Page43.44,45.46.

U.S. Gross Domestic Product (GDP), Exports, and Imports . . . . . . . . . . . . . . . . . 175Imports of Color Televisions as a Percentage of Total US. Sales . . . . . . . . . . . . 183Proportion of Sales Accounted for by Semiconductor Products. . . . . . . . . . . . . . 198Research and Development Expenditures of Several U.S.Computer Manufacturers, 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

List of FiguresFigure No. Page32. Distribution of Economic Activity in Several Countries . . . . . . . . . . . . . . . . . . . . 17333. World Exports of Manufactured Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17434. Distribution of U.S. Semiconductor Sales by End Market.. . . . . . . . . . . . . . . . . . 18835. Market Segmentation of U.S. Computer Sales by Value . . . . . . . . . . . . . . . . . . . . 202

CHAPTER 5

Competitiveness in theInternational Electronics Industry

Overview

According to numerous American businessand political leaders, other nations are over-taking the United States in trade competitive-ness. Growing import penetration in such in-dustries as automobiles, steel, and electronics—including high-technology products like com-puter memory chips-has led to discouragingcommentaries and a variety of diagnoses. Butfrom their statements, international competi-tiveness clearly means different things to differ-ent people. Some see the United States losingcompetitiveness as a nation relative to econom-ic rivals like Japan or West Germany; to suchobservers, the declining U.S. share of globaltrade in manufactured products—from 25 per-cent in 1960 to 18 percent in 1980—is primafacie evidence that the Nation is losing com-petitive vigor. On the other hand, OTA in itspast work has evaluated competitiveness on asector-by-sector basis—believing this to bemore meaningful than attempts to generalizeabout the economy as a whole,

That multiple views on international compet-itiveness coexist would be of little moment ifsimilar policy remedies followed. But they donot. Viewing competitiveness from an aggre-gate perspective directs attention toward pol-icies affecting the economy as a whole, andperhaps toward measures intended to promoteexports. Policies aimed at improving overallproductivity, encouraging capital investment,reducing inflation rates, or stimulating eco-nomic growth may have little or no impact onpatterns of trade. In contrast, viewing compet-itiveness in the context of individual sectors—such as steel—is more likely to suggest rem-edies tailored to the problems of these sectors.Alternatively, the sectoral perspective mightsuggest that Government support be directedto industries whose international trade position

promises to improve. One danger was illus-trated by the course of discussions over U.S.industrial policy during 1980, which were dom-inated by the issue of “winners” as opposedto “losers,” or “sunrise industries” and “sunsetindustries ”-a debate that hindsight shows tobe beside the point.

This chapter begins by sorting through per-spectives on competitiveness, primarily in thecontext of electronics. Discussion then turnsto the practical problem of evaluating com-petitiveness and attempting to isolate factorsthat have affected the ability of American elec-tronics firms to compete internationally. At-tempts to measure [competitiveness in an indus-try with rapidly evolving technology are at bestindicative. From the viewpoint of Governmentpolicy, choices then hinge on dynamics—direc-tions and rates of change, their causes. Projec-tions always carry uncertainty. It may not beeasy to discriminate short-term competitiveshifts from the longer term secular trends ofmost concern to policy makers. Some portionsof an industry may be in competitive declinewhile others prosper; a few years later posi-tions may reverse, Within a single firm, variousdivisions will differ in their ability to compete,Within a division, some product lines may farebetter than others. Because technical change,itself not very predictable, is central to com-petition in electronics, “measuring” competi-tiveness in any simple sense is impossible. Inorder to link the technological elements withother business, economic, and policy variables,the chapter concludes with an examination ofbusiness strategies,

Comparing strategies pursued in variousparts of the world—how firms in several coun-tries have taken advantage of the technologies

163

164 International Competitiveness in Electronics

available to them—yields insights into competi-tive shifts. Corporate planners have options indeciding how to utilize existing technologies.At the same time, corporate strategies affectthe course of technological development itself,as firms decide how to allocate resources forresearch and product development. In elec-tronics, strategic patterns vary across nationalindustries and among countries. In contrast tomanufacturers of semiconductor devices andcomputers, U.S. consumer electronics firmshave seldom approached their markets on aworld scale; while taking advantage of offshoreproduction sites and exporting technologywhen they could, they have otherwise beencontent with the large and formerly lucrativedomestic market, On the other hand, Japaneseentrants in consumer electronics-and to someextent the Dutch multinational Philips—pro-duce and sell all over the world. In microelec-tronics and computers, the situation is re-versed; here it is American firms that led—investing overseas and exporting long beforeJapanese firms were factors in this part of theindustry,

Japanese firms now seem likely to take thelead in future generations of consumer elec-tronic products. In part, this competitivesuccess—including the massive inroads intothe U.S. market for color televisions summa-rized in the previous chapter—was fueled bylow manufacturing costs and supportive gov-ernment policies. But compared to the aidJapan’s Government has channeled to micro-electronics and the information industries,assistance for consumer electronics has beenrelatively small: low costs and prices (includingproven instances of dumping), good products,and aggressive marketing led the way. Technol-ogy is a more potent competitive weapon insemiconductors or computers than in consum-er electronics—one of the reasons Americanfirms, with their proven ability to turn technol-ogy into successful commercial products—have been able to preserve many of their tradi-tional markets. Low costs are still important,but a unique integrated circuit or a better per-forming computer system offer advantages ofa kind that can seldom be achieved in con-sumer products.

Comparative Advantage and Competitiveness

The Economics of Competitiveness

Is Comparative Advantage Stilla Meaningful Concept?

To some, the traditional explanation of inter-national trade flows in terms of comparativeadvantage is a relic—made obsolete by nationalindustrial policies. Still, without denying thereality of government interventions and theireffects—whether these be nontariff barriers re-stricting inflows of goods and funds for invest-ment, or incentives to attract foreign capi-tal—comparative advantage provides a usefulbackdrop for more detailed analyses of tradeand competition.1

I For one view of the limitations of the comparative advantageperspective in a context of rapid technological and industrialchange, see M. F. Cantley and J. A. Buzacott, “Industry Scale,Free Trade, and Protection,” Scale in I+oduction Systems, 1lASAProceedings 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 ofcomparative advantage—with roots going backto the origins of social science--state in essencethat nations tend to export goods (or services)that best utilize their available resources, andto import other items; i.e., they export goodsin which they have comparative advantage.This is not so obvious as it first appears. Forinstance, it follows that any nation engagingin international trade must have comparativeadvantage in some products. Except for finan-cial flows of one type or another, imports mustbe paid for by the proceeds from exports.Therefore, from the viewpoint of comparativeadvantage, it is meaningless to speak in termsof a nation being uncompetitive. If a countrytrades at all, it must be competitive in some-thing.

The word “comparative” plays dual roles inthe definition. First, how do industries relateone to another within a country on their effi-

Ch. 5—Competitiveness in the International Electronics Industry 165

ciency in using resources? In principle, thiscomparison should yield a list of industriesordered from most to least efficient. (The pre-cise meaning attached to efficiency is not criti-cal, but it refers essentially to costs.) All elseequal, nations would be expected to exportgoods that appeared near the top of their effi-ciency listing, import those closer to the bot-tom. Such an outcome does not depend on howthese efficiencies compare to the efficienciesof the same industries in other countries. It de-pends only on the relative standing of domesticindustries. The fact is that industries at the topof one country’s list can have ‘‘efficiency” lev-els below those of the same industries abroadand still export. The first characteristic of anexport industry, therefore, is that it be efficientin its use of resources relative to other domesticindustries.

The second comparison adds the interna-tional dimension. Here, the efficiency structureof one nation’s industries is compared withthose of its potential trading partners. Wherethe efficiency structures of two countries differ—the usual case—trade can be advantageousto both. The United States might in principlebe just as efficient in the production of videocassette recorders (VCRs) as Japan; but if U.S.efficiency is greater in, say, agriculture, itwould pay both countries to trade—the UnitedStates shipping agricultural goods to Japanwhile importing VCRS, Even given identicalcost structures, trade might be advantageouswhere demand conditions differ between twocountries. Of course, such a discussion leavesout a host of other forces—ranging from tarifflevels to export subsidies—that can affect tradepatterns. Still, comparative advantage providesa starting point for examining these.

Technology plays a central role in electron-ics. Some countries may possess technologicalexpertise unmatched elsewhere, hence be ableto export products that no one else can make.More often, technology is a route to lower costmanufacturing or to products that perform bet-ter. A number of nations that could manufac-ture computers do not because countries likethe United States can make better computerscheaper.

While U.S. exports have often been based ontechnological leads, in other cases trading ad-vantages may stem from natural resource en-dowments. This country’s exports of land-based products—food, fiber, timber, paper—are the consequence of an abundance of arableland combined with high-technology inputs.Conversely, Japan would be hard-pressed todevelop agricultural advantages–regardless oftechnological expertise—because of her scar-city of good land.

Nations may also be able to maintain market-based advantages in particular industries, ad-vantages that can persist over long time peri-ods. The American lead in commercial aircraft,or some types of capital equipment—e.g., gearcutting machines—may not have resulted fromunique technological skills so much as that cer-tain kinds of products first found large marketsin the diversified and affluent U.S. economy.Likewise, the Japanese lead in VCRs is now sogreat in terms of production scale and develop-mental experience that it would be very diffi-cult to overcome.

None of these examples detracts from the pri-macy of relative costs of production and distri-bution in determining international tradeflows. When a nation has comparative advan-tage in a given product, that advantage is usual-ly visible as lower costs and prices, Sometimesmanufacturing costs themselves may be thechief indicator—this has generally been thecase in consumer electronic products. Some-times price/performance ratios must be exam-ined—the more typical situation for computersystems. In an industry like steel, where it hasbeen clear for more than a decade that Japanhas a comparative advantage in productioncosts with respect to the United States, thecrucial questions—particularly for public pol-icy—then concern sources of advantage or dis-advantage, from the national perspective howto capitalize on the former while minimizingthe latter.

As the discussion above suggests, most cost-based comparative advantages can be explained,at least to first order, in terms of resourceavailability and technology, Countries with am-ple supplies of capital relative to labor can ex-

166 ● International Competitiveness in Electronics

pect to excel in industries that rely on capital-intensive production methods—e.g., syntheticfibers or primary metals. On the other hand,where production methods call for large num-bers of unskilled workers, nations with abun-dant supplies of such labor—hence low laborcosts—are likely to be the more efficient pro-ducers. Clothing and apparel, where much ofthe output is still hand-stitched, are well-knownexamples. In consumer electronics, low laborcosts have helped Asian nations such as Japan,South Korea, and Taiwan achieve strong com-petitive positions; although automation has in-creased, assembly remains labor-intensive. Sev-eral American industries that have been los-ing competitiveness depend on substantial in-puts of both labor and capital. To make eithersteel or automobiles requires large capital in-vestments (in most but not all cases), whilelabor content is also high. Labor is expensivein the United States, while the Nation’s advan-tages in technology and capital are not so greatas 25 years ago. These long-term shifts arecreating difficult problems for this pair of tradi-tionally important American industries.

Consequences

For every comparative advantage, such asthe United States has had in computer systems,there must be a comparative disadvantage, asnow found in steel. Given flexible exchangerates, the value of a country’s exports will nor-mally counterbalance its imports almost exact-ly, since in a very real sense nations must usethe proceeds from exports to purchase their im-ports. While this may seem straightforward, theconsequences are not so obvious, Listed beloware four general conclusions that follow fromthe earlier discussion,

1. If a nation engages in international trade,some of its industries are by definition competi-tive, but some are also uncompetitive. It is, toreiterate, impossible for a trading economy tolose competitiveness overall, since the very ex-istence of trade implies that some sectors areprice competitive while others are not. Froma comparative advantage perspective, it makesno sense to state that the United States is los-ing its ability to compete. What can happen isthat, over time, shifting patterns of comparative

advantage may leave the United States lesscompetitive in industries that once were lead-ing exporters.

Some observers argue that the competitive-ness of the United States has declined becauseits percentage of total world exports of indus-trial products has fallen relative to nations likeWest Germany or Japan. Such changes, how-ever, are virtually inevitable in a world whereindustries in other countries have been grow-ing much faster than those in the United States—overseas growth built in many cases on tech-nologies painstakingly developed here. Similarfates are likely to befall the countries that todayare experiencing the highest rates of economicexpansion. Such nations as Brazil, South Ko-rea, Mexico, and Taiwan are steadily increas-ing their share of world trade in manufactures.As these and other economies continue to in-dustrialize, the current leaders are likely to findthemselves losing ground in sectors that mightnow be mainstays. Certainly Japan’s relativeadvantages in steel or consumer electronics arenot nearly so great as they once were.

2. If a nation overall rate of productivitygrowth—however productivity be defined andmeasured—is lower than in other countries,this need not result in losses of competitivenessfor all that nation’s industries, provided ex-change rates are free to adjust. Instead, real percapita income will decline relative to othercountries, This may be a serious consequence,but should not be confused with impacts oncompetitiveness. Productivity growth does af-fect international trade flows, but again in arelative way: firms and industries where produc-tivity growth is lower than average can expectto find themselves moving downward in a na-tion’s efficiency ordering.

Nothing has yet been said about U.S. levelsof productivity, cost, or efficiency comparedto other countries, The comparisons have beeninternal. But it does follow that, if U.S. percapita income is to remain high, productivitylevels must keep pace with those of our tradingpartners. At the same time, the sad fact is thatan American firm or industry might be moreproductive—or otherwise efficient in its use ofresources—than its overseas rivals and still not

Ch. 5—Competitiveness in the International Electronics Industry ● 167—

be competitive. The examples drawn on earliercan illustrate the point. In American industrieslike steel, apparel, consumer electronics—evenshoes—labor productivity is as high or higherthan in most foreign countries, yet these indus-tries are in competitive difficulty. (The primaryexceptions to this statement come when reces-sions in the United States are out of phase withthose in other parts of the world; productivitylevels depend on capacity utilization and candrop rapidly during downturns.) While theseindustries may be more efficient than their in-ternational rivals, other domestic sectors dobetter still. U.S. manufacturers of color TVshave not been sufficiently more productivethan the average U.S. company to maintaintheir competitiveness; other American goodsare more attractive to our trading partners, im-port competition in TVs stiffer, The first com-parison for domestic industries is then theirperformance with respect to the rest of thedomestic economy, again leaving aside distort-ing factors such as trade barriers or subsidies.

3. This conclusion follows: When industriesexperience relatively rising costs in world mar-kets, and lose market share both at home andabroad, the price system may be signaling thatresources should be reallocated internally—i. e.,that domestic restructuring is necessary. T orestore the competitiveness of declining indus-tries would often require productivity improve-ments—for instance, through improved manu-facturing technologies—greater than experi-enced 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 notimprove its ability to compete. Whether or notit can strengthen its position will depend onfactors such as:

●

●

the attributes of the technologies the com-pany invests in (or the other investmentsit makes),the subsequent impacts on productivitycompared with the rest of the domesticeconomy,

●

●

responses to the investments by bothdomestic and foreign competitors, andthe opportunities available to other trading. .sectors both here and abroad—far fromlast in importance.

It is an unpleasant fact that the realities of glob-al comparative advantage may leave no simpleremedies for a firm or industry bent on regain-ing its competitiveness. Substantial capital in-vestment might be necessary to maintain thestatus quo but insufficient for improving com-petitive ability.

A brief example will illustrate: Americanautomobile firms have been undertaking exten-sive programs of product redesign, accom-panied by investments in new manufacturingfacilities, intended to restore price competitive-ness and profitability. The investments arehuge, and clearly necessary if the industry isto again be competitive. Still, to succeed, thesespending programs must do more than keepthe U.S. industry on a par with productivitylevels in Japanese automobile firms–if onlybecause wages here are considerably higher.These wage levels reflect, not only the high pro-ductivity levels attained by U.S. automakersover the years, but also the lead in aggregatelabor productivity that the United States stillmaintains with respect to Japan. To be compet-itive, the U.S. automobile industry must findways to exceed the productivity levels in thefactories of its overseas rivals—the same prob-lem American steelmaker have faced since the1960’s. Given the available production tech-nologies, this might not in fact be possible; cer-tainly the steel industry has not found the key.

4. A further conclusion, relating to Govern-ment initiatives aimed at improving overallproductivity: if such policies succeed—that is,if average productivity across all industrial sec-tors were to increase faster here than in othercountries—then some formerly competitiveAmerican industries might become uncompeti-tive, Productivity improvements do not occuruniformly across an economy; some firms andindustries improve faster than others. In termsof competitiveness, when some improve otherswill decline—even if the declining firms or in-


dustries experience productivity improvementsof their own, and even if they improve fasterthan their rivals overseas.

This is a nontrivial conclusion. Phrases suchas “getting the economy moving again” or “re-industrializing America” often seem to suggestthat all industries can begin to compete inter-nationally once new policies—whether changesin Government regulations, a revised tax struc-ture, encouragements for exporting—are putinto place. Unfortunately, this is highly improb-able, if not impossible. The actual outcomeswill depend on relative impacts—for instance,on how changes in tax law affect capital invest-ment decisions and hence manufacturing ef-ficiency across industries. Likewise, Govern-ment programs aimed at encouraging exports—removing disincentives, promoting Ameri-can goods overseas, even providing subsidiessuch as tax benefits or low-interest loans—areunlikely, by themselves, to have more than mar-ginal effects on competitiveness. Export incen-tives are puny weapons for combating struc-tural problems, and—as experiences in severalEuropean countries show—even massive sub-sidies may be little help to an industry whosecosts are too far out of line.

Many of these points apply across firmswithin an industry as well as across industries.Manufacturing sectors are typically populatedby a spectrum of companies ranging from mostto least efficient. In a relative price sense, someof the producers in a given country maybe ful-ly competitive while others face difficulties. Aparticular Government policy might help allfirms in a given industry; an alternative meas-ure might help some firms but not others; stillother policies might hinder all uniformly. Inelectronics, tax credits for research and devel-opment (R&D) are more likely to aid semicon-ductor firms intent on being at the leading edgeof the technology than those that concentrateon low-cost production of standard devices, Ina complex economy like that of the UnitedStates, it is not easy to determine a priori theoutcomes of any particular set of policies. Evenif the objective is to aid all firms, this may beimpossible, A neutral policy—either amongfirms within an industry, or among industries

within the economy—is a theoretical outcomethat is seldom very closely approached. On theother hand, differential effects can rarely bequantified with much precision—and if theycould, political choices among alternativesmight be more difficult than they are now.

The essential lesson is that any policyadopted by Government will result in winnersand losers, In an open economy, it is not possi-ble to simultaneously help all sectors competewith foreign enterprises, The nature of the eco-nomic process dictates that choices be madewhen formulating public policies—choices thatdiscriminate implicitly if not explicitly amongsectors, and sometimes among firms.

Market Distortions andNonmarket Factors

In assuming that prices in world markets de-pend only on costs and on the qualitative char-acteristics of goods that lead customers to per-ceive value in them, the previous section leftaside many of the forces affecting competitiveevents. In reality, market distortions of severaltypes can affect prices, as well as resource allo-cations and other economic decisions. One ex-ample occurs when governments provideotherwise uncompetitive industries with sub-sidies—direct payments, preferential alloca-tions of credit, tax benefits, protection from im-port competition, As such a list suggests, dis-tortions can be introduced by policies havingtargets—whether direct or indirect—quite apartfrom international trade, Several Europeancountries openly subsidize industries in orderto maintain employment levels, Some of thesesame countries point to the alleged advantagesAmerican high-technology firms get from R&Dexpenditures by the U.S. Department of De-fense.

Pricing practices can also create distortions—e.g., dumping, normally defined as selling ex-ports at prices less than charged domestical-ly. Dumping is considered an unfair tacticunder the rules of GATT (the General Agree-ment on Tariffs and Trade, ch. 11); govern-ments typically attempt to counter such distor-


tions in rather direct fashion, aiming to im-prove the operation of the price system. At leastin principle, dumping margins can be offset byadded tariffs, subsidies by countervailingduties. Remedies are less straightforward whenthe sources of impacts on pricing decisions areremote from the marketplace. The TokyoRound Multilateral Trade Negotiations, com-pleted in 1979, addressed one of the more com-plicated of these: implicit subsidies to ex-porters. Examples include government pay-ments for R&D directed at domestic objectives—such as military security—which also, pos-sibly as a side-effect, improve internationalcompetitiveness. In the United States, technol-ogies such as semiconductors and computers(in their early days), jet engines, and nuclearpowerplants have benefited from such expend-itures, All have been strong export sectors forthe U.S. economy. In recent years, countrieslike Japan and France have targeted commer-cial technologies and commercial industriesquite overtly (ch. 10). While the Tokyo Roundnegotiations resulted in a new subsidies codeto be implemented through GATT, this is onlya small step toward resolving such issues.

In other cases the problem may not be dis-torted price signals, but market outcomesjudged unacceptable. The most common in-stance—at least in terms of the frequency withwhich the argument is invoked—has probablybeen the uncompetitive industry claimed es-sential for national security. A number of coun-tries have refused to allow open competitionin computers because they believe domesticmanufacturing is vital to their militarystrength. In the United States, spokesmen forthe machine tool, steel, and automobile in-dustries have advanced the national securityargument,

At other times, unfettered competition is op-posed for social or political reasons, The U.S.textile and apparel industry receives trade pro-tection partly because it employs large num-bers of low-skilled minority workers who mighthave difficulty finding jobs elsewhere. When,in early 1981, the Japanese were persuaded tolimit exports of automobiles to the UnitedStates, the ostensible reason was to give Amer-

ican firms time to recover from recession andadjust to rapidly shifting market conditions;this step was taken even though there were fewindications that trade restrictions would be asignificant aid to recovery. In consumer elec-tronics, orderly Marketing Agreements havebeen negotiated to soften the impacts of risingimport levels. In these and other cases, politicalpressures—here and abroad—often carry moreweight than economic indicators. The latter,for example, might instead suggest a need toshift resources to more competitive sectors. Itis precisely when political pressures are mostintense that the benefits of alternative policiesshould be widely aired before decisions arereached; the travails of the American steel in-dustry have been aggravated by refusals, span-ning many years, to directly confront the factof shifting comparative advantage.

The Role of Technology

Any given technological development—anew or improved product, a more efficientmanufacturing process—is likely to make somecountries more competitive, others less com-petitive. For example, user-friendly softwarefor numerically controlled (NC) machine toolswould improve productivity most in countriesthat have a large base of NC machines coupledwith a shortage of skilled parts programmers.More generally, even if the technology is wide-ly available and all nations are able to imple-ment it, some economies will benefit more thanothers. If a new manufacturing process reduceslabor intensity, the competitive gain will begreatest for countries with high labor costs,least for those with large numbers of availableworkers. Even the most sophisticated new con-sumer electronic products may continue to bemanufactured largely in the Far East so longas production requires sizable labor inputs. Theeffects of new technologies on internationalcompetitiveness depend, therefore, on attri-butes which must be related on a case-by-casebasis to the resources available in each coun-try and their costs, the mix of products manu-factured and sold, and existing patterns oftrade, Impacts of R&D projects—developmentsin both products and processes—are inherently


difficult to predict. This can be troublesome forpolicymakers. When, if ever, does it make sensefor government to select promising researchareas for generalized support? To provide di-rect funding intended to maintain existingtechnological leads or foster new competitiveenterprises? To support the development ofavowedly commercial products? Differentcountries give different answers at differenttimes. Even when the thrust of an R&D strat-egy might seem sensible, the consequences canbe other than anticipated, It is entirely possi-ble that a program sponsored by the U.S. Gov-ernment could result in new products or proc-esses better suited to the economic environ-ments of our competitors.

“Technology gaps” have been an importantsource of U.S. comparative advantage in thepast—notably in computers and semiconduc-tors. Europeans tended to believe, as recentlyas the late 1960’s, that technology gaps favor-ing the United States would be a permanent—and undesirable—feature of internat ionaltrade, z These technological advantages havenever resided so much in fundamental knowl-edge—whether of the sc iences or engineer-ing—as in the abilities of American firms tobuild on the existing knowledge base. A p p l y -ing new technical knowledge can be a greaterchallenge—a different kind of challenge—thangenerating that knowledge in the first place;the guideposts are seldom so clear, the skillsdiffer. In sectors as dissimilar as agricultureand electronics, the United States has been atthe forefront in R&D and its applications; inboth, exports by U.S. multinationals have beencharacterized by continual product/process de-velopments. Even so, in microelectronics, thesec o m m e r c i a l d e v e l o p m e n t s h a v e o f t e n p r o -ceeded without a well-established foundationi n t h e p h y s i c s a n d c h e m i s t r y o f e l e c t r o nd e v i c e s . S u c h p a t t e r n s a r e n o t u n c o m m o n ;computer sof tware , which has very sketchytheoretical foundations, is another case. Undersuch circumstances, the successes and failures

‘See, for example, J. J. Servan-Schreiber, The Americ~n Chal-lenge (New York: Atheneum Press, 1968).

of individual firms at product developmenthave more direct consequences for competi-tiveness than do government R&D policies, al-though the latter help shape and direct tech-nical progress.

Today, it is difficult to maintain purely tech-nological leads. Unless knowledge of the tech-nology is coupled with unusual resource re-quirements—large capital investments, sophis-ticated research facilities—diffusion among in-dustrialized nations will be rapid. Moreover,the flow of technical information is no longerso one-sidedly from the United States overseasas during the 1950’s and 1960’s. Firms in manycountries now have the ability to locate andlicense the technologies they need, or to quick-ly duplicate products and processes developedelsewhere .

In essence, this means that gaps in technol-ogy should be viewed as largely self-closing,if only because it is easier to catch up by im-itation than to create new knowledge. Whilesome Americans continue to lament the pass-ing of clear-cut leadership by the United States,there is little to be done except to work hardon our own technical abilities; it is plain thatother countries can make a great deal of prog-ress with imported technologies provided theyhave capable people and adequate capital forinvestment. virtually all the nations that com-pete with the United States have taken advan-tage of this avenue. Japan consciously followeda strategy of purchasing technology from Euro-pean and American companies. 3 Importing for-eign technology has, in fact, been a central ele-ment in Japanese economic development sincethe late 19th century.

Although Japan has recently been the mostconspicuous in adapting foreign technologies,v i r t u a l l y a l l c o u n t r i e s l e a n i n o n e w a y o ranother on more advanced economies to fosterdevelopment. Nations such as Taiwan and Ko-rea are doing so today. During the 19th cen-tury, 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., formaking iron and steel. In the postwar period,German expertise in rocketry helped build theU.S. space program. When the United Statesdevelops a synthetic fuels industry, it will de-pend to considerable extent on the technologybase developed earlier by countries without ourpetroleum reserves.

In essence, flows of knowledge among de-veloped countries have returned to a situationmore like that before World War II; diffusionof technology has also been accelerated by theactivities of multinational corporations. Par-ticularly in electronics, foreign investments byU.S. firms have aided infrastructure] develop-ment in many countries, industrial as well asindustrializing. Even in the absence of jointventures or other corporate connections, elec-tronics firms in many parts of the world nowhave the ability to monitor and learn from de-velopments elsewhere, taking advantage of themultiple pathways by which technology movesinter nation ally.

From the standpoint of the individual firm,that technology transfers take place so rapid-ly makes R&D more rather than less essential.Companies that are leading try to stay ahead.Those that are behind must do their best toutilize the technologies available to them. TheUnited States still maintains technologicalleads in electronics—computer software, mini-computers, microprocessor designs, officeautomat ion equipment such as word proces-sors. These leads are not as large, nor as broad-ly based, as a few years ago. Because commer-cial advantages are short-lived, continuous ef-fort is required; in today’s economy, cuttingR&D expenditures is often tantamount to ac-cepting a position of dependency on technol-ogy developed elsewhere, Nations without theresources to stay at the leading edge may haveno alternative. On the other hand, economiesnow at the forefront have evolved industrialstructures adapted to a leadership position. Toslip back means a painful adjustment-not onlytechnical stagnation, but marked shifts in tradepatterns.

Other Perspectives on Competitiveness

Productivity

Some commentators hold that an industrialeconomy is losing competitiveness if its ag-gregate productivity-i,e., gross domestic prod-uct (GDP) per capita—is growing more slowlythan the GDPs of its rivals. The United States,by this definition, would be declining in com-petitiveness relative to most other industrialnations. Q Great Britain is the obvious exampleof a nation losing competitiveness, in this view,over several decades.

To what extent are definitions of competi-tiveness based on relative productivity levelsmeaningful? 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 nota close one; as pointed out in the previous sec-tion, even countries with very high rates of pro-ductivity growth cannot be competitive in allindustries. Japan’s agricultural sector is inef-ficient and unable to compete internationally–as a result of which farmers have used theirpolitical power to exact trade protection fromthe Japanese Government. Nor do rapid in-creases in productivity necessarily correlatewith technical leadership. Japan, with un-matched productivity improvements over thepostwar period, has depended on the UnitedStates and Europe for much of its technology.Early applications of robots—an area whereJapan has lately gained a justified reputationfor leadership (ch. 6)–were based on equip-ment imported from the United States. In elec-tronics, Japanese companies have only recentlybegun to compete in product lines character-


ized by the newest technology; for the mostpart, inroads have been in such products asradios, TVs, and standard semiconductor de-vices. As Japanese firms move into high-tech-nology product lines, these patterns change;still, they belie the significance of aggregatetrends in productivity or GDP by themselves.Indeed, for many years other countries ex-pressed little concern over Japan’s competitive-ness despite the explosive growth of that na-tion’s economy—some even continued to deni-grate Japanese products as the cheap andshoddy output of low-cost labor.

Nevertheless, relative productivity gains—considered either in the aggregate or on asector-by-sector basis—are central to thedynamics of any nation’s economy. Differingrates of productivity growth will, over time,lead to shifts in the structure of internationaltrade and thus the competitive positions offirms and industries throughout the world, Inthe United States, sectors where the pace oftechnological change has been modest—steel,automobiles, shoes, consumer electronics—have borne the brunt of restructuring; penetra-tion of American markets varies considerablyamong these industries, but in each the FederalGovernment has resorted to trade restrictionsto control imports and blunt competitive pres-sures. At the same time, even in such indus-tries, the stronger U.S. firms have often main-tained their ability to compete with overseasrivals; most often, the companies displacedwere in trouble before imports became a fac-tor. In consumer electronics, Zenith and RCAhave lost little in the way of market share,though imports and U.S. investments by for-eign corporations have driven others from thebusiness. In steel, domestic minimills havesteadily won sales in selected product linesfrom larger American steelmaker; they havedone so in the face of stiff import competition,Thus, the primary effect of import competitionmay be to accelerate processes of industrial ad-justment already underway. Market penetra-tion by imports in such industries need notimply that an economy is in overall decline.These same industries may eventually findthemselves revitalized; indeed, many econo-mists contend that exposing industries to com-

petition is crucial to their continued healthsThis is an attitude long reflected in U.S. anti-trust law.

One reason for slow productivity growth inthe United States is simply this Nation’s greaterindustrial maturity compared with many of itsrivals—shown, for instance, by the much great-er proportion of economic activity devoted toservices than manufacturing. As figure 32 in-dicates, by 1980 two-thirds of the Americanwork force was employed in the service sec-tor. Other industrial countries continue toemploy more of their people in industry, fewerin services; even in the United Kingdom, serv-ices account for only a little over 55 percent,Productivity improvements in the service sec-tor are more difficult to achieve—or at least tomeasure. Despite the much lamented declinein U.S. productivity growth, the manufactur-ing portion of the American economy con-tinued to increase its productivity about as fastduring the 1970’s as over the preceding 20years.6 Even if productivity improvements havelagged in the service sector, the shift hasbrought compensations internationally. Reve-nues to American firms for such services as theengineering and construction of public worksprojects—airports, hospitals, dams—have in-creased rapidly. As one result, other portionsof the economy have moved downward in therank ordering of U.S. comparative advantage,In other words, the United States is substitutingexports of services for shipments of industrialproducts, importing more of the latter. The sub-stitution need not imply either rise or declinein competitiveness,

Of course, greater aggregate productivity inthe United States as measured by GDP per cap-ital—one of the fundamental indicators of liv-ing standards—is a desirable goal wholly apartfrom its possible influence on competitiveness,But public policy instruments directed at the

—sFor a well-known statement of this view, see B, Klein, Dy-

namic EcorIomics (Cambridge, Mass: Harvard University Press,1977).

‘U. S. Industrial Cornpetjtjveness: A Comparison of S’teel, Elec-tronics, and Automobiles, op. cit., table 10, p, 61. Annual ~ro-ductivity growth in manufacturing was 2,4 percent from 1950to 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 CountriesAgricuIture

I I

Industry

I I

u1960 1980

UnitedStates

1960—

1980

—

—1960

—1980

WestGermany

1960

Services

—

—1980

—

—1960

—

—1980

Japan France United

SOURCE Wor/d Development Report 1982 (Washington D C World Bank, 1982)

K i n g d o m

general dilemma—i.e., macroeconomic and be reflected in shifting exchange rates, whichmarket promotion policies—would be morelikely to achieve such objectives than measuresaimed at improving the positions of particularindustries. The tax reductions and savingsstimuli embodied in the Economic RecoveryTax Act of 1981 are examples of steps thatshould help improve productivity. Still, evenif they lead to greater productivity growth,there may be little change in the competitivepositions of many American firms. All elseequal, aggregate productivity improvement will

in turn will increase the price competitivenessof some industries while decreasing that ofothers,

Market Share

Another common perspective on competi-tiveness starts with market shares of differentcountries. In this view, a drop in the U.S. shareof world manufacturing exports could indicatea loss in competitiveness. The popularity of


market share as a measure of corporate per-formance helps account for the application tointernational competitiveness. For measure-ment purposes, markets can be defined global-ly, nationally, or regionally. Figure 33 com-pares the U.S. share of world trade in manufac-tures to the shares of several other countries.Perhaps the most striking point made by thefigure is the huge expansion in total worldtrade: a sixteenfold increase between 1960 and1980; changes in country market shares, in con-trast, are matters of a few percentage points.The United States is now less prominentamong exporting nations, but to transfer a pa-rameter such as market share—with real thoughlimited meaning in a corporate setting–to thearena of trade between nations risks misunder-standing. Losses in the U.S. share of worldmarkets are virtually inevitable as other nationsprogress economically. Starting from a lowerpostwar base, growth rates elsewhere have fre-quently exceeded those here. As a result, theUnited States has been left with a smaller por-tion of total world output, and a smaller share

Figure 33.—World Exports

of trade; to some extent, market share is noth-ing more than a surrogate for comparing eco-nomic growth rates.

Rather than worldwide exports, wouldshares of the U.S. domestic market or par-ticular third country markets make better in-dicators of competitiveness? If the U.S. marketis the basis for comparison, the expansion oftrade as a percentage of GDP must be con-sidered. Growth in trade—exports as well asimports—has exceeded income growth in theUnited States, as table 43 indicates. Thatgrowth in imports exceeded that for nationalincome does not, by itself, imply a loss of com-petitiveness; indeed, the growth rate for ex-ports over the period in the table is a bit higher,

If the intent were to evaluate competitivenessby examining the exports of advanced econ-omies to nations in the developing world—where the United States has, on the whole,declined—the question is then whether Amer-ican corporations have slipped in their abilityto compete with foreign exporters. Is this so?

of Manufactured Goodsa

1960Total $55 billion

1980Total. $880 billion

a Expor t s 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


Table 43.– U.S. Gross Domestic Product (GDP),Exports, and Imports

Value in billions ofconstant 1972 dollars

1960 1980GDP ., . . . . . . : . . . . . . . . . . $732.0 $1452.4Total U.S. exports . . . . 38.4 161,1Total U.S. imports . . . 30,7 109.1SOURCE De-partment of Com-merce, Bureau of Ec;nomtc A;alysls

Not necessarily, and for several reasons—thefirst being rates of economic growth in par-ticular developing country markets. Long-established ties still link traditional tradingpartners-e. g., France and her former colonies.Such patterns tend to be rather stable; the pro-portion of U.S. trade with Canada and LatinAmerica remains high, European firms tendto have a greater presence in African markets,Japan has high export shares in the Far East.If market position in the developing worldwere to be treated as an indicator of compet-itiveness, relative shifts in the position of acountry such as the United States might sim-ply reflect the economic growth rates of tradi-tional trading partners relative to other devel-oping nations. Moreover, changes in the Amer-ican share of exports might indicate nothingmore than a varying mix of goods and servicessent abroad. If the United States is movingtoward increased exports of technologicallysophisticated products and services—and if theimports of developing countries tend to belower in technology–then U.S. market sharemight decline for this reason alone. Should itbe taken as a sign of reduced competitive abili-ty that Japan replaces the United States in ex-ports of automobiles to, say, Canada at a timewhen American exports of computers to bothCanada and Japan are rising? Finally, U.S.trade performance on a relative basis could slipbecause of the activities of multinational cor-porations. American firms have invested heavi-ly abroad compared to their counterparts inother countries, Foreign direct investment byU.S. corporations averaged $15.5 billion an-nually over the period 1977-81; in contrast,West German companies invested an averageof $3.9 billion, Japanese $2,8 billion, while Brit-

ish firms spent $5.8 billion.7 Overseas manufac-turing by subsidiaries of American multina-tionals may substitute for goods earlier shippedfrom the United States. Furthermore, subsidi-aries may themselves export, adding to theshipments of countries with which the UnitedStates competes. Does this diminish U.S. com-petitiveness? It would be hard to argue for sucha conclusion in the common case of subsidi-aries that owe much of their competitive ad-vantage to technology and skills developed bythe American parent.

The point is not to slight the significance ofrelative market shares, but to note that tradestatistics reflect economic currents that maybe unrelated to competitive ability. Further-more, wholly exogenous events can have greatimpact on comparative trade figures. Virtual-ly all the countries with which the UnitedStates competes depend far more heavily onimported energy. Changes in oil prices havemuch greater effects on the trade positions ofsuch countries; when energy costs jumped inthe mid-1970’s, European and Japanese im-ports swiftly rose in value terms, creating sud-den trade deficits. Among the consequences,exchange rates eventually adjusted to bring ex-ports more closely in line with new levels ofimports (while many countries were able to cutquantities of energy imports, the value of theseimports still tended to increase). One result wasa reduction in the U.S. share of world exports.Again, there is no reason why this should im-ply a shift in competitiveness.

Indicators Based on Technology

According to yet another view, U.S. compet-itiveness has declined because other nationshave gained ground in technical ability--i.e.,the technology gaps that once benefited theUnited 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 figurwfor the [Jnited Kingdom exclude int’estments by oil companie~,Investment Ie\els fluctuate nlarkedly from year to year; for in-stan~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 con-clusions can only be substantiated by carefulexamination on a technology-specific basis;generalizations about technological capabilityare often suspect. Moreover the implicationsfor competitiveness are not always straightfor-ward; many Japanese companies have followedbehind and benefited from the experience—in-cluding mistakes—of innovators in the UnitedStates.

Attempts to develop indicators of technolog-ical competitiveness founded on some basisother than case-by-case evaluations have gen-erally focused on patents, occasionally on datesof introduction of new products or processes.By such measures, the relative position of theUnited States has been declining in many in-dustries.8 Yet patent statistics or product/proc-ess introductions are highly imperfect meas-ures of technical competence, particularly ifused in isolation. There are simply too manyfactors other than the characteristics of thetechnology that affect them. In some portionsof electronics-semiconductors for one-firmstend to view patenting as a routine tool ofbusiness. Rather than a means of “protecting”technology, or capitalizing on it in any con-certed fashion, a patent may be something tobe bartered. Under such circumstances, cor-relations between patent statistics and techno-logical ability have little meaning. Some observ-ers point to the high rates of patenting by Japa-nese electronics firms (see ch. 10, table 77) asa foreboding sign; however, it seems clear thatreward systems in Japanese firms encouragepatenting regardless of the value of the tech-nology patented.9 Even in the United States,only a small fraction of the patents grantedcould be considered meaningful advances inthe state of the art.

Patents or similar indicators give an especial-ly oversimplified picture in industries like elec-tronics where technological change is rapid

‘Science Indicators 1980 (Washington, D. C,: National ScienceBoard, National Science Foundation, NSB-81-1, 1981), pp. 16-22.

‘A number of other factors act to encourage patent registra-tions in Japan, including very low fees. See S. Fleming, ‘LIFOoffers View of Rise in Japanese Patents, ” Financial Times, May7, 1982.

and product cycles can move more quicklythan the patenting process. Again, there is nosubstitute for case-by-case analysis. In semi-conductors, American companies are generallystill the first to introduce new or improveddesigns for microprocessors or more special-ized memory circuits—static random accessmemories (RAMs), various types of read-onlymemories (ROMs)—but today their lead is brief.Where new products from American firms winacceptance in the marketplace, Japanese man-ufacturers have been quick to follow withcheap, reliable devices of their own. They ap-pear to have taken the lead in dynamic RAMs,a product where the path of technical evolu-tion is well marked, with little uncertainty overwhat the market wants.10

Likewise in the computer sector, severalcountries can match American capabilitiesover a range of hardware. This rough tech-nological parity does not so readily translateinto competitive ability. Selling computers de-mands much more than hardware; commercialsuccess depends heavily on software—a fieldin which American companies maintain a use-ful lead, even more so as software costs con-tinue to rise compared to hardware. Also im-portant are service, a good appreciation of userneeds, and other customer support functions.Although prospective mainframe purchaserstend to have a relatively sophisticated under-standing of the technologies offered by com-peting manufacturers, customers for smallbusiness or home systems may know less aboutcomputers than about the family car. Selling

lopi]ot production of 256K RAMs by the major Japanese man-ufacturers began at the end of 1982—evidently well ahead of theplans of American merchant manufacturers, though WesternElectric announced a 256K chip in mid-1983. See “Recent De-velopments 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 merchantmarket, early in 1978. (IB M’s 64K chip entered volume produc-tion the previous year.) However, Hitachi’s design required twosupply voltages, was rapidly superseded by singlesupply designsfrom other manufacturers, and never mass produced. See “64KRAM Sweepstakes: Round 4 Winner Is . . . ,“ Morgan Stanley.?Hectronics Letter, June 29, 1979, p. 1; E. W. Pugh, D. L. Chritch-10W, R. A. Henle, and L. A. Russell, “Solid State Memory De-velopment in IBM, ” IBM Journal of Research and Development,VO]. 25, 1981, p. 585.


in such markets is just as much an art as de-signing the system in the first place. But themain point is that even in rapidly evolving tech-nologies, the United States cannot expect tomaintain the kind of technological leads thatexisted in the 1950’s and early 1960’s. Othercountries can now keep close—perhaps abreast—in fields they choose to emphasize, if notacross the board.

While there is no need for pessimism, itshould be clear that the United States cannotlive off its past achievements. U.S. R&D ex-penditures fell as a proportion of GDP for 15years before beginning to turn back up at theend of the 1970’s. Meanwhile countries likeWest Germany and Japan have been steppingup their research spending, at the same timedevoting far smaller fractions to military R&D.Still, the United States continues to spend sub-stantially more on R&D than any other coun-try. ” Furthermore, if the United States is ableto borrow from other countries as they haveborrowed from us, increased R&D spending inother nations could help U.S. competitiveness.In any event, figures on royalty and licensepayments continue to show the United Statesmaintaining a large and growing surplusagainst other industrial nations; although tech-nology gaps may be shrinking, the UnitedStates is still predominately a source of knowl-edge rather than a user of skills developed else-where. 12

11 ~r.s !nc]ustrja] COrnpetltjVeneSS: A Comparison of Steel, Elec-tronics, and Automobiles, op. cit., pp. 62-64, See aIso ch, 10 ofthe present report.

12 U.~7, Industrial Competitiveness: A Comparison of Steel, Elec-tronics, and Automobiles, op. cit., pp. 64-65.

Other aspects of the U.S. environment fortechnology development, several discussedmore thoroughly in subsequent chapters, dogive cause for concern. As one example, thiscountry has been lagging in the education ofthe technically trained people upon whomtechnological progress depends.13 Japan, withhalf the population, now graduates more elec-trical engineers than the United States. And,far more than here, the people occupying lead-ership positions—whether in business or gov-ernment—in Japan, West Germany, or Francetend to have technical backgrounds, Thesesigns suggest that other nations may be betterplaced to understand and exploit future tech-nological opportunities.

Furthermore, the United States allocates asmany as 25 percent of its best technical peo-ple to defense-related R&D and production, ahigher percentage than most other countriesexcept for the Soviet Union and its allies. Whileit is true that military research sometimes spillsover into commercial products, with benefitsfor technological competitiveness—as hap-pened with computers, aircraft, semiconduc-tors, and nuclear power—it is also true thatthese are the exceptions, Certainly the fears ex-pressed by Europeans in the “technology gap”debate of the 1960’s proved exaggerated: U.S.spending for defense and space has by nomeans allowed American firms to continuedominating high-technology markets.

Iach, B; See also J. A. i41iC, M, Cal~well, and R. R. Miller, ‘“1’heRole 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 ofchange means among other things that produc-tion costs—often the primary determinant of

Assessing the competitiveness of the United a nation’s ability to compete—are less central.States is more difficult in electronics than in Certainly this is true compared to, say, agricul-most industrial sectors. This is partly a mat- ture or steel. But if cost is less critical in com-ter of the diversity of the industry; few parallels puter manufacture than for color TVs, it isexist between the current situation in con- never irrelevant—certainly not for firms tryingsumer electronics and that in computers. The to compete with IBM.


Manufacturing costs in electronics are close-ly tied to a firm’s ability to utilize product aswell as process developments. In most partsof the industry, the advantages of incorporatingnew product technologies as a means to lowercosts—more generally of providing greater val-ue per dollar—far outweigh those of simplymanufacturing conventional designs more ef-ficiently. Even in mature segments of the in-dustry such as color TV, advances in micro-electronics may lead to new product featuresor simpler and cheaper design approaches notfeasible earlier.14 Companies that fail to keeppace find their vulnerability heightened, par-ticularly at the low-priced end of the marketwhere import competition is stiffest.

Because of the changing technology, trendsin the usual indicators of competitiveness—such as labor productivity (output per hour)—are either unavailable or of little relevance toelectronics .15 While chapter 9 examines pro-ductivity in electronics for insights into im-pacts on employment, output per man-hour orvalue-added per man-hour has less to tell aboutcompetitiveness. Today’s TV set is a differentproduct than those of 10 years ago. Labor pro-ductivity statistics ordinarily assume that goodsremain qualitatively the same—a ton of steel,a bushel of wheat. The more their characteris-tics change over time, the less meaning pro-ductivity trends convey. The problem extendsto many economic sectors, Even steel or wheatchange; the physical properties of steel im-prove with better control of chemical composi-tion and processing, the nutritional value ofwheat increases as hybrid varieties are intro-duced, But the rates of change are slow com-pared to electronics.

14 For examp]e, ~i~ita] rather than analog Circuitry for Process-

ing incoming TV signals carries the potential for greatly reduc-ing numbers of chassis parts, thereby cutting assembly costs.In addition, many of the adjustments needed during manufac-turing could be eliminated. See T. Fischer, “Digital VLSI BreedsNext-Generation TV Receivers, ” Electronic.~, Aug. 11, 1981, p.97. Ch. 6 outlines reductions in parts counts in TV chassis overthe past decade. “1’hese reductions have helped keep prices stabledespite inflation.

lscomparatlve shifts in labor productivity over time are oneof the more useful measures of changes in the competitivenessof a nat ion’s industries, See U. S’. lndustria) Competitiveness; AComparison of Steel, Electronics, and Automobiles. op. cit., ch.4, especially pp. 54-58.

Technological advance also means that manyproducts selling in large volume today did notexist a few years ago—thus productivity gainscannot be calculated at all. How can produc-tivity improvements be evaluated for integratedcircuits (ICs) with a lifetime of 4 or 5 years fromlarge-scale production to obsolescence? Canmeasures of productivity such as value-addedor output per worker-hour for a 64K RAM man-ufactured in 1983 be compared to those for the4K RAMs of 1975? What does labor productivi-ty mean for pocket calculators—where thisyear’s offering may be twice as powerful as lastyear’s? Although manufacturing costs can bea vital ingredient in determining sales volumesfor all these products, conventional approachesto international competitiveness must be ap-plied with care.

Regardless of the pitfalls and uncertainties,policy guidance demands insights into whetherthe United States is gaining or losing ground.Electronics is a high-technology field par ex-cellence, one in which this country has beena leader for decades, If U.S. competitivenessdeclines here, there is more to worry aboutthan the shifting patterns of comparative ad-vantage that affect textiles or even steel. Theconcerns extend beyond declining productivitygrowth, beyond the possibility of relative lossesin per capita income; while these are far fromtrivial matters, it is fair to say that a loss oftechnical leadership in electronics would domuch greater harm. The Nation’s military secu-rity depends in many ways on electronics tech-nology. Even more, decline would have direimplications for the future vitality of the en-tire economy. If the United States were dis-placed as the primary technical innovator inelectronics it would be a symptom that thiscountry was following Great Britain on thepath to industrial decay,

But is this the case? Much that has been saidon such matters is impressionistic and emo-tional—all the more reason to collect andevaluate the evidence with care. The remainderof this chapter examines the question of U.S.competitiveness in electronics primarilythrough examination of business strategies.While consumer electronics, semiconductors,


and computers are treated separately, some ofthe distinctions risk becoming artificial; semi-conductor manufacturers, following their earli-er attempts to enter consumer markets withproducts such as watches and calculators, arebusy designing “systems on a chip” to helpthem move into markets for industrial end-products. Meanwhile, computer firms inte-grate backward to make ICs. Desktop comput-ers sold at retail blur the line between con-sumer and original equipment markets. Arepersonal computers a product of the consumerelectronics sector or the computer sector? Themicrocomputer market was developed first byentrepreneurial firms, later by companies likeTandy Corp.—largely consumer oriented. Nowthat Digital Equipment and IBM have entered,vastly different enterprises-in size, style,market power—are competing with one anoth-er. I B M’s tactics, involving heavy reliance onoutside suppliers (including imports of in-dustrial robots from Japan to be controlled bythe company’s personal computer) mark a turn-ing point for a firm that in the past has de-signed and produced virtually all its own hard-ware and software-evidence of the flux withinthis part of the industry.

While many industries go through periods ofrapid expansion and change, evaluations ofcompetitiveness are more problematic in themidst of such a process. The marketplace willeventually sort out the winners and losers indesktop computers, but no one can predictwith much confidence which firms will surviveand prosper, Because in the end a nation’s in-ternational trade position is built on the suc-cesses and failures of individual business en-terprises—the competitive tactics and strategiespursued, here and abroad—the remainder ofthe chapter discusses competitiveness from thestrategic perspective. While such an approachdoes not result in direct indicators of competi-tiveness, it leads to an understanding of thedynamics of trade and competition not possi-ble by other means.

International Business Strategies

Corporations compete on much more thanproduct technologies and efficiency in manu-

facturing; success depends on effective ap-proaches to markets, approaches that take ac-count of a particular firm’s strengths andweaknesses. As Texas Instruments’ experi-ences with digital watches and small comput-ers exemplify, state-of-the-art technology is noguarantee of ability to bring to market prod-ucts that consumers will purchase.

The following pages review some of themoves and countermoves by participants inworld markets for electronic products. Thatstrategic considerations are vital comes as nosurprise: explications of corporate strategy area staple of the business press; they provide fod-der for professors of business administration,handsome fees for management consultingfirms, And for good reason. A not inconse-quential part of U.S. economic growth can betraced to the ability of American firms to moverapidly into emerging markets, to commercial-ize evolving technologies—ability embodied inthe managers, technical staffs, and other em-ployees of these companies. The success recordof American corporations extends to technol-ogies originating in other countries. The tech-nical underpinnings for digital computers havebeen fed by the efforts of engineers and scien-tists in many parts of the world. One aspect ofthe American genius has been turning arcanedevelopments such as the computer into thriv-ing commercial industries. The skills neededfor success in the marketplace can be quite dif-ferent 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 in-dustry; today, the Comet is remembered chieflyfor its lessons in metal fatigue.

Most privately funded R&D—in the UnitedStates as elsewhere—is directed toward prod-uct development. Marketing strategies basedon product differential ion have a place evenat the leading edge of microelectronics or com-puter technologies. Bell Laboratories devotesaround 90 percent of its efforts to development,10 percent to basic research (a considerablyhigher proportion of basic research than foundin most electronics firms), That an R&D orga-nization known best for its more fundamental


work—including research that provided muchof the foundation for solid-state electronics—infact gives most of its attention to developmentpoints to the central importance of such activ-ities. As the focus on development suggests,many of the “technology gaps” separating theUnited States from its competitors have beenassociated with product design rather than un-derlying differences in technical capability.The microprocessor was an innovation in thesemiconductor design; it did not depend onnew manufacturing technology, still less on im-proved understanding of the physics of elec-tron devices,

More recently, American electronics firmshave sometimes found themselves in reactivepositions rather than leading in product and

process developments, Innovation remains asource of U.S. competitive advantage, but othercountries have become more active in intro-ducing new products, as well as new manufac-turing techniques. This has been one cause ofslipping U.S. competitiveness in industries likesteel and automobiles; while innovation in theelectronics industry has certainly not stag-nated, the U.S. lead is no longer unchallenged.Executives of American firms have repeated-ly found themselves responding to competitivethrusts from foreign firms rather than takingthe initiative. These thrusts have involved im-aginative, well-researched, and well-designedproducts, In electronics, new competitive pres-sures have come most notably from the Japa-nese, but in some cases also from countries thatare still industrializing.

Strategies in Consumer ElectronicsMore than in any other industry, Japanese

companies have come to dominate world mar-kets for consumer electronics, Beginning withportable radios, the Japanese moved succes-sively 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 inthe United States. Video recorders are a tell-ing example; Japanese firms make well over 90percent of the world’s VCRs—a product withorigins in the laboratories of Ampex and RCA.The product development, manufacturing, andexport strategies followed by Japanese firms inconsumer electronics—discussed below in thecontext of the U.S. market, although applyingwith only minor variations to export thrustsinto Europe as well—have often been trans-ferred to other parts of the industry.16 Thus,they are a logical starting point for an examina-tion of business strategies in electronics,

Japan

Efforts by Japanese firms to sell TVs in theUnited States—beginning in the mid-1960’s—

IeSee, for examp]e, R. Ball, ‘‘The Japanese Juggernaut Landsin Europe,” Fortune, Nov. 30, 1981, p. 108.

included three parallel strands, First, the ex-port drive began with a focus on market nichesthat appeared to be served inadequately or notat all by American manufacturers—the kind ofopportunity that firms anywhere look for whenattempting to enter new markets (app. C de-scribes how Phase Linear, an American man-ufacturer of stereo components, created a newmarket category with its first product). The sec-ond strand in the Japanese thrust was to drawon product technologies and manufacturingexperience gained in their highly competitive,if protected, home market—as well as in export-ing to other Far Eastern nations; Japan’smanufacturers had a strong foundation for sell-ing in the United States. Third, TV shipmentswere part of a continuing effort by Japanesecompanies to export a succession of productsof increasing technical sophistication. Thestrategy, while carried out by firms that com-peted among themselves, plainly was guidedand encouraged by the Japanese Governmentthrough MITI (the Ministry of InternationalTrade and Industry) and other agencies.

Success was by no means guaranteed. In the1960’s, the U.S. TV market was served by morethan a dozen domestic entrants, These in-

Ch. 5–Competitiveness in the International Electronics Industry ● 181

eluded some of the largest merchandisers andelectrical equipment manufacturers in thecountry. Firms like RCA, Zenith, GE, Sylvania,and Magnavox had patiently constructed na-tionwide distribution networks. Their dealersgenerally handled servicing and repairs as wellas sales. Much of the production of smallercompanies consisted of private-label sets forretailers like Sears, K Mart, and J. C. Penney.Although the market was still expanding rapid-ly, its structure was relatively mature, Such amarket is not an easy one to enter, especiallyfrom abroad.

The Japanese manufacturers recognizedtheir disadvantages: 1) lack of an establisheddistribution and service network; 2) lack ofrecognized brand names, a deficiency accen-tuated (at that time) by the lingering reputationof Japanese goods for shoddy quality. Thesefactors argued against direct competition withentrenched industry leaders such as Zenith andRCA.

The Japanese sought ways around these bar-riers through both technical developments andmarketing strategies. First of all, manufacturersin Japan moved quickly toward solid-state chas-sis designs, following their earlier successes inexporting transistorized portable radios. Theintent was to lower manufacturing costs overthe long run, and—perhaps more important—improve reliability and reduce the need forservice (ch. 6). Japanese TV manufacturerscould not be certain of reaching either objec-tive, American producers chose to stay witholder technologies, partly in the belief that itwas too early to expect improvements in eithercosts or performance from solid-state com-ponents.

The development of solid-state TV designsin Japan during the 1960’s illustrates the selec-tive nature of government assistance. The Kan-sai Electronic Industry Development Centerserved as the coordinating body for a multiyearR&D project directed at using ICs in TV chas-sis, The cooperative effort, with funding fromMITI, included five Japanese consumer elec-tronics manufacturers, seven parts suppliers,four universities, and a pair of research insti-

tutes.17 Despite this, perhaps the most impor-tant policy support came through TV broad-casting; Japan’s Government has gone fartherthan most by actively promoting such newtechnologies as stereo sound for TVs, multi-plexing to give multiple language capability,and direct satellite broadcasting. Such meas-ures have fueled demand in the domestic mar-ket, helping build a base from which Japanesemanufacturers could achieve scale economiesand export.

The second leg of the Japanese plan centeredon their selection of products. Here—as laterthe case in automobiles—the choice may havebeen more fortuitous than brilliant. The firstJapanese exports were small-screen sets (ch. 4,especially table 9), where they had experience,and where solid-state designs contributed tolight weight and portability. For a variety ofreasons, the product lines of American firmswere thin in this part of the market. The Japa-nese emphasis on small-screen TVs turned outto coincide with rising demand for second setsin American homes, demand that was moreprice elastic than for the first of a family’spurchases.

Design improvements such as solid-statechassis helped Japanese exporters bypass tradi-tional distribution channels. Greater reliabili-ty reduced the need for service and repair fa-cilities, as well as for large stocks of spare parts,opening the way for distribution through out-lets where low price would have immediate im-pact, Japanese exporters first sold their TVsthrough private-brand and discount retailers,a tactic that had worked earlier with portableradios. 18

AS part of their marketing plans, it ap-pears that exporting firms frequently inducedretailers to carry their product lines by offer-

Y 7E, Sugata and T. Nameka~va ~ “ I nte~ratcxi ( ;lrt:~lits for Tele\l -sion Receivers, ” IEEE Spectrum, Lfay 1969, ~). 64. T h r e e o fJapan’s largest TV manufacturers were in(:luded hlatsushita,Sanyo, and Mitsubishi.

lfl’[’[lshiba hegan supp]ving Sears with sma]]-screen ~OIOrsets 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 Competit ive-

ness. Tele\rision Recei\ers and Semiconductors, draft reportunder ,Natlona] Science Foundation C,rant No. PRA 78-20301,(~harles Ri\’er Assot:iates ln(:., Boston hfass,, Jul\ 1979, p. 2-18.


ing higher than normal margins.19 In essence,the Japanese tried to make TVs an “off-the-shelf” item. Note again that this strategydepended on producing TV sets with consid-erably greater reliability than had beencommon.

Instead of head-on competition with en-trenched American producers, the Japanesethus located a market niche that was relative-ly open, and offered low-priced but well-de-signed TVs of high quality through price-sen-sitive retail outlets. Indeed, price was a domi-nant aspect of the Japanese thrust; dumpingc o m p l a i n t s b r o u g h t b y U . S . i n t e r e s t s w e r erepeatedly upheld, as discussed in chapter 11.Still, low prices by themselves were far fromsufficient for the steady expansion of exportsthat followed this opening wedge. In a patternnow familiar, Japanese exporters widened boththeir product lines and distribution channels.Eventually, they began to assemble TVs in theUnited States. Japanese manufacturers nowcompete virtually across the board with Amer-ican consumer electronics firms, utilizingmany of the same retail outlets.

Some accounts have emphasized the depend-ence of Japanese pricing strategies on theclosed nature of their home market. This wasa central claim in the dumping proceeding ini-tiated by the Electronic Industries Associationin 1968. In this view, low-priced Japanese ex-ports were only possible in the early years be-cause of trade protection that kept imports outof Japan; closing their domestic market to TVsproduced by more advanced American andEuropean firms allowed the Japanese to chargehigh prices at home, effectively subsidizingtheir exports. Investigations following the 1968dumping complaint provided support for theseallegations.

On the other hand, dumping in internationalmarkets implies monopolistic pricing by Japa-nese firms that, most observers concede, com-pete intensely within Japan. The implication,then, is that these companies colluded onlywith respect to exports—or that manipulation

191,. Landro, “Technology, Competition Cut Price of Elec-tronics Gear as Quality Rises, ” Wa]] Street Journal Dec. 1, 1981,p. 37.

by higher authority, presumably MITI or someother agency of the Japanese Government, tookplace behind the scenes. Such possibilities can-not be rejected out of hand, but are not whollyconsistent with the rest of this view: thatJapanese TV manufacturers took advantage oftheir protected domestic market to generate theeconomies of scale needed to compete in theUnited States. From the perspective of highlycompetitive Japanese firms, price-led expan-sion at home might well have seemed a moreattractive way to maximize learning and scalebenefits.

The American Response

Exports to the United States by Japanese con-sumer electronics firms were by no meansnew. As early as 1954, Japanese companies hadbegun to manufacture transistors, with muchof the output going into portable radios. Within5 years, fully 80 percent of the radios producedin Japan were solid-state, many of them des-tined for sale in the United States.20 In export-ing radios, the Japanese gained valuable ex-perience that could be brought to bear on themore lucrative TV market.

As a consequence of the Japanese emphasison small-screen TVs-and also because of themarket focus of American producers—most im-ports have been lower priced models, as shownby the consistently lower percentages in thevalue column of table 44. Conversely, Ameri-can manufacturers have continued to concen-trate on higher priced, more profitable sets—large screen and console models. While im-ports have moved up-scale over the years, theystill account for a considerably smaller propor-tion of the market in dollar terms than in units.Now that many Japanese companies assembleTVs here, more of the imports come from Tai-wan and South Korea. Firms in those countrieshave followed Japan’s lead in emphasizing low-priced, small-screen sets.

“J’’ The U.S. Consumer Electronics Industry and Foreign Com-petition, Executive Summary,” final report under EDA grant No06-26-07002-10, Department of Commerce, Economic Develop-ment Administration, May 1980, pp. 46-47.


Table 44.—imports of Color Televisions as aPercentage of Total U.S. Sales

Imports Importsas a percentage as a percentage

of unit sales of value of sales

1968 . . . . . . . . . . . . 11 .0 ”/0 5.1 “/01970 ...., . . . . . 17.0 8.41972 .., . . . . . 14,9 8.31974 . . . . . . . . . . . . 16.0 9.61976 ........, . . . 35.9 18.91978, . . . . . . . . 26.4 15.71980 . . . . . . . . . . . . 11.3 7.41982 . . . . . . . . . . . . 19.1 12,8SOURCES 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, May1980, 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 strategiesof the major American TV makers; when con-fronted with low-priced import competition,U.S. producers essentially ceded that portionof the market.21 Part of the reason was simplythat, even in the absence of imports, profitswould have been lower on small-screen sets.Given expanding markets, the strategies pur-sued by American firms enabled them to utilizetheir production facilities in optimal fashion,at least in the shorter run. With the portableradio experience in the background, U.S. man-ufacturers must have been well aware that con-cessions at the lower end of the TV marketwould give the Japanese a foothold—makingfor stiffer competition in later years across therest of their product lines, Viable counter-strategies needed to be developed—and were.At present, the major U.S. manufacturers havestrong product offerings in all parts of the mar-ket, small sets as well as large.

Domestic firms found themselves in differentsituations as a result of import competition,and reacted in different ways. The major pro-ducers, RCA and Zenith, each held between 20and 30 percent of the market in terms of unitsales, higher in value terms, at the end of the1960’s. Through the 1970’s—and today—eachhas retained a market share in the vicinity of20 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); brandrecognition and strong distribution networks,combined with an emphasis on larger sets, less-ened their vulnerability to imports. Both Zenithand RCA automated some of their facilities tohold down costs, and moved other productionoverseas. Firms with smaller market shares, onthe other hand—especially those that dependedheavily on private label sales–quickly felt theimpact of Far Eastern competition. For several,lower production scales—and higher manufac-turing costs—combined with foreign competi-tion to move their operations into the loss col-umn. Companies like Philco, Admiral, War-wick—most recently Sylvania—left the market.

Prominent in competitive responses by theU.S. industry were efforts to persuade the Fed-eral Government that Japanese imports wereentering via unfair trade practices. While com-panies like RCA and GE that get substantialrevenues from overseas sources have taken a

Photo crecllt RCA

Color TV assembly


“free trade” stance, others, whose orientationhas been primarily domestic, have been vigor-ous in pursuing trade remedies over manyyears. The intent has been to raise importprices through antidumping penalties or coun-tervailing duties. Chapter 11 outlines the se-quence of events; briefly, collection of addi-tional duties imposed on TVs from Japan wasdelayed for years by a series of interdepartmen-tal disputes within the Government. Petitionsseeking adjustment assistance under the TradeExpansion Act of 1962 were denied in 1973,as were parallel efforts to have countervailingduties assessed on Japanese TVs. Attempts byAmerican interests—labor unions and suppli-ers were active along with domestic manufac-turers—continued in one form or another fromthe late 1960’s on through the 1970’s, indeedare still underway. But from the viewpoint ofU.S. producers, these efforts to stimulate Gov-ernment action that would raise import priceswere less than successful, Even so, the cons-tant stream of claims that competitive tacticsby Japanese firms were both unfair and dam-aging had considerable political impact: areluctant administration was forced in 1977 totake action. The results were the import quotastermed Orderly Marketing Agreements(OMAs) mentioned in the previous chapter.The initial OMA with Japan was followed in1979 by agreements with South Korea and Tai-w a n .

A second response by domestic firms wastechnological. Far Eastern competition forcedU.S. TV makers to move into solid-state designsboth to lower costs and to improve reliability.But these efforts came too late for many Amer-ican manufacturers. Japanese exporters hadachieved the volume required for economiesof scale, and could continue to drive pricesdownward. By 1971, Matsushita was the big-gest manufacturer of TVs in the world, and 5of the top 10 firms were Japanese (ch. 4). Thesecompanies were expanding worldwide, whilethe efforts of even the strongest U.S. firms werelargely restricted to their home market. Mean-while, American consumers were choosing

small-screen TVs—where imports were strong-est—in ever-larger numbers. Table-model andportable sets went from 12 percent of U.S. col-or TV sales in 1965 to 68 percent in 1974.22

Those American suppliers that remained eco-nomically viable did so in part by improvinglabor productivity at relatively high rates; theyalso transferred many of their more labor-in-tensive manufacturing operations overseas.

The U.S. response was, therefore, mixed. Onthe one hand, American firms sought tradeprotection—a reaction not untypical of busi-nesses experiencing foreign competition inlucrative domestic markets, particularly whenthey find themselves in this situation for thefirst time. On the other hand, a number of U.S.manufacturers successfully reduced costs, en-hanced quality, and managed to keep most ifnot all of their traditional market share; RCAand Zenith together still account for some 4 0percent of U.S. color TV sales, But the majori-ty of American companies were unable to keeppace in the newly competitive environment.

Foreign Markets

U . S . a n d J a p a n e s e c o n s u m e r e l e c t r o n i c sfirms have approached markets in third coun-tr ies quite di f ferent ly . Companies l ike RCAhave sold technology overseas—most recent-ly, RCA has licensed its new video disk tech-nology in Europe—but have seldom embarkedon major efforts to market consumer productse lsewhere , The except ion is ITT—an Ameri -can-owned firm which is one of Europe’s largerproducers of color TVs but does not manufac-ture consumer products in the United States.In contrast, Japanese manufacturers have ex-ported products as well as technology; in re-cent years they have also invested extensivelyin industrialized as well as developing coun-tries.

In Western Europe—which offers a marketfor color TVs about the s ize of that in the

—zz~~ectronjc &farket Data Book 1975 (Washington, D. C.: Elec-

tronic Industries Association, 1975].

Ch. 5—Competitiveness in the International Electronics Industry ● 185——————--———

United States—Japanese firms have made sig-nificant inroads. For many years, trade barriersand patent protect ion helped European pro-ducers fend off imports (ch. 4). Now many ofthe barr iers are weakening. Near ly hal f thehigh-f idel i ty equipment sold in Germany isal ready imported from plants in the Far East. 23The Japanese share of the West German colorTV market more than doubled from 1979 to

1981, reaching an estimated 15 percent. ColorTVs are made in the United Kingdom by fiveof the major Japanese manufacturers; a sub-stantial fraction of the output is shipped toother European nations. One-third of the pic-ture tubes used in TV sets manufactured inEurope are imported from Japan; few if any oft h e 1 0 r e m a i n i n g f a c t o r i e s m a k i n g p i c t u r etubes in Western Europe are profitable. Japa-nese eports of VCRs to European countriesmore than doubled in 1981, and doubled again—to nearly 5 million--in 1982; threatened withdumping complaints, Japan recently agreed tolimit VCR shipments to the European Commu-nit y.

Japan’s entry into the European TV markethas been remarkably similar to that here. Asthe PAL licensing agreements continue to ex-pire, the Japanese will broaden their productranges; they are now beginning to compete inthe upper reaches of the European market. Oneresponse by local firms has been to move to-ward Tv broadcasting accompanied by stereosound. Through a new round of restrictivelicensing practices, European companies hopeto keep the Japanese out of new high-end prod-ucts .

Japan’s electronics firms have also been ac-tive in the Far East, where the U. S. presenceis limited to offshore production. Still, as Asia

has developed economically, the advantages ofJapanese manufacturers have diminished. Mar-kets are expanding in Taiwan, South Korea,Singapore, and Malaysia—with local industriesaiming both to export and to supply rising do-mestic demand. While it is no surprise to findJapanese firms with a greater presence in Asia,one might expect the situation to be reversedin Latin America. But here too, many of Japan’sTV makers have established subsidiaries, jointventures, and licensing agreements—in addi-t i o n t o t h e i r e x p o r t a c t i v i t i e s . T h e U . S .presence, except for assembly plants in Mex-ico that ship back across the border, appearslimited to scattered licensing arrangements .24

Japanese consumer electronics firms havetaken a long-term approach to the developmentof world markets. They have been willing toadapt their s t rategies to the constra ints im-posed by foreign governments , and to locallaws and regulations. Where governments havelimited imports, they have invested. Where in-vestment is restricted, they enter into joint ven-tures. As one example, Toshiba commissioneda Costa Rican company to make Toshiba-brandTVs in 1971, several years before color broad-casting began in that country. Later, Toshibapurchased part of the local firm, establishinga joint venture for manufacturing a broaderline of their consumer electronic products. Inpursuing such activities, Japanese firms havetaken significant risks. They have invested ineconomically depressed regions, in countrieswhere the initial markets for their products

have been small, and in regions of questionablepolitical stability. In their early years, many ofthese operations probably lost money. N o w ,Japanese companies are firmly established insuch countries, and appear well positioned totake advantage of growing demand in nationsranging from the Arab states to the People’sRepublic of China. If American firms were, atthis late date, to try to emulate the Japanesestrategy and compete on a global scale, they


would face a formidable task in overcoming thehead starts of their rivals,

Other Consumer Electronic Products

Not only home entertainment goods likeV C R s , b u t p o c k e t c a l c u l a t o r s , e l e c t r o n i cwatches , and CB radios are now producedmostly in the Far East. The older, establishedc o n s u m e r e l e c t r o n i c f i r m s i n t h e U n i t e dS t a t e s — t h o s e t h a t h a v e m a d e r a d i o s , T V s ,audio equipment—seldom participate in thesemarkets . More of ten, the American entrantshave been small specialty manufacturers, semi-conductor firms, or suppliers such as Tandy,which sells under the Radio Shack name. U.S.e l e c t r o n i c s c o m p a n i e s w i t h l i t t l e p r i o r e x -perience in the consumer arena attempting todivers i fy have, not surpris ingly , sometimesmisjudged demand, introduced products thatproved to have little appeal to customers, orfailed to establish adequate distribution chan-nels. Among the semiconductor firms, even them o s t s u c c e s s f u l — e . g . , T e x a s I n s t r u m e n t s —have had a difficult time learning to developand market consumer products. 25 profits havenot always been high enough to convince U.S.entrants to persevere, particularly where for-eign firms with low production costs were al-ready well established.

What then of the future? Will American firmsattempt to develop new strategies for market-ing future generations of consumer products?How will their approaches contrast with thoseof manufacturers in other parts of the world?Some of the trends can be discerned, at leastas they relate to product developments. Bot-tom-end pocket calculators will offer more fea-tures as sophisticated models evolve into hand-h e l d c o m p u t e r s . W a t c h e s m a y i n c o r p o r a t eg a m e s , c a l c u l a t o r s , p e r h a p s e v e n r a d i o s .Speech synthes is—and later voice recogni-tion—will appear, enabling TVs, for example,to switch channels in response to spoken com-mands , Integrated home enter ta inment sys-tems combining TV reception, video tape and/or disk players, and computing capability will

ZsSee, for example, B, Utta], “Texas Instruments Wrestles Withthe Consumer Market, ” Fortune, Dec. 3, 1979, p. 50,

be developed, with component TV one of thefirst steps,

To a considerable extent, the future of theU.S . consumer e lectronics industry wi l l de-pend on its ability to keep up in such products,How successful will American manufacturersbe? On the one hand, new product offer ingslike the RCA video disk system are favorablesigns. Although thus far something of a disap-pointment in the marketplace, RCA’s invest-ment in the video disk demonstrates that U.S.Consumer electronics firms are still willing totake risks. Zenith’s venture into personal com-puters is another indication that American sup-pliers are not ceding their home market to for-eign producers; so are the efforts of smallercompanies marketing electronic games, projec-tion TVs, and innovative audio products. At thesame time, the failure of U.S. companies to par-ticipate in the manufacture of VCRs will makeit more difficult for them to regain productleadership.

With U.S. sales of VCRs growing rapidly, theapproaches of Japanese and American f i rmsnow stand in stark contrast. Broadcast video-tape recorders were introduced by Ampex in1956, with RCA following in 1959; at least eightJapanese firms–starting with these U.S.-devel-oped technologies—pursued consumer ver-sions during the 1960’s, with various degreesof resource commitment and success. 26 N o n eof the American consumer e lectronics f i rmsfollowed suit, although some made attemptslater on. Sony’s Betamax, which opened themarket, was in fact a fourth-generation ma-chine—the result of many years of persistenta n d o f t e n - d i s a p p o i n t i n g e f f o r t s , T h e o t h e rmajor VCR system—developed by Matsushita(a third, built by Philips, has only a small shareof the market)—was also the result of years ofengineering, 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 InstitutionalClimate for Innovation in Industry: The Role of ManagementAttitudes and Practices, ” The 5- Year Outlook for Science andTechnology 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,


development programs, and now have chosento sell Japanese VCRS under their own brandnames.

The point is that, once having lost productl e a d e r s h i p - a s h a s o c c u r r e d w i t h V C R s –American firms will find it increasingly dif-ficult to compete in new technologies, and mayeventually find themselves importing or adapt-

ing other products as well. Because U.S. man-ufacturers cannot expect cost advantages, theymay be left with only their distribution systemsand brand recognition as prime competitiveweapons. To a considerable extent, Japanesefirms have already countered these advantages;thus, the long-term prospects for Americanfirms in consumer electronics do not appearbright.

SemiconductorsTechnological forces have dictated the mar-

keting strategies of semiconductor companiesin all parts of the world since the inception ofthe industry. The case study on 4K RAMs ina p penal ix C points to the i mportance of e ngi-neering capability for U.S. merchant firmssuch as Mostek or Intel, Technology is no lessimportant now than a decade ago, when the4K RAM was being developed-but as late asthe mid-1970’s the business strategies of foreignsemiconductor manufacturers were of little in-terest to Americans. As the 4K RAM case dem-onstrates, U.S. firms appeared to have little tofear from producers in Japan--certainly notfrom those in Western Europe, But from aminor position in 4K chips, Japanese firmswent on to claim about 40 percent of the worldmarket for the following generation of 16KRAMs. By 1982, the perception was wide-spread that U.S. firms had “lost” the marketfor dynamic RAMs. Certainly this is an over-dramatization, and the RAM market can by nomeans stand for the industry in microcosm; butthe picture has changed. How did it change sofast?

During the 1970’s, Japanese companies ex-ported considerable numbers of electroniccomponents--including transistors—to thiscountry, but the major growth segment, ICs,was dominated by American suppliers. Eventhough Japan’s Government protected the localindustry, U.S. shipments took a substantial partof the expanding Japanese IC market. Custom-ers in Japan depended on American firms fordevices that domestic manufacturers could notprovide—high performance or large-scalechips, custom parts, even some types of linear

circuits needed for consumer products. As thetechnological level of Japan’s semiconductorindustry caught up with that of the UnitedStates, many of these imports were replacedby indigenous production. The phenomenon,termed import displacement, has been charac-teristic of Japan’s computer industry as well.Displaced items quickly become potential ex-ports for Japanese firms.

During the 1970’s, awareness of the possibleconsequences of foreign competition grewwithin U.S. industry and Government, al-though the production and trade data showedlittle cause for concern. The Federal TradeCommission, reporting on interviews con-ducted in 1976, stated: “. . . a number of com-pany executives expressed the opinion thatcompetition from foreign companies would bemuch tougher to handle than competition fromother 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 timemaintaining their technological lead overforeign companies. “27 Hindsight shows thoseof the first persuasion closer to the mark.

One sign that patterns of international com-petition would change came from subsidiesand promotional efforts adopted by foreigngovernments with the aim of fostering in-digenous production. Japan, France, West Ger-many, the United Kingdom—all in one way oranother marked the semiconductor industry ascritical to continued economic vitality, an in-

2T~’faff ~eilor{ OH the Semiconductor lndustrs’: A S’urIre~ ofStructure. Conduct and Perlbrmance (Washington, D. C.: FederalTrade (;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 bothtechnological expertise and production vol-ume, the implicit targets were American com-panies, not excluding those that had investedin local production facilities. These govern-ment-led attempts to build competitive semi-conductor industries have had mixed results.Joint projects involving public and private sec-tors in Japan were quite successful—in semi-conductors as in earlier Japanese industrialpolicy initiatives. European attempts have beenfar less fruitful, for reasons that may have asmuch to do with the characteristics of the in-dustry and marketplace on the continent aswith the policies pursued.

United States

Applications of semiconductors reflect ongo-ing synergistic relationships among merchantsuppliers and their customers. Purchasers out-side electronics have lately presented growingmarket opportunities—e.g., in automobiles.Nonetheless, from a technological viewpoint,firms building computer- or microprocessor-based systems remain the most influential cus-tomers (fig. 34). Manufacturers of consumerelectronics, communications systems, instru-ments and controls, and office equipment haveconsiderable impact as well. While most of theattention below goes to merchant firms, cap-tive operations have played a vital role in thetechnological development of the U.S. indus-try. Furthermore, production decisions by thelarger integrated manufacturers sometimeshave major consequences for the merchantmarket,

Figure 34 shows that the phenomenal expan-sion in semiconductor output during the 1970’swas accompanied by a major shift from de-fense purchases to consumer and industrial ap-plications; competitive success in the mostrapidly growing market segments depended onthe ability to make the transition from special-ized military requirements to the demands ofprivate sector customers. Some companies thatfared quite well in the military market couldnot compete effectively for commercial sales,

Figure 34.— Distribution of U.S. SemiconductorSales by End Market

Mil i tary Consumer Computer andIndustr ia l

20 —

o1960 1968 1980

Year

SOURCES 1960, 1968 Innovation, Compel ltlon, and Governmental Policy InI he Semiconductor Industry Charles River Associates, Incfinal report for Experimental Technology Incentives Program,Department of Commerce March 1980, p 213

1 9 8 0 .SIatus 8 0 A Re,oorf o n (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 de-livery schedules more important.

Factors in Strategic Decisions

Competitive strategies adopted by merchantsemiconductor firms revolve around factorssuch as size, market power and technologicalcapability, internal need for devices (if any),and stage of development relative to others inthe industry. A company’s technical strengthsshape its product line, Process technology—whether a manufacturer is strong in bipolar orMOS (metal-oxide semiconductor), which va-rieties of MOS a firm knows best—is one as-pect, design capability another. Some com-panies are known for innovative circuit de-signs, others for prowess at mass produc-tion—some for both. Smaller entrants tend tospecialize; only a few merchant suppliers havebroad product lines (the world’s semiconduc-tor manufacturers supply perhaps 50 billiondevices a year—of 100,000 different types—toseveral hundred thousand customers).


*

.i - .& &

Photo credIf Western E/ecfr)c Co

Technician loading plasma reactor withsemiconductor wafers

A number of U.S. merchant manufacturershave integrated to some extent into systems.A few, such as Texas Instruments, have alwaysbeen diversified. Others have been purchasedby larger enterprises but still sell the great bulkof their production on the open market (ch. 4,table 24). As merchant suppliers expand, sodoes the range of their product offerings,Smaller companies with limited resources aimat niche markets, Newer entrants set out to de-velop specialized or custom devices of less in-terest to larger corporations; the 1981 startupLinear Technology—a spinoff from NationalSemiconductor—specializes in linear ICs, inwhich the founders have expertise.

Captive semiconductor producers have dif-ferent strategic aims. While most of the largercomputer firms make some of their own logicchips, IBM has traditionally produced most ofits memory circuits as well. The company con-sumes so many that, for products such asRAMs, on occasions when it chooses to pur-chase from outside vendors it can account fora sizable proportion of total demand (the com-pany is probably the largest single purchaserin the merchant market, as well as the world’slargest producer of semiconductors). This thenaffects the business decisions of merchant sup-pliers: IBM’s external purchases were a power-ful and rather unpredictable force on the mar-

ket for 16K RAMs at the close of the 1970’s,the company’s unexpected entry contributingto shortages of these devices. Capacity short-falls by American firms—primarily stemmingfrom failures to invest in additional productionfacilities in the wake of the recession of 1974-75—left an open door for Japanese IC suppliersto sell in this country.

Captive manufacturers contribute in a majorway to the overall strength of the U.S. positionin microelectronics through their R&D activ-ities; in particular, IBM and AT&T’s Bell Lab-oratories have been responsible for much of thebasic research underlying the semiconductorindustry in this country, indeed around theworld. Merchant firms—because of the paceand intensity of product development, the con-tinuing cycles of improvement in design andproduction that characterize succeedinggenerations of ICs—must set different pri-orities; they also have more limited resourcesfor R&D.

Technological Factors

A company introducing a new device mustassume that even if their design is at theforefront of the state of the art it will besuperseded later if not sooner. Timing is crit-ical; technological windows sometimes open,providing opportunities for leapfrogging thecompetition. Companies that quickly masteredproduction of dynamic RAMs, or concentratedon microprocessor design architectures in at-tempts to tie up large portions of that market,were aiming at such advantages, Needless tosay, some firms have better records at ex-ploiting these opportunities than others. Anumber of companies that had been strong inbipolar technology–including Fairchild andTexas Instruments—did not move as rapidlyinto MOS as the competition; Texas Instru-ments staged a quick recovery, while Fairchildhas continued to lag. Mostek, as its name con-notes, was founded with the intention of spe-cializing in MOS; the company has emphasizedmemories, designing their own RAMs—the defacto industry standard 4K RAM was a Mostekdesign (see app. C)—while serving as an alter-nate source for microprocessors. Electronic


Arrays, now owned by Nippon Electric, hadspecialized in read-only memories (ROMs).Other firms seeking to exploit particular tech-nological paths have had less success: Amer-ican Microsystems’ work on v-MOS ICs is oneexample, RCA’s pursuit of silicon-on-sapphirec-MOS another. Internationally, Japanese firmsmoved into MOS ICs much more rapidly thanthe Europeans, most of whom are still wellbehind their competitors in the United Statesor Japan and relying on technology imports totry to catch up; this has been one of the objec-tives of Le Plan des Composants—a major in-dustrial policy effort by the French Govern-ment (ch. 10). In the United States, some firms—Signetics, Monolithic Memories—continue tospecialize in bipolar devices. IBM likewise re-mains relatively stronger in bipolar than MOS;the speed advantages of bipolar circuits haveled many computer manufacturers to continueemphasizing the older technology.

Quality and reliability comprise another com-petitive realm where strategies depend both oncircuit design and manufacturing practices (ch.6). While Japanese firms have zealously pub-licized the quality and reliability of their ICs—in much the same way that Japanese con-sumer electronics firms used reliability as awedge into the American TV market—domes-tic producers like Advanced Micro Deviceshave also pursued an image of quality andreliability as a marketing tool.

Products and Prices

One of the attractions of memory circuits—in addition to the vast market—is the relative-ly orderly and predictable progress of the tech-nology itself; circuit design is vital—along withexcellent process capability—but more straight-forward than for logic or microprocessors.Everyone in the industry knows that the nextgenerations of dynamic RAMs will be 256Kchips, followed by 1 megabit; circuits offeredby various firms are much more similar thanthe designs of competing 16-bit microproc-essors, One result is the fierce price competi-tion that has often seemed the dominant char-acteristic of the memory market. Progress instatic RAMs, and in the various types of ROMs,

is likewise rather easy to predict. Under suchcircumstances, Japanese suppliers quite nat-urally emphasize memory products.

In contrast, market acceptance of logic cir-cuits or microprocessors is less predictable. In-vesting in a new microprocessor design—the32-bit Intel iAPX 432 cost more than $100 mil-lion to develop—is risky, but the potential re-wards are great; designs with an edge over thecompetition—in performance, ease of program-ing, adaptability to a wide range of applica-tions—sell for premium prices.28 Furthermore,microprocessors—best thought of as familiesof related ICs rather than unique devices—havelonger product cycles, extending the periodover which investments can be recouped.Memory circuits are manufactured as long asdemand holds up, but sales tend to peak anddecline more rapidly than for other devicetypes. Five or six years elapsed between theonset of high-volume production for 8-bit mi-croprocessors and mass production of the suc-ceeding generation of 16-bit parts, while life-cycles for RAM chips—though slowly length-ening—have been perhaps 3 years, sometimesless.29

Abbreviated product cycles dictate strategiesaimed at profitability within a narrow timewindow, along with continuous efforts to de-velop new or differentiated offerings. The lat-ter can be original designs but need not; sec-ond-sourcing has been widespread for manyyears, in part because customers often insiston more than one supplier before they willdesign an IC into their end products. Thus, sec-ond-sourcing can accelerate market expansionfor everyone, Semiconductor firms choose tobecome alternate sources for chips developed

Zaon the ~om of microprocessor design, see R. N. Noyce andM. E, Hoff, Jr,, “A History of Microprocessor Development atIntel, ” IEEE MICRO, February 1981, p. 8. Intel’s first micro-processor, a 4-bit device, was designed in 9 months by a singleengineer; 100 man-years went into the iAPX 432.

ZQIntel’s 8080 family—introduced in 1974 and the largest sell-ing 8-bit microprocessor—will no doubt remain in productionfor many more years, Worldwide, more than 10 companies stillproduce 8080 chips. Mostek—an alternate source for anotherpopular 8-bit processor, the Z-80—for a number of years pro-duced more of these devices than Zilog, the originator. See “TheAntenna, ” Electronic News, Mar. 12, 1979, p, 8; “Eight-BitLevel,” Electronic News, July 5, 1982, p. 12.


by other companies to beef up their own prod-uct lines, perhaps by complementing circuitsthey already build, as well as to reduce marketrisks and save on R&D expenses. From theviewpoint of the originator, it may be more sen-sible to settle for a smaller piece of a rapidlyexpanding market than to try to keep othersfrom duplicating an IC design. Attempts to pre-vent duplication are virtually impossible if acircuit finds an enthusiastic reception in themarketplace. As one consequence, formalizedalternate sourcing agreements have largely re-placed the copying that was once common-place. Sometimes alternate source manufac-turers acquire the originator’s technology —e.g.,mask sets for lithography. Other times onlydrawings or specifications are provided. Therecent agreement between National Semicon-ductor and Fairchild, the latter acquiring theright to build National’s model 16000 micro-processor in exchange for developing a com-plementary line of peripheral chips, is an in-creasingly popular route.

Cost reductions via the learning curve (ch.3, fig. 5) help shape competitive strategies, Asproduction volumes increase, yields rise andmanufacturing costs drop. Pricing decisionshave often been based on projections of ex-pected cost reductions into the future, For afirm early to market with a new design, costadvantages over potential rivals can build rap-idly, increasing with leadtime. Firms that arelate to market face a dilemma; they may haveto choose between foregoing participation orpressing on with their own design in the hopethat it too will win acceptance, In early 1982,with six Japanese entrants mass-producing 64KRAMs, versus only two American manufactur-ers, a number of U.S. firms were confrontedwith such decisions; Advanced Micro Devices,for one, decided not to build a 64K chip,

In different circumstances, then, firmsassume different strategic postures. Companiesentering the market with a new device, par-ticularly one incorporating proprietary technol-ogy—product or process—may have several ad-vantages over competitors that follow. An earlyentrant will normally try to remain ahead onthe learning curve, keeping production costs

below those of its rivals, margins above. Com-panies with proprietary designs often licensealternate sources, but at least at the outsetsecond-source suppliers will be at a cost disad-vantage. If the initiator decides to follow a pric-ing strategy keyed to anticipated cost improve-ments, follow-on firms may find it difficult tomake a profit. Texas Instruments, for instance,has had the reputation of practicing advancepricing whenever possible, In a very real sense,then, later entrants can be at the mercy of in-novators should the latter choose to cut pricesand exercise the cost advantages of being far-ther down the learning curve. On the otherhand, an innovating firm might choose to in-crease margins by holding price levels high.Under such circumstances, an alternate sourcemay itself be able to carve out a place throughprice. One facet of Intel’s corporate strategyhas been to choose products where it couldenter the market first, reap high profits, thenmove on—leaving later sales, at lower margins,to others, Nonetheless, in many cases, especial-ly where the innovating company is small, lin-ing up an established supplier as a secondsource may be a prerequisite to sales in any vol-ume.

A further strategic choice, increasingly crit-ical for American firms, is whether to designand produce commodity-like chips or to con-centrate on custom or semicustom devices, Thefirst option entails high-volume production ofICs that are, or may become, shelf items—standard circuits serving the needs of cus-tomers who design them into end products,The alternative, customizing, can be ac-complished in a variety of ways; semicustomchips such as gate arrays or programmablelogic arrays are specialized only at the laststage of processing. Regardless of the techno-logical approach, firms in the custom or semi-custom business create specialized ICs meetingthe needs of one or a few, rather than many,purchasers. Because circuit design is expen-sive, prospective order quantities must be largeenough to cover engineering costs; alternative-ly, the buyer must be willing to pay a higherprice, Custom chips for automotive applica-tions are an example of the high-volume case,


military systems of custom chip markets whereproduction volumes tend to be small. Occa-sionally, end users design their own ICs andcontract out production.

At the center of competitive strategies insemiconductors—as for many industries—thenlies the choice of products. Firms with broadproduct lines may offer devices based on avariety of technologies while attempting to stayat the technical frontier with only some ofthese. Others—such as Mostek in the mid-1970’s—operate within narrower boundarieswhere they attempt to be leaders. Some en-trants are content to follow the obvious trends,offering unique designs infrequently whilerelying on other strengths—perhaps low pricesor a reputation for quality—to attract custom-ers, In its early years, Advanced Micro Devicestook such an approach (see app. C).

Beyond these common themes, mostly hing-ing on aspects of the technology, companiesplan their strategies according to the strengthsand weaknesses they perceive in their own po-sitions compared to those of their rivals. Nosingle company has the resources to manufac-ture and sell all the tens of thousands ofsemiconductor products now marketed in theUnited States—one of the reasons for theperiodic emergence of startups, Extensiveproduct lines can confer advantages wherecustomers prefer to deal with only a few ven-dors; broad-line manufacturers may also beable to achieve economies by spreading mar-keting costs over many items. Nonetheless,such factors are secondary compared to choiceof product and process technology, along witha variety of ingredients that could be labeled“entrepreneurship.’ Successful new compa-nies have frequently been established to exploita particular product, often one that larger com-panies have failed to pursue—perhaps becauseof limited resources, or simply a judgment thatthe potential market was too small,

No matter the decisions they themselves take,managers of semiconductor firms can be cer-tain of two features of their market: 1) competi-tion will eventually drive prices downward (ithas been extremely difficult to capture signifi-

cant monopolistic profits from new technolo-gies), and 2) just as inevitably the pace of tech-nical advance will render new product offer-ings obsolete within a few years at most. Theprice history of the 64K RAM illustrates thefirst point: offered in sample quantities at $100each in 1979, and $20 to $30 during 1980,prices dropped to the $10 to $15 range in early1981 and $5 to $7 a year later; during 1981, 16KRAM prices were driven down from $4 toabout $1, largely as a result of price declinesfor 64K parts.30 Such pricing trends have meantthat all firms, U.S. and foreign, have had towork continuously at cost reduction, In con-trast to numerous other industries, passive orreactive pricing policies are hardly possible;although product differentiation is a viablealternative under some circumstances, pricecompetition in semiconductors is a constantforce–enough by itself to set this industry offfrom many others. The second market charac-teristic, rapid technological change, has forcedmanagers and technical personnel alike toadapt constantly; firms that have remainedwedded to older technologies have faltered ordisappeared from the marketplace,

International Dimensions

From an international perspective, the largerU.S. merchant firms have shared three majorstrategic thrusts: 1) offshore manufacturing toreduce labor costs, 2) foreign investment toserve overseas markets, and 3) attempts to dobusiness in Japan. This last effort–on whicha number of companies are just embarking, orreembarking after past rebuffs—may prove crit-ical to the continuing ability of U.S. merchantfirms to compete with large, integrated Japa-nese manufacturers, particularly in commodityproducts like memory.

Offshore manufacturing investments havebeen concentrated in developing Asian na-tions, Generally, the more labor-intensiveassembly operations—e.g., wire bonding andencapsulation—have been moved. In the semi-

30A, Alper, “Buyers Hedging on Long-Term 64K Pacts UntilU.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 lowsof about $3 during the 1982 slump.

Ch. 5—Competitiveness in the International Electronics Industry ● 193. —

conductor industry, the stimulus for thesetransfers has not been import competition, asin consumer electronics, but domestic rivalry.Transfers offshore began in the early 1960’s,long before Japan appeared a significant threatin semiconductor production. By 1970, Ameri-can companies operated more than 30 subsidi-aries in such locales as Hong Kong, Singapore,Malaysia, the Philippines, and Mexico.31 Re-locating labor-intensive production operationshas been especially attractive because transpor-tation costs are low; chips are often shippedby air. A cost comparison illustrating the ad-vantages of offshore assembly is included inappendix B (table B-2).

A second international involvement of U.S.semiconductor companies has been point-of-sale production to serve developed countrymarkets, Investments in point-of-sale plantsbegan about the same time as offshore assem-bly, but from the standpoint of industry strat-egy the motives were quite different. Thesehave been twofold, First, foreign governmentshave often taken steps to make local produc-tion attractive, or, conversely, to make export-ing from the United States onerous. Europeancountries, in particular, have relied on incen-tives combined with tariff and nontariff bar-riers to attract U.S. high-technology in-vestments. Second, point-of-sale productioncan become a competitive necessity to the ex-tent that other firms have already made suchmoves.

Efforts to establish sales, production, and/orR&D facilities in Japan—now a bigger marketthan all of Europe—comprise the most recentoverseas thrust by American firms. WhileTexas Instruments had been able to establisha wholly owned subsidiary in Japan, otherAmerican firms were kept out until recently.Semiconductor manufacturers attempting toinvest in Japan suffered much the same fate asother U.S. companies; the Japanese Govern-ment, through the Foreign Investment Coun-

31 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 industrialoat

cil, MITI, and other agencies, controlled in-ward investment flows and for the most partprevented the establishment of manufacturingfacilities under foreign ownership.32 Joint ven-tures in which a Japanese company held themajority interest met a more favorable re-sponse. The purpose was obvious: to provideshelter for Japanese companies which at thetime were well behind in semiconductor tech-nology. MITI believed—with good reason, ifthe European case is indicative—that allowingAmerican firms to produce in Japan would sti-fle the domestic industry, particularly when itcame to more advanced device types. In actingthis way, the Japanese Government was behav-ing much like others that have sought to pro-tect infant industries, but Japan has often beenaccused of maintaining protectionist measureslong past the point at which her industries havebeen able to fend for themselves,

In any event, as a consequence of protec-tionism in Japan, American suppliers wereforced to adopt business tactics different fromthose pursued on the continent. Most re-sponded to MITI’s entreaties and entered intolicensing agreements with Japanese produc-ers.33 Such steps were entirely rational, pro-vided the U.S. firm could be reasonably cer-tain the technologies transferred would notfind their way into products they would faceat home or in third-country markets. With thisproviso, it would pay to sell technical knowl-edge, the proceeds from which could then atleast partially offset the costs of generating thatknowledge, The outcomes of licensing agree-ments with Japanese firms have led to manysecond thoughts within the American industry.Nonetheless, clear-cut cases in which U.S.technology was an irreplaceable ingredient inthe growing capability of Japanese semicon-ductor manufacturers are rare, particularly inlater years —the exceptions being perhaps de-velopments 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 Semicon-ductor Technology Betureeo Japan and the United States, ” f’~rst1 I! S.-]apan Technological Exchange S~’mposium, Washington,DC,, oct, 21, 1981. Finan points out that American firms general-ly did not transfer proprietary information to licensees (p, 9],


Texas Instruments became the single excep-tion to MITI’s licensing rule—in reality onlya partial exception. Because it held a series offundamental patents covering ICs, Texas In-struments was in stronger position than otherAmerican companies. As a condition for li-censing its patents to Japanese firms, Texas In-struments demanded that it be allowed to estab-lish manufacturing operations there. WhenMITI refused—consistent with its decisions re-garding other electronics firms—the stage wasset for prolonged negotiations. 34 Texas In-struments and MITI eventually compromisedin a 1968 agreement permitting a joint semi-conductor manufacturing venture with Sony.Four years later, Sony sold its share to theAmerican company.

Thus, Texas Instruments, although reported-ly subject to a production ceiling, became theonly U.S. semiconductor firm to both manufac-ture and sell its devices in Japan, just as IBMhad—a few years earlier—become the onlyAmerican company to build computers there.(IBM was also able to gain entry by taking ad-vantage of its patent position.) Only recently,as the Japanese have gained confidence in theirown technical abilities, has MITI softened itsattitude toward foreign investment; a growingnumber of U.S. electronics manufacturers arenow contemplating wholly owned subsidiariesin Japan. While the longer term consequencesof these decisions are not yet clear, investmentwithin Japan could—given the examples ofother industries—prove a vital support forAmerican firms seeking to compete with Japa-nese rivals in third-country markets as well asin Japan.

Current Trends

The competitive strategies of American semi-conductor firms have been aimed first andforemost at survival in a highly competitive,rapidly changing market. Companies big andsmall have had to stay abreast of and adapt totechnological change. Flexible managementand organizational structures have been a

34J. E. Tilton, International Diffusion of Technology: The Caseof Semiconductors (Washington, D. C.: The Brookings Institu-tion, 1971), pp. 146-147.

necessity. The usual explanations for the exitsof a number of large corporations during theearlier years of the industry revolve aroundrigid decisionmaking styles.

More recently, the character of the markethas been shifting; American companies havebeen forced to alter their thinking. In somerespects the changes are a continuation offamiliar patterns: more complex ICs–large andvery large-scale integration (VLSI)—make stillmore applications cost-effective, creating newand different puzzles for chip-makers. Morefundamentally, VLSI has altered the cost struc-ture of the industry in at least two ways. First,production is growing more capital-intensive;new sources of financing are needed to pur-chase more expensive manufacturing equip-ment (ch. 7). Some of the capital has come viamergers, which have changed the industry’sstructure. The second way in which VLSI isaffecting the structure of the industry stemsfrom shifts in product design. What had beena hardware-oriented business is now systems-and software-based as well. ICs are becomingmore than components, To tap the vast poten-tial markets made possible by microprocessorscoupled with cheap memory, semiconductormanufacturers must commit substantial re-sources to computer-aided design and softwaredevelopment, This comes at a time of intensi-fying international competition—but with orwithout the Japanese in the picture, the prob-lem facing U.S. merchant firms is one of lo-cating sources of new capital in substantialamounts while battling to preserve even theirexisting profit margins. As companies devisetheir responses, several trends are emerging,

Greater vertical integration will probablyhave the farthest reaching consequences. Larg-er merchant companies—e.g., Texas Instru-ments, which has entered a variety of con-sumer markets, including that for personalcomputers —are taking advantage of broad-based positions in microelectronics to integratedownstream into the manufacture and sale offinal products, The reasoning behind such de-cisions is straightforward. If much of the tech-nology of data processing and other electronicsystems is incorporated in ICs, why not make


end products too, increasing value-added andprofitability? To this strategy—essentially an of-fensive one—could be added a defensive ele-ment. For semiconductor manufacturers withthe resources to contemplate entry into systemsmarkets, greater vertical integration reducesvulnerability in the event that customers beginto integrate backward into device production.The fact is that backward integration is on theupswing, as manufacturers of computers, of-fice equipment, consumer durables, and a hostof other products sense the need to develop in-house capability in microelectronics. One pathis purchase or merger with a semiconductorcompany. Merger activity in the industry hasbeen high since the latter part of the 1970’s; by1983 only a few of the larger, broad-line mer-chant suppliers remained independent.

Mergers have been of several types: somesemiconductor firms have been absorbed intoconglomerates—one example is United Tech-nologies’ purchase of Mostek. Other acquisi-tions have been more directly motivated by in-ternal needs, as in General Electric’s acquisi-tion of Intersil. Foreign takeovers have beenprominent—Schlumberger’s purchase of Fair-child. Sometimes the apparent motive on thepart of the semiconductor company is the needfor new financing; this was no doubt a factorwith Mostek, explicitly so with IBM’s purchaseof a substantial interest in Intel. The motivesof foreign investors have varied: buying anAmerican firm can be a quick way to get tech-nology as well as a convenient entrance intothe U.S. market.

In a related development, many Americansemiconductor companies are seeking alter-natives to “going it alone” in the developmentof new technology-largely because of risingcosts. New variations on accepted technologysharing arrangements have been devised. Somesemiconductor manufacturers have prevailedon customers for assistance in developing spe-cialized chips and software. Both GeneralMotors and Ford have supported such efforts.Semiconductor firms have also sought newways to share product development costsamong themselves, sometimes through exten-sions of past practices in second-sourcing,

where it is becoming common for such agree-ments to spell out in considerable detail theR&D and/or circuit design obligations of eachpartner.35

Arrangements in which two or more com-panies independently develop different mem-bers of a family of chips fall at one end of theR&D spectrum—complementary product devel-opment. At the other end, closer to basic re-search, industry groups are moving towardcooperative rather than independent but com-plementary projects, The Semiconductor In-dustry Association and the American Elec-tronics Association have each established pro-grams that will channel contributions frommember firms to university projects. The Semi-conductor Research Cooperative is funding re-search directly, while the Electronics Educa-tion Foundation aims to improve training inelectrical and computer engineering, primari-ly through fellowships and faculty support.36

Another effort, Microelectronics & ComputerTechnology Corp., will be an independent prof-it-seeking R&D organization capitalized by theparticipating firms. 37 At least six universitiesare also establishing centers for R&D in semi-conductor technology and/or systems applica-tions of microelectronics.38 Whether all theseefforts will survive and flourish remains to beseen.

The emerging strategic picture in the UnitedStates, therefore, is fluid and uncertain. Semi-conductor manufacture, along with other por-tions of electronics, is undergoing far-reachingrestructuring, with outcomes that are hardlyobvious. Given settlements in the IBM andAT&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{)] aTighten Hold on General-Purpose MPUS: Sec Peripherals KeYIMarket for Niche Suppliers, ” Electronic Newrs, hlar. 8, 1982,p. 1. U.S. merchant firms are also negotiating such agreementswith Japanese manufacturers—S. Russell, “Zilog, Toshiba toSwap MIJU, CMOS Technology, ” Electronl(: .hreb~,s, Apr. 19,1982, p. 53; “National Semiconductor Sets ~renture L$’ith Japa-nese Firm, ” Wall Street )ourna], Jan. 23, 1983, p, 22 (the Japaneseparticipant is Oki).

3CIS, Russell, ‘‘S I A Eyes $5 M Fund i ng for Research Coopera-t lve, ’ ‘ Electronic Newrs, Dec. 21, 1981, p. 6.

37C, B a rney, “R&I) CO-01) Gets Set To Open [Jp Shop, ” Elec-tronics, Lfar. 24, 1983, p 89.

wC. Norman, “Electronics P’irms Plug Into the [~nitersities,”Science, Aug. 6, 1982, p. 511.


for continued expansion by these two giantsemiconductor/communication/computer com-panies. AT&T’s manufacturing arm, WesternElectric, plans to be the first American firm todeliver 256K RAMs—a rather spectacular en-trance into the merchant market. Other firms—Xerox is one—are also contemplating broad,systems-oriented strategies. Meanwhile, small-er companies continue to seek specializedproduct niches that will prove lucrative whilenot attracting large and powerful competitors.And in the background are the Japanese, add-ing another dimension that will continue to in-fluence the strategies of American firms bothdomestically and internationally.

Japan

Until half-a-dozen years ago, few in the U.S.semiconductor industry gave much thought toJapan as a serious competitive threat. Japanesemanufacturers—almost exclusively divisions oflarge corporations— mostly produced devicesfor consumer products; even today, nearly halfof Japan’s semiconductor output goes to con-sumer appl i ca t ions .39 During the 1970’s ,Japan’s budding computer manufacturers de-pended on American suppliers for advancedICs. While Japanese companies were clearly onthe way to the skill levels needed for more ad-vanced devices, the prevailing belief in theUnited States was that they could not reallyhope to catch up. The primary concern was theclosed Japanese market. American companieshad been prevented from establishing a pres-ence remotely comparable to that which theyhad achieved in Europe; customers in Japanbought only those devices that were not pro-duced locally.

Today the situation seems quite different.Japanese firms have emerged as viable globalcompetitors in VLSI devices. Although theirprowess has centered on memory chips, theyhave made up a great deal of ground in logiccircuits and other device types as well. By 1980,the gravity of the threat had become obvious;quite suddenly, Japanese firms captured near-

3e]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 seemedwell on their way to comparable levels ofpenetration in the next-generation 64K RAMs;indeed, as sales began to build, the Japaneseshare soared toward 70 percent. While thereis considerable feeling that ultimately they willnot be able to hold more than about half theU.S. market for 64K chips, any temptation tounderestimate the capabil i t ies of Japan’ssemiconductor manufacturers has long sincepassed. Seemingly countless studies recountthe strategic attack, tracing the targeting prac-tices of government and industry.

From Linear to Digital Circuits

Firms in Japan had long since become majorproducers of linear semiconductors, a main-stay in consumer electronics. By the early1970’s, some American companies began toabandon this part of the market, especially asdomestic sales seemed to be drying up. LeadingU.S. producers put their resources into rapid-ly expanding digital IC technologies. Mean-while, for the Japanese, strength in consumerdevices was both a blessing and a curse. Whilegiving their engineering staffs experience incircuit design and—more important—in high-volume production, the concentration on linearcircuits did little to raise overall levels of com-petence. At the time, the primary customers fordigital ICs—computer manufacturers—were arelatively minor component of Japanese de-mand.

This was the situation when, in line with itslongstanding policy of fostering internationallycompetitive industries, MITI acted to break theimpasse created by the focus on consumerproducts, The agency helped fashion an R&Dprogram intended to increase Japan’s capabili-ties in large-scale digital ICs, particularly MOSdevices, and accelerate movement towardVLSI. The organization of the program, whichbegan in late 1975, is described in chapter 10;five companies and three separate laboratorieswere involved in the 4-year effort. Funding—totaling about $300 million—was provided part-ly by the participants and partly by govern-ment. The program has had far-reaching im-


pacts—as much through diffusing technologyand training people as through the technologydeveloped. A parallel government-sponsoredVLSI program—this one focused on telecom-munications—was carried out in the labora-tories of Nippon Telegraph and Telephone(NTT), which had the most capable microelec-tronics R&D organization in Japan.

MITI’s objective was not only to aid Japan’ssemiconductor manufacturers: the VLSI pro-gram was part of a much more extensive ef-fort to move the nation toward knowledge-intensive products with high export potential.Like its counterparts within the governmentsof other industrialized countries, MITI recog-nized that semiconductors would be funda-mental building blocks for many sectors of theJapanese economy. Supporting the computerand information industries was the first step.MITI was fully aware that technical compe-tence in digital ICs would be essential, and thatwithout some form of stimulus private compa-nies would find it difficult to shift rapidly fromlinear to digital devices. From MITI’s perspec-tive, support for “cooperative” R&D was a nat-ural extension of past efforts in other indus-tries; the VLSI program itself has been followedby related work in computers and robotics, aswell as further microelectronics projects.

Still, by American standards, MITI’s sub-sidies were not large. Individual U.S. firms likeTexas Instruments had R&D budgets that cameclose to matching the yearly outlays of the VLSIproject; IBM’s corporate R&D spending was anorder of magnitude larger. Of course, partici-pating Japanese companies continued their in-ternally funded R&D programs; MITI spendingthus gave a substantial incremental boost toJapanese semiconductor research, reducingrisks and supporting longer term work. Evenso, total expenditures in Japan remained wellbelow those here. Nor did the VLSI project re-sult in large and direct benefits to Japanesefirms, at least in terms of product offerings. Agreat deal of attention in the United States hascentered on the thousand or so patents asso-ciated with the program, but it is not clear whatvalue these have. There are no signs of majorinnovations. Primary attention went to process

rather than product technologies; one-third ofthe funds were spent in the United States sim-ply on purchases of state-of-the-art manufac-turing equipment. This suggests that the majorthrust was to develop skills in low-cost produc-tion of commodity-like devices such as RAMchips.

Two aspects of MITI’s approach deserve par-ticular emphasis. First, subsidization of micro-electronics R&D was only the opening movein a broader strategy for building a competitivecomputer and te lecommunicat ions sector .Hindsight provides ample corroboration ofwhat was in fact an explicit goal: MITI’s subse-quent support of computer and software devel-opment, as well as the Japanese Government’sreluctance to allow open competition for NTTprocurements. NTT was a principal—thoughindependent—actor in the VLSI program; thegovernment evidently hoped to restrict its high-volume purchases to domestic manufacturers(the company does not produce its own semi-conductors), helping generate the economiesof scale so necessary for international competi-tiveness,

The second point—suggested by MITI’s levelof support, generous for a government R&Dprogram but certainly not enough by itself toboost the Japanese industry past Americanfirms—is that the VLSI project was never con-ceived purely as an exercise in technology de-velopment. Consistent with the usual Japaneseapproach to government-supported R&D, itwas intended to focus industry efforts, helptrain engineers from private firms in state-of-the-art technologies, diffuse these technologieswithin the Japanese industry—in other words,to overcome weaknesses in Japan’s technologi-cal infrastructure created in part by the lackof personnel mobility (ch. 8).

This makes it doubly difficult to assess thecontribution of the VLSI project. While sep-arating what might have happened from whatdid occur is impossible, pieces of evidence doexist: for instance, MITI excluded Oki Electricfrom participation and subsidies, yet Oki man-aged with NTT’s help to develop a 64K RAMthat the company now exports in considerable

198 ● International Competitiveness in Electronics—

volume. Many of the events of the past fewyears—the upsurge in Japanese production andexports of RAMs—would probably have oc-curred in any event, albeit at a slower pace;memory chips were obvious targets for Jap-anese firms confident of their abilities tomass-produce relatively straightforward de-signs to high quality standards. They were alsoneeded for the computers that these same firmswere determined to make in greater numbers.

In the United States, the impact of the VLSIproject has been exaggerated. It has come tosymbolize not only direct subsidization of com-mercially oriented R&D but also interfirm co-operation that might be illegal under Americanantitrust law. In fact, as pointed out in chapter10, cooperation among Japanese companieshas been rather l imited—evidence of thestrength of the barriers within the Japanese in-dustry that MITI was trying to overcome; thisaspect has been overplayed by American man-ufacturers understandably distressed at in-roads by overseas competitors, While the VLSIproject makes a convenient target, by itself itis a far-from-adequate explanation for penetra-tions of what had been traditional Americanmarkets. Indeed, government policies in sup-port of Japan’s information industries haveranged far beyond R&D subsidies, Among theother policy tools have been:

preferential government procurement;favorable credit allocations, especially dur-ing the formative years;special depreciation and other tax meas-ures; andgrants for training and education.

Domestic firms have been effectively protectedfrom import competition as well as from pro-duction within Japan by foreign-owned con-cerns. Protection of growing industries throughgovernment action is hardly unique, but canonly be judged to have succeeded if the pro-tected companies eventually emerge as viablecompetitors. In microelectronics, the “infantindustry” approach has been attempted else-where, most notably in several European na-tions, but only Japan has achieved success. Jap-anese industrial policy is discussed in detail inchapter 10; here the point is that none of thepolicy measures adopted by Japan’s Govern-ment, taken separately, appear to have beenmajor forces in the ultimate growth and ma-turation of the semiconductor industry. Takentogether, they paint a different picture—one inwhich industrial policy provided vital guidanceand support for the development of an inde-pendent capability in semiconductor designand manufacture. Cumulatively, the policies ofJapan Government have had a major impact.

Strategy and Structure

Despite MITI’s pervasive influence, the com-petitive strategies of individual Japanese semi-conductor manufacturers are governed first bythe basic structure of the industry, which ispopulated by companies for whom microelec-tronics comprises a relatively small part oftheir business. Most of these companies—Okiand Nippon Electric being partial exceptions—are large, integrated firms whose sales consistpredominatel y of final products such as com-puters, consumer electronics, and telecommu-nications systems, Table 45 shows that only for

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

Japanese firms (1981) U.S. firms (1979)

Nippon Electric Co. (N EC) . . . . . . . . . 19.8% Mostek . . . . . . . . . . . . . . . . . . . . . . . . 93%Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . 12.9 Advanced Micro Devices . . . . . . . . . 89Oki Electric . . . . . . . . . . . . . . . . . . . . . . 9.8 Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Toshiba . . . . . . . . ., , . . . . . . . . . . . . . . 8.1 Fairchild . . . . . . . . . . . . . . . . . . . . . . . 69Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Texas Instruments . . . . . . . . . . . . . . 36Mitsubishi . . . . . . . . . . . . . . . . . . . . . . . 5.3 Motorola . . . . . . . . . . . . . . . . . . . . . . 31alncluding 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 forthe Semiconductor Industry Association, June 9, 1980, p 15


NEC and Fujitsu—the latter Japan’s largestcomputer manufacturer, with heavy internalconsumption—have semiconductors contrib-uted a proportion of total sales even half asgreat as for those U.S. merchant firms that areleast dependent on their semiconductor divi-sions—Motorola and Texas Instruments. Semi-conductors account for less than one-tenth thesales of the other Japanese manufacturers. Inthis, they are closer to American companieslike Rockwell or RCA, which nonetheless dif-fer in being primarily suppliers of specialtyrather than mass-market circuits.

The fact that the major semiconductor sup-pliers in Japan build end products createspotential intracorporate synergisms absent incompanies that are primarily chipmakers.While some U.S. managers view integration asdysfunctional, likely to sap entrepreneurialdrive and retard innovation, it has been an ad-vantage for Japanese companies—which havedifferent sets of strengths and weaknesses thanAmerican firms. To begin with, the same half-dozen corporations that produce most of Ja-pan’s ICs account for perhaps two-thirds of de-mand; given the focus on vertical integrationand internal production, it should be no sur-prise that U.S. suppliers have had difficultyselling in Japan. Second, as the next chapterpoints out, the quality of Japanese ICs has beenhigh–again, this might be foreseen, given thatfirms producing for internal consumption willfind themselves bearing high downstream costswhen quality lags. A further synergism asso-ciated with size and diversification stems fromthe ability to tap cash flows generated in otherlines of business; these funds can be channeledto R&D or added production capacity, mattersamplified on in chapter 7. Further, diversifiedcompanies can more easily tolerate short-termlosses resulting from price-led penetration ofnew markets. Diversified Japanese companieshave combined such tactics with an emphasison quality—both image and reality—to driveboldly into markets once the province ofAmerican firms. Indeed, few other strategiescould have worked. Unfortunately, from thestandpoint of smaller and less diversified U.S.merchant manufacturers, unrelenting price

competition in products representing a sub-stantial part of their total business leaves fewoptions for counterattacks.

The Japanese strategy—protecting domesticsemiconductor manufacturers from overseasrivals while providing modest R&D subsidiesand at the same time fostering domestic com-petition—parallels that in television. It hasyielded equally impressive results: deep pen-etration in targeted markets based on lowprices and quality levels above previous norms.There has been a fortuitous element as well;unexpected demand swamped U.S. suppliersduring 1979 and 1980. As a result of continuedcapacity expansions during the preceding mar-ket slump, Japan’s producers were ready to fillthe void.

Some spokesmen for the American industryfind other familiar features: claims have beenrepeatedly voiced that the Japanese practiceprice discrimination, maintaining high mar-gins in protected home markets while slashingprices in the United States and Europe, Suchtactics would imply either explicit or implicitmonopolistic agreement among Japanese man-ufacturers—e, g., tacit acceptance of existingmarket positions at home, with price cuttingconfined to foreign markets. Even so, questionsof dumping are problematic for integratedfirms; companies making ICs for both internalconsumption and open-market sales have agood deal of latitude in allocating costs and set-ting prices. Dumping, as defined under GATTrules and the laws of most countries, would bedifficult to prove; nor would the usual ration-ales for prohibiting dumping necessarily bevery relevant.

MITI’s push toward ICs for computers andcommunications has contributed to Japan’sstrength in world markets for memory chips.At the same time—one legacy of the industry’sroots in devices for consumer applications—Japanese product lines remain more narrow-ly based than those of the leading Americansuppliers. Microprocessors are a case in point;the major Japanese firms all continue to pro-duce American designs. NEC, Toshiba, Mit-subishi, and Oki sell members of the Intel 8080


family; at least three Japanese firms are build-ing Intel’s 16-bit 8086.40 Although several Japa-nese manufacturers have designed microproc-essors for internal use, these have not foundother markets. And if made-in-Japan dynamicRAMs now claim a major share of worldwidesales, the overall Japanese presence in theUnited States remains modest. In 1982, importsfrom Japan accounted for about 5½ percent byvalue of total U.S. integrated circuit consump-tion; although increasing rapidly (fig. 26, ch.4), Japanese imports remain small in absoluteterms. Still, the inroads have come in a marketsegment that American manufacturers right-

‘R. H. Silin, The Japanese Semiconductor Industry: An Over-view (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 depend-ent on memory products have been severely af-fected, In other product categories, Japanesecompetition is also stiffening; a major effectwas to further depress prices and profits dur-ing 1981 and 1982, when domestic firms weretroubled by a deep recession,

In the longer term, American semiconduc-tor manufacturers have every reason to bewary of continued pressure from powerfulmultinationals with headquarters in Japan—firms that have already demonstrated their abil-ity to compete successfully in major world mar-kets for other technically demanding products.The U.S. merchant manufacturers have theirown advantages—they do well some things thatJapanese firms do poorly–but they cannot ex-pect an easy time of it in the future.

Computers

If American manufacturers were for manyyears unchallenged in world markets for semi-conductors, the United States has been stillmore preeminent in computers. Even in Japan,American-owned firms continue to account forover 40 percent of mainframe sales; the U.S.share of the Japanese market for small systemsis lower, but such firms as Data General andHewlett-Packard have recently established pro-duction facilities there. In Europe, U.S. com-panies are far out front except in the UnitedKingdom, where the government has activelysupported ICL through procurements and sub-sidies. American-owned enterprises accountfor nearly three-quarters of all computer salesin Europe.

This section again concentrates on theUnited States and Japan. While Japanese com-puter manufacturers have not yet proven no-tably effective competitors outside their homemarket, they are at present uniquely situatedto launch a campaign aimed at the U.S. posi-tion—in part because of their newly acquiredstrength in microelectronics, in part becauseof their active pursuit of joint venture ties with

suppliers in Europe and the United States. Itis too early to predict the extent to which theJapanese strategy may succeed, but structuralchanges in the world computer industry arecreating new opportunities for firms every-where. The Japanese will probably be able toexploit at least some of these, certainly betterthan European producers.

The Environment for U.S. Suppliers

By virtually any standard, the United Stateshas far and away the most computer-intensiveeconomy in the world, a position it can expectto maintain indefinitely. From the early daysof the industry, the number of computers in-stalled in the United States mounted at a pacethat kept the total about an order of magnitudegreater than for all of Western Europe. 41 B y1981 there was a computer terminal for every48 people employed in the United States; by

41Gap5 in Technology: Electronic Computers [paris: Ch’ganiZa-tion 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 Americanleadership in design, production, and sales—as well as utilization—is reflected both in tradedata, where the computer industry continuesto be a prodigious net exporter, and in theprominence of U.S.-owned subsidiaries inother parts of the world.

Strategic Patterns

For many years the story of American su-premacy in the global computer industry wasthe story of one company—International Busi-ness Machines, Although IBM trailed Reming-ton Rand, builders of the Univac, in marketingearly computer models, by the late 1950’s IBMhad gained the huge lead it still enjoys. For theother old-line firms—including Burroughs,NCR, Honeywell—competition has mostlymeant jockeying for places in the residual mar-ket left by IBM; these companies have foundit difficult to reach the Wale needed to offera full product line and to’ support a sales/serv-ice organization competitive with IBM’s. Ingeneral-purpose mainframes, IBM has ac-counted for 60 to 70 percent of the w o r l dmarket over the years, with lower figures insuch countries as Japan and the United King-dom balanced by even higher percentages else-where. To be sure, numerous entrants—mostlyAmerican—have attempted to carve out com-petitive positions against IBM, with muchmore success in rapidly growing markets forsmall systems than in mainframes. Companiesranging from Digital Equipment Corp. or Con-trol Data in the United States to Fujitsu inJapan and Nixdorf in West Germany have es-tablished themselves solidly in some portionsof the market. But none has come close toIBM’s overall sales, despite the rapid shifts inoverall market structure described in the pre-vious chapter,

Most of IBM’s American competitors havetaken a straightforward approach to their situa-tion: following IBM’s lead in the developmentof faster and larger systems, trying to maintain

421, M, Branscomb, “computer Communications in the Eight-ies—’I’ i me To Put It All Toget her,” Computer Networks, ~ol. ~,1981, p. 3.

product lines that match up reasonabl y wel lwhile at the same time staking out their ownterritory—e.g., Control Data in high-perform-ance scientific machines, Burroughs in smallbusiness systems (on the latter, see the casestudy in app. C). In these efforts, Americancomputer firms have been aided by the tech-nological lead of the U.S. semiconductor indus-try, Although IBM has relied heavily on inter-nal semiconductor design and manufacture,other firms—whether or not maintaining cap-tive production facilities—have been able totake advantage of components available on themerchant market that were often superior byconventional yardsticks to IBM’s devices, Thisis one of the reasons IBM has itself begun topurchase ICs on the outside. A major elementin the strategies of other mainframe suppliers(excluding those making plug-compatible ma-chines] has been to expand into new applica-tions while tying their installed base to propri-etary software—thus keeping old customers.None have had more than limited success;other mainframe-oriented firms have general-ly been a good deal less profitable than IBM,and have made little headway in eroding IBM’smarket share, Several have done better abroad;Honeywell’s joint venture in France has beena greater force in the European market thanthe parent has been in the United States.

The Impacts of Microelectronics andReliability Improvement

Because the market has enlarged and changedso radically, focusing on the older mainframecompanies hardly gives a fair sampling of cur-rent strategies. As figure 35 indicates, marketgrowth for general-purpose mainframes—themainstay of the industry just a few years ago—is now much slower than for other types of sys-tems. As sales of minicomputers, small busi-ness installations, and desktop and personalmachines exploded, competitive dynamicsaltered fundamentally. Newer entrants havestaked out major shares of markets for productslike word processors. These structural shiftsare continuing—indeed accelerating.

What are the implications for internationalcompetitiveness? As in semiconductors, prod-

99-111 0 - 83 - 14


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

1980

1985(pro jected)

SOURCE “Moving Away From Mainframes The Large Computer Makers’ Strategy for Survival, ” Business Week, Feb 15, 1982, p 78

Ch. 5–Competitiveness in the International Electronics Industry ● 203

uct planning decisions in the computer in-dustry are shaped by technical possibilities.Specialized machines of all sizes have long hadtheir place, but the turn toward small and ver-satile computers is a direct consequence oftwin driving forces: advances in software fornetworking and distributed processing, plusadvances in microelectronics. Computer sys-tems need no longer be structured around asingle processor. A central unit can be sur-rounded by a number of satellites, or the en-tire processing load can be shared throughouta network. Given cheap microprocessors andsingle-chip microcomputers, designers can put“intelligence’ where they want it, Computerfirms that fall behind in such developments—more broadly, manufacturers of systems incor-porating machine intelligence, not all of whomthink of themselves as part of the computer in-dustry—will be poorly placed to compete in fu-ture markets.

Improvements in system reliability—flowingpartially but not wholly from the growingreliability of microelectronic devices—yieldanother powerful driving force. Mean times be-tween failure for computer systems have beenincreasing steadily despite greater complexi-ty. Today’s computers are orders of magnitudemore dependable than those of even a decadeago; this not only cuts operating and main-tenance costs but helps expand applications.Computers can now be used in a host of ap-plications where the dangers of a failure wereformerly too great–real-time air traffic control,electric utility load management, critical in-dustrial processes.

Ever-greater reliability combined with ever-greater computing power per dollar has eatenaway at IBM’s traditional strengths—customersupport and service, plus the ability to lock incustomers via a product line broad enough tosatisfy virtually every need. Now, so many ap-plications have opened up that no one com-pany can hope to cover them all; in many ofthese, IBM’s market power—so valuable in sell-ing general-purpose mainframes—has been, ifnot irrelevant, at least a far smaller advantage.New entrants can specialize in systems for

banking or distributed word processing. Start-ups of earlier years—Data General, Prime, Tan-dem—have become substantial multinationalsin their own right. Independent software ven-dors are creating a whole new industry.

Better reliability—in addition to broadeningthe applications of computers—has had a sec-ond, equally important, impact. As in con-sumer electronics, it has allowed manufac-turers to skirt traditional distribution channelsand reach customers through new outlets. Thistrend—which began as early as the 1960’s withsystems houses that purchased minicomputersand peripherals in quantity, assembling them,together with software, to supply turnkey in-stallations—also promises to continue and per-haps accelerate. Greater reliability has reducedthe need for onsite maintenance and repair;where field service was once a vital elementin any marketing strategy, smaller manufactur-ers are now less constrained by the need to fi-nance service networks. Moreover—while hob-byists, engineers and scientists, and many bus-inesses could be reached through specializeddistribution channels–selling personal or desk-top computers to the general public requiresretail distribution. This, in turn, is realistic onlyif the need for aftersales service is modest. Cur-rently, the personal computer market is mov-ing through a transition paralleling the earliershift in color TV—desktop machines are be-coming off-the-shelf items rather than productssold and serviced by specialty outlets. The per-sonal computer is a product in which IBM hadno great advantages beyond name-recognitionand abundant internal resources for productdevelopment. While these are far from trivialassets, IBM will probably not be able to dupli-cate its position in mainframes in the far morediverse and competitive desktop market, justas the company has not been able to do as wellin small business systems, supercomputers, orword processors. The general point is: to be inthe computer business no longer necessarilymeans confrontation with IBM; it need not en-tail attempting to cut into the installed base ofany mainframe manufacturer, much less try-ing to match IBM’s hardware or softwareacross a broad spectrum of products.

*


Even in small systems, only a few companieshave been able to span a major portion of themarket. Some—e.g., Hewlett-Packard—havespecialized in powerful machines for sophis-ticated customers. Others, like Wang and Data-point, have aimed at business applications,Digital Equipment Corp. (DEC)—which startedas an OEM supplier—now has a relativelybroad product line, including personal com-puters, As in the semiconductor industry, man-agers have had to search for market opportuni-ties that match their organizations’ strengths.Their choices and decisions, constrained by re-source limitations and conditioned by govern-ment policies, will determine the future com-petitive posture of the U.S. industry. Mistakeswill be made, and weaker companies—mostlikely those making peripherals, office automa-tion equipment, and desktop computers—willfind themselves being absorbed or merged withcompetitors.

Product Strategies: Hardware and Software

The mainframe-oriented companies do retainadvantages in structuring complex and far-flung information systems. Designs for suchsystems are often shaped by existing softwareinventories, The original supplier has an easiertime achieving compatibility; indeed, computerfirms have had a good deal to gain by makingit difficult for competitors to reverse-engineertheir software and develop compatible systems.Some have gone so far as to replace portionsof the system software with “firmware” storedin ROM chips which can be changed from timeto time. Generally, such efforts have been in-tended to thwart plug-compatible manufac-turers.

The importance of software extends far be-yond the system level. Machines capable ofdata processing for business needs are nowwithin the financial reach of even the smallestfirms—and, of equal significance, can be usedby people with little special training, Softwarethat is user-friendly, as well as reliable, is a keyelement in selling to those without previousdata processing experience. As the case studyin appendix C points out, credit for the suc-cess of IBM’s System/32 small business com-

puter goes in large part to the specialized ap-plications programs that were available, Evenmore, as hardware costs fall, specialized soft-ware becomes the pacing factor in applicationsranging from office automation—where muchof the competition for word processor salesrevolves around software—to industrial robots.Limited growth in software productivity andhigh associated costs (ch. 3) are problems thatnow confront all firms in the industry, here andoverseas; among the possible solutions are mul-tinationalized software generation. In thefuture, the importance of software comparedto hardware can only increase; the exceptionsare perhaps at the very high and very low ends,where supercomputers remain hardware-inten-sive and small machines selling for less thana thousand dollars compete on the basis ofprice.

From a slightly different perspective, soft-ware can become a constraint: switching tonew software, particularly system software, istime-consuming and expensive. Customerswith extensive data processing installationsand large software inventories become lockedin because of the high costs of transferring.This is a constraint on the system manufactur-er as well, who may be burdened with obsoles-cent software that cuts into potential perform-ance. The picture is somewhat different forcomputers sold to purchasers who are techno-logically adept—e.g., OEMs who integrate com-puters into their own products, or those withneeds in engineering or science. Such custom-ers commonly have the internal resources forsolving their own software problems, and findshifting to new systems, though a difficult task,not an insurmountable one. Still, given theirsoftware investments, virtually all customershave strong motives for replacing or augment-ing their equipment with new models from thesame manufac turer—and manufac turersstrong motives for ensuring software compati-bility within their product lines. Therefore,once markets begin to mature, a manufactur-er’s share of the installed base becomes a goodindicator of future prospects; competitors needhardware that is substantially better or cheaperto stand much chance of convincing customersto switch allegiance, Brand loyalty has been


high in general-purpose data processing mar-kets, largely for such reasons.

Plug-compatibility is aimed at breaking thiscycle. Originally referring to peripherals suchas disk drives, plug-compatible manufacturers(PC MS) later moved into mainframes that canoperate on IBM software; now some buildequipment compatible with DEC minicom-puters or IBM Personal Computers. Basically,the PCM strategy has been to make equipmentthat can be used interchangeably with IBM’s,while undercutting the latter’s price/perform-ance ratios .43

The forces outlined above shape the strat-egies of companies striving to keep up in themarketplace. New approaches to product de-velopment are appearing throughout the in-dustry; even IBM has begun to purchase morehardware outside, as well as software. Inanother new departure for the company, IBMhas started selling disk drives on an OEM basis.As in semiconductors, technology-sharingagreements have become more common—cross-licensing of patents, direct purchases oftechnology, joint development—as firms con-serve resources through specialization. This isthe idea behind Microelectronics & ComputerTechnology Corp.—spearheaded by ControlData and presumably aimed not only at oncom-ing competition with the Japanese but the con-tinuing struggle of smaller entrants with IBM.Movement toward technology purchases andtechnology sharing appears to have even moremomentum in Europe, despite earlier failuresof joint efforts like Unidata. Siemens, ICL, andOlivetti are among the companies now market-ing Japanese-built mainframes in Europe.

International Aspects

The picture that emerges in the U.S. com-puter industry is one in which the long-dom-inant 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 main-frames, has said that sur~i~’ing in competition with IBM requirescosts that are 15 percent lower or performance that is 20 per-cent better, See “Makeshift Marriage, ” The .&onomist, Aug. II,1979, p, 78.

the technology—although occasionally marketdemand outstrips what the industry can sup-ply, as happened with word processors—andit is difficult to predict where it may lead. Someobservers believe that IBM’s market power willcontinue to deteriorate, even in areas wherethe firm’s position has heretofore seemed un-assailable. Others think the future lies withlarge and powerful companies able to combinefar-flung communications and information net-works into vast integrated systems. In fact, bothviews are probably correct, given the fragmen-tation and specialization brought by cheaphardware.

American computer manufacturers, livingnervously with rapid technical change at home,face another series of choices in foreign mar-kets. Governments in industrialized nationswhere American subsidiaries have long beendominant continue to follow policies trans-parently intended to reduce that dominance,Such policies are nothing new: France’s PlanCalcul was set forth more than 15 years ago,and the Governments of Great Britain and Ja-pan have, over the years, found many ways tosupport local computer manufacturers. Whilemost such policies have had only limited ef-fects in the past, certainly in Japan the tech-nological fervor is now intense,

If competition from Japanese computer firmsis on the rise, American entrants are them-selves fashioning new international strategies.Already DEC operates six plants in Europe andthree more in the Far East. A partial list ofother American minicomputer manufacturerswith foreign production facilities would in-clude Hewlett-Packard, Wang, Data General,Datapoint, and Texas Instruments. U.S.-basedmultinationals specializing in desktop ma-chines include Apple, with plants in Irelandand Singapore, and Tandy. Manufacturers pro-ducing plug-compatible mainframes have alsobegun to expand abroad: Amdahl has openedan Irish facility intended in part to supply theCommon Market, as has Trilogy Systems.

The rules of the competitive game are in par-ticular flux in lesser developed parts of theworld. Developing countries are putting in-


dustrial policies to work attracting technologyand fostering local computer manufacturing.Mexico’s approach has been to restrict imports,limiting sales to companies that agree to estab-lish production facilities. With an annual mar-ket now approaching $500 million, Mexico hasbeen able to attract a pair of U.S. minicomputerfirms willing to live with these rules. Brazil’sGovernment has reserved the domestic mini-computer market for locally controlled enter-prises; transfers of technology have been en-couraged, but foreign investments are limitedto minority interests. While American compa-nies have generally chosen to stay out, severalEuropean and Japanese firms have agreed toparticipate—no doubt hoping for benefits sim-ilar to those now flowing to the Japanese con-sumer electronics manufacturers that acceptedsuch conditions in earlier years.

How will the onset of local production indeveloping countries affect international com-petition in computers? While any answer re-mains conjectural, it would be foolish to dis-miss the possibility that some of these nationsmay evolve into viable forces in the market-place. Although their ability to compete willprobably be restricted to simpler products overthe foreseeable future, developing economieswill begin by building equipment such as ter-minals, printers, and disk drives, where laboris a major cost element. It is not a big step frommaking TV receivers to producing the simplertypes of computer terminals—indeed a stepthat countries like Korea and Taiwan have al-ready taken. With the experience gained insuch products, and with protected marketscontributing to scale economies, a number ofthe newly industrializing countries could movefairly quickly into world markets.

As a final point, again consider software de-velopment. By its nature, programing has beenlabor-intensive–therefore increasingly costlyin high-wage nations. Software generation de-pends on people with ability and experience—including an understanding of the problemsfaced by users, Such factors have prevented thetransfer of this work to developing countries,even those like India where the raw program-ing skills might be available. Nonetheless, sev-

eral industrializing nations are attempting toimprove the capabilities of their labor forcesso that they can produce software needed inadvanced economies. Countries like Singapore,Hong Kong, and Taiwan are seeking to create“software centers” where Western computermanufacturers could establish subsidiaries thatwould transfer skills and provide training forthe local work force while also producingmuch-needed software. Once the people wereavailable, locally owned companies could takeover at least some of the work.

Japan

Objectives announced by Japan’s Govern-ment over the past few years herald a com-petitive onslaught directed at the U.S. com-puter industry. MITI is sponsoring a pair oflong-term R&D projects dealing with computersystems, plus several related efforts.44 The fifth-generation computer project—the origins andorganization of which are described in chapter10—is software-intensive, directed at artificialintelligence, information organization andmanagement, and natural language input andoutput. In the second project, MITI is helpingfund the development of a supercomputer in-tended to surpass the most powerful offeringsof American companies like Control Data andCray. A related lo-year project will supportdevelopment of the high-speed microelectron-ic devices needed to implement the softwareconcepts of both fifth-generation machines andsupercomputers. The goal is nothing less thanto thrust Japanese companies into the forefrontof world computer technology, to leapfrog theUnited States in the design and marketing ofboth hardware and software. The objectives of

‘Outline of Research and Development Plans for Fifth Genera-tion Computer Systems (Tokyo: Japan Information ProcessingDevelopment Center, Institute for New Generation ComputerTechnology, May 1982); Computer White Paper: 1981 Edition(Tokyo: Japan Information Processing Development Center,1982], pp. 59-75; “Machinery, Information Industries ’81 Pro-grams Outlined, ” )apan Report Joint Publications Research Serv-ice JPRS L/10086, Nov. 2, 1981, p. 21; “Archetype of Fifth Genera-tion Computer Described, ” )apan Report, Joint Publications Re-search Service JPRS 1./11007, Dec. 14, 1982, p. 49; “MIT I Proj-ect To Develop Supercomputer Starts in January, ” Japan Report,Joint Publications Research Service JPRS L/10348, Feb. 23, 1982,p. 34.


these programs are by no means unique toJapanese manufacturers; they are squarely inthe mainstream of the evolution of computing.It is the strength of Japan’s commitment—thebacking by MITI and other government agen-cies, the lo-year schedules—that differentiatethem from efforts in other countries.

As the rhetoric associated with such pro-grams makes clear, Japanese firms, with thehelp of their government, hope within 10 or 15years to lead the world in computer technol-ogy. Despite Japan’s relatively successful ex-perience with previous government-sponsoredR&D efforts—the Pattern Information Process-ing System (PIPS) project, the VLSI project—this is a tall order. At present, the market posi-tion of Japanese manufacturers is modest; asof 1981, American-owned companies heldmore than three-quarters of the world com-puter market in value terms, Japanese-ownedcompanies only about 7 percent. Still, Japan isnow the second largest supplier of general-purpose computers to the world market, witha very high rate of export growth (ch. 4, fig.30). The country is also second only to theUnited States in intensity of computer utiliza-tion. After the experiences of consumer elec-tronics, automobiles, and semiconductor mem-ory chips, few in the American industry wouldtake Japan’s goals lightly.

Nevertheless, because of the role that factorssuch as installed base and software inventoriesplay in the marketing of computer systems,Japanese manufacturers must begin with theknowledge that—no matter how good theirtechnology—they cannot hope to come closeto the United States for many years. In thissense, the computer market is not at all like thatfor semiconductors, where purchasers quick-ly switch suppliers to take advantage of lowprices, quick delivery, or new device types.Success in niche markets for computer systemsis quite possible, indeed a necessary first step,but breadth in an industry expanding in asmany different directions as information proc-essing can only be a long-term undertaking,The U.S. position, both in technology andmarket share, is simply too strong. Leaders inJapanese Government and industry recognize

their weaknesses, and have made plans accord-ingly.

Technology

Carefully targeted R&D is a central strand inthe Japanese computer strategy, as in earlierventures into other industries, Japanese pro-ducers and their government realize, just asthey did in microelectronics, that internationalcompetitiveness in computers cannot be at-tained so long as they rely on technology fromthe United States, The reasons are twofold,First, American firms are far less likely tolicense technologies than in the past, The Jap-anese know that computer manufacturers inthe United States, unlike at least some of theirpredecessors in other sectors, are acutelyaware that technical leadership is a primarysource of competitive strength, and that tomake their technology too easily availablewould weaken their own position, The secondreason is even more fundamental. In the basicbuilding blocks of computer hardware, semi-conductors, Japanese firms are near parity withAmerican companies; in some areas they maybe ahead. Japan can hardly depend on im-ported technology; rapid progress toward aneventual goal of leadership in informationprocessing requires extensive indigenous capa-bility of the sort that Japanese firms now havein high-density memory chips,

The Japanese also recognize that their short-comings in the marketplace are not so muchmatters of hardware as of software and relatedapplications-based constraints, Several Japa-nese firms now offer computer hardware aspowerful as any. However, IBM’s huge in-stalled base and vast catalog of applicationsprograms have forced Japanese competitors,as those elsewhere striving to break into themainframe market, to build plug-compatiblemachines that run on IBM software. To getaround this impediment is perhaps the majorreason for the fifth-generation project. Whilecompanies like Amdahl have demonstratedthat a comfortable business can be built sup-plying PCM mainframes, markets tied toanother manufacturer’s software are inevitablylimited. Japan’s gamble is that it can jump


ahead of American entrants with families ofcomputer systems having performance capa-bilities that will render present-day softwareinventories obsolete. This goal has shaped thehardware and software R&D planned for thefifth-generation project: to take full advantageof emerging microelectronics technologies inmore closely linking the needs and abilities ofpeople with the capabilities of the system. Ifthese objectives are met, individuals—eventhose with little training—will be able to com-municate with f i f th-generation machinesthrough ordinary language in spoken or writ-ten form, as well as through graphical or pic-torial images. Such systems would not onlybe user-friendly, but might ultimately displaysomething of the independent decisionmakingcapability associated with human reasoning. *If the technical objectives of the fifth-gen-eration project—and similar efforts in othercountries—are achieved, even novice userswould be able to harness enormous computingpower. The commercial potential is immense.

Government Assistance

The Japanese Government has supportedR&D activities in information processing overmany years. MITI has been selective in finan-cial aid, directing funds to potential bottle-necks, exemplified by the VLSI program’s sup-port for digital ICs, or to R&D that could helpJapan’s industries leapfrog the competition, theintent of the fifth-generation computer project.Funding for the latter is projected at about $500million over a 10-year span (1981-91); the super-computer project is expected to get another

*An example from the field of artificial intelligence—the areaknown as expert systems—will illustrate, Research in expert sys-tems aims at computer programs that mimic attributes of peo-ple who are “experts” in some realm of knowledge—e. g., medi-cine, where such programs might help automate diagnosis. Theobjective would generally be to augment or complement ratherthan supplant human skills; an expert system would not havethe judgement of a physician, but could offer, for example, per-fect recall of vast amounts of information. Expert systems typ-ically depend on complex software and large data bases; thus,advances in hardware as well as software maybe needed if theyare to be widely implemented.

$100 million over roughly the same period.**A parallel microelectronics project—whichgoes by names such as “R&D on New Func-tion Elements’’—has a budget of about $150million and is scheduled to run from 1980 to1990, Money will go to three major develop-ment efforts:45

Three-dimensional circuit elements—which can be visualized as more-or-lessconvent iona l ICs s tacked a top oneanother, increasing the density.H i g h e l e c t r o n mobi l i ty t rans is tors(HEMTs), one variety of which consists ofvery thin layers of semiconducting mate-rials such as gallium arsenide or galliumaluminum arsenide; HEMTs offer poten-tially higher switching speeds, hence fastercomputers.Radiation-hardened devices suitable foruse in extreme environments such as nu-clear powerplants or outer space (resist-ance to heat and vibration is a related ob-jective).

The first two especially will support bothsupercomputer and fifth-generation projects.Among related government-sponsored pro-grams, another of major significance for thecorporate strategies of Japan’s computer man-ufacturers has aimed at the development ofsoftware and peripheral devices with Japaneselanguage input-output capability. Scheduledover the period 1979-83, nearly $200 millionwas allocated to this effort.46

As in microelectronics, R&D is but one ofmany ways in which Japan’s Government as-sists the computer industry. The Japan Devel-opment Bank loans money to the Japan Elec-tronic Computer Corp. (JECC), a jointly heldfirm which purchases computers from partic-ipating manufacturers and leases them to

* * Planning for the fifth-generation program began severalyears earlier, as outlined in ch. 10. A variety of funding levelsfor both projects have been reported; spending plans and sched-ules will no doubt shift as they progress.

46’’FY82 Government Projects in Electronics Listed, ” }apanReport, Joint Publications Research Service JPRS L/10676, July22, 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 Josephsonjunction integrated circuit chip

users. Manufacturers can set up tax-free re-serves to offset losses incurred when lease con-tracts with JECC are canceled and equipmentmust be repurchased. Since 1979, tax-free re-serves have been permitted for up to half theincome associated with some categories of soft-ware. Purchasers of certain types of computerscan write off 13 percent of their value, beyondnormal depreciation, in the first year. The gov-ernment has also established special deprecia-tion schedules for high-performance remotedata processing equipment.

A panopoly of support measures—of whichmany more examples could be cited—has thusbeen designed to help Japanese companiesachieve technological superiority and commer-cial success in the 1990’s. At first glance, thesums of money involved may seem large; infact, when viewed in the context of the worldcomputer industry, they are modest; as chapter10 stresses, it is the consistent support providedby many individual measures acting in concertthat gives Japanese industrial policy its impact.

To place the expenditures of the JapaneseGovernment in perspective, table 46 lists R&Dspending by a number of [J. S.-based computerfirms. On an annualized basis, subsidies pro-vided by Japan’s Government for R&D in in-formation processing come to less than the ex-penditures of any one of these American com-panies. (Total subsidies for the information in-

. —.—

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

Burroughs . . ... . . ...C o n t r o l Data Corp. ., ... ... ...D ig i ta l Equipment Corp. . . , . . .Hewlett-Packard . . . .Honeywell . ... ... .IBM ., ... . . . . . . . . . . ... . .SOURCES Annual reports

R&D spending(millions of dollars)

$220202251347369

1,600

dustries in Japan—including indirect supportthrough tax preferences—could only be esti-mated by making a large number of essential-ly arbitrary assumptions; see ch. 10. ) MITI'sR&D subsidies are also modest in comparisonto 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 governmentmoney does have an important function: help-ing with the kinds of long-term R&D that in-dividual companies might otherwise have dif-ficulty in justifying. In addition, MITI-spon-sored projects—though not cooperative in theusual sense-attempt to stimulate creativethinking, technology interchange, and the com-plex of synergies so vital to engineering re-search. The Japanese electronics industry prob-ably benefits more from these factors—whichtend to be lacking within the laboratories of in-dividual corporations-than a strict compari-son of funding levels would suggest.

Of course, other governments also provideassistance to their computer industries, not ex-cluding the United States. European nationsroutinely channel direct financial aid to localcompanies, along with indirect subsidiesthrough procurement and tax benefits. Hand-some incent ives des igned to a t t rac t in -vestments and technology have been dangledbefore the European subsidiaries of U.S. andJapanese companies. In the United States,funding by the Department of Defense throughthe Very High-Speed Integrated Circuit pro-gram and this country’s own supercomputerproject—still in the planning stages—will have

47An n ual reports


commercial spillovers. The lesson is that no in-dustrialized nation has been content to accepta secondary position in technologies and mar-kets considered essential to future economicdevelopment. The concern is that the Japanesemay be more successful in implementing theirpolicies than other countries.

Marketing Strategies andMultinational Operations

Individual computer manufacturers in Japanhave begun to formulate product strategiesbased on technologies expected to flow fromgovernment-supported R&D projects, as wellas their internal activities. Marketing com-puters presents special difficulties because thechief competitors are already well entrenched;only in peripheral equipment such as ter-minals, printers, and disk drives have Japanesemanufacturers made a significant impact out-side their home market. In Europe and theUnited States, where nearly two-thirds of theworld’s computer systems have been installed,Japanese companies are inconsequential as in-dependent suppliers.

In an industry where sales depend on a thor-ough grasp of user needs at a technical level—software as well as hardware—late entry is amajor handicap. American suppliers-includ-ing newer participants like DEC and Hewlett-Packard—have built networks of sales and serv-ice centers staffed by engineers and techni-cians who now have longstanding ties withcustomers; IBM has such a network within Ja-pan, Even those Japanese firms with strong in-ternational positions in microelectronics ortelecommunications cannot match the distribu-tion systems of U.S. computer manufacturers.To make much progress, Japanese entrants willhave to invest substantial sums over manyyears without the expectation of immediatereturns. The history of fields like consumerelectronics indicates that at least some Jap-anese companies will be willing to make thiscommitment.

Perhaps surprisingly, given the global per-spectives of consumer-oriented firms like Mat-sushita, the Japanese computer industry as awhole suffers from a pronounced lack of in-

ternational business experience compared toAmerican firms of even quite modest size,Until recently, most (but not all) Japanese com-panies have preferred to manufacture at homefor export; this could prove a major weaknessin computers. While a few Japanese electronicscompanies—Toshiba is another—have ex-panded aggressively via overseas investment,most of Japan’s past international successeshave come in products where integrated man-ufacturing and marketing in foreign countrieshas not been essential. The examples includesteel, automobiles, and semiconductors; con-sumer electronics is only a partial exception.In each of these cases, Japanese companies, atleast in the beginning, concentrated on exportsales. Generally able to take advantage of es-tablished distribution systems, they investedoverseas only when import restrictions com-pelled local manufacturing. The competitivepressures that led U.S. semiconductor or com-puter firms to invest in Europe and elsewherehave only recently begun to impinge on theJapanese. By now, American computer firmsnot only operate wholly owned sales and serv-ice networks in many parts of the world, theyhave established internationally dispersed andintegrated manufacturing operations—partly inresponse to governmental demands and part-ly due to the nature of the market. Japanesefirms, on the other hand, have been largely un-willing or unable to make the enormous in-vestments required to participate in the worldmarketplace for computers.

Managers of Japanese firms, along with bu-reaucrats within the government, recognizetheir lack of background and experience, andare seeking remedies. The international (as op-posed to R&D) strategy appears to be an in-cremental one, geared to minimizing the re-sources at risk and taking advantage of existingstrengths. As part of this strategy, Japaneseelectronics firms, with the encouragement ofMITI, are beginning to establish manufactur-ing plants in other industrialized countries,Following investments by Japanese consumerelectronics suppliers in the United States andelsewhere, tentative steps have been taken insemiconductors, a market in which the Japa-nese have already become well entrenched

Ch. 5–Competitiveness in the international Electronics Industry 211

through exports. These same semiconductormanufacturers are of course the major com-puter firms. Experience gained from invest-ments in semiconductor production will helpin structuring multinational computer opera-tions.

As a parallel step, Japanese manufacturershave established marketing links with a num-ber of foreign firms, Fujitsu now furnishesSiemens [West Germany) and IGL (Britain) withlarge mainframes, while Hitachi has similar ar-rangements with BASF (West Germany) andOlivetti (Italy). Fujitsu has taken a minority in-terest in SECOINSA of Spain, while agreeingto a technology transfer tie with a companypartially owned by the Brazilian Government.In the United States, Fujitsu holds a minorityinterest in Amdahl, the PCM pioneer to whichit exports large machines; for several years, Fu-jitsu distributed its smaller systems within theUnited States through a joint venture withTRW. National Advanced Systems, a subsidi-ary o f National Semiconductor, sells Hitachic o m put ers here.

Such arrangements build from the fact ofJapanese parity in hardware for large com-puters, parity which does not extend to soft-ware; both Fujitsu’s and Hitachi’s systems areIBM-compatible. European firms have beenunable to attain the economies of scale thatJapanese manufacturers get in their home mar-ket, and have chosen to compete with Ameri-can producers by importing from Japan, Fromthe collective viewpoint of Japanese firms,these ventures—even where the equipment islabeled with some other brand name—increasemarket exposure and add to production scale.For some time, such relationships will continueto be essential elements in the marketing strat-egies of at least several of Japan’s computermanufacturers, Even so, they link companiesnone of which has more than a minor shareof the global computer market. Siemens, ICL,and the other partners of Japanese firms to-gether do not account for even 5 percent ofworld computer sales. With the possible excep-tion of ICL, none has a scale of operation anddistribution approaching that of the competinglocal subsidiary of IBM. None is strong in

minicomputers or small systems. Moreover,the Japanese participants remain a critical stepremoved from the customers whose applica-tions their equipment is intended to serve—joint ventures will provide limited help at bestin remedying past weaknesses of Japanesefirms in software or customer support andservice. To become viable international com-petitors, Japan’s computer companies will needto accumulate experience in dealing directlywith the requirements of customers in marketswhere they hope to sell.

Computer manufacturers in Japan do notshare these problems in equal measure; the in-dustry is far from monolithic. Fujitsu, at themoment in a clear leadership position (ch. 4),has, along with Hitachi, chosen to stake its in-ternational position on supplying IBM-com-patible equipment--decisions that will limitboth companies’ options for many years tocome. NEC has taken a different route, devel-oping its own system software (although deriv-ative of U.S. technology). Nor has NEC yetentered into marketing arrangements with for-eign concerns. Instead, the company's manage-ment appears to be shaping a strategy intendedto take advantage of the overlap and mergerof computer and communications technolo-gies, areas where the company is already prom-inent. Despite its relatively small size comparedto other Japanese electronics firms, much lessIBM or AT&T, Nippon Electric’s managers areattempting to position their organization forwhat they see as an eventual competitive strug-gle with these two American giants for domi-nance of the international information indus-try,

At several points above, the entry barrierscreated by the well-established sales and serv-ice networks of American firms have been de-scribed. This aspect of the market for com-puters effectively turns one of the supposed ad-vantages of the Japanese system on its head.Barriers erected by government to keep outforeign firms have given Japan’s manufacturersadvantages in a number of industries, partlythrough scale economies. Closed markets cre-ated by import restrictions and foreign invest-ment controls have been reinforced by com-


plex distribution structures and a deeply in-grained “Buy Japanese” attitude. In computers,however, the longstanding customer ties main-tained by U.S. firms combine with technologi-cal strengths to create formidable entry barriersfor Japanese companies—indeed, new entrantsfrom any part of the world. Windows do openbecause of technological advance; throughthese windows newcomers have moved intomarkets for microcomputers, small businesssystems, and other specialized products. Thusfar, most of these entrants have been Americanfirms—in part because the U.S. market is solarge, but also because American companiescontrol the distribution apparatus in most partsof the world. The going will be difficult forJapanese manufacturers, although they are be-ginning to find niche products—desktop com-puters may be one—suited to their strengths.

In medium and large systems, Japanese com-panies can choose from a number of alternative(or complementary) courses of action. One isto continue to build joint relationships withforeign enterprises. As noted above, such astrategy will require, first, deeper involvementswith end users by the Japanese participants,and, second, movement into markets in moreparts of the world. If firms such as Burroughs,Control Data, or Honeywell were to be en-ticed—each has a relatively small but well-established market share—the prospects forJapanese firms would look a good deal better.The constant pressure of trying to achieve costscomparable to IBM’s could well force one ormore American companies to accept such ties.

As an adjunct to joint marketing ventures,Japanese manufacturers will probably seekother ways of incrementally expanding sales,while awaiting the fruits of the fifth-generationcomputer project. If Japan succeeds in pioneer-ing a new generation of hardware and soft-ware, companies with multinational produc-

tion and marketing experience will be able toexploit the new technologies most effectively.In this context, present efforts would not beso important in themselves; rather they wouldbe preparatory steps for rapid growth in the1990’s. Another path, one that some firms willcertainly pursue, is to concentrate on sellingsmaller systems and personal machines. Herethe now-traditional Japanese entry strategy isfeasible because distribution networks are opento all comers, Thus far, attempts to challengeAmerican companies like Apple or Tandy inpersonal computers, or the many U.S. entrantsin the market for small business systems, havenot been notably successful—in the UnitedStates or elsewhere. Still, if and when suchproducts become more nearly standardizedand interchangeable, Japanese companiescould expect an easier time, But even if com-panies based in Japan were to expand intothese markets, it is not at all obvious that thiswould help them in other types of systems.

Japanese producers of computers are thustaking what seem the only paths available intheir attempts to break into the world market:independent technology development coupledwith joint marketing relationships. That themarketing ties involve firms that are them-selves weak and in need of partners is hardlysurprising, but makes the establishment of aviable international presence that much moredifficult. At this point, the Japanese have hadonly marginal impacts on global markets; athome, IBM-Japan remains a formidable com-petitor. Whether or not technical developmentsin microelectronics and software will thrustJapan into a position nearer the forefront re-mains to be seen. If Japan’s computer manufac-turers do begin to increase their market sharessignificantly, the most likely victims will besmaller competitors—first in Europe, then per-haps in the United States.

Summary and Conclusions

While international competitiveness—in anyindustry—depends on many factors, the busi-ness strategies pursued by private corporations

are central. Costs of labor and capital, techno-logical resources, government policies, humanresource endowments—all can, at least in prin-

Ch. 5—Competitiveness in the International Electronics Industry 213— . —.—

ciple, be looked on as forces impinging on man-agement decisions, as features of the landscapefor business tactics and strategies.

While a useful perspective, the strategic viewof competitiveness is nonetheless an imperfectsubstitute for more quantitative indicators. Un-fortunately, the swiftness of technical changein electronics precludes useful quantitativemeasures. Productivity trends mean littlewhere the standard products of today—wheth-er semiconductors or mainframe computers--have capabilities that may be orders of magni-tude beyond those of a decade past. Compara-tive manufacturing costs carry weight in somecases, but not where one company can buildproducts exceeding the reach of competitors.Little meaning attaches to patent statistics assurrogates for technical ability when incentivesfor acquiring patents vary widely among coun-tries and nowhere correlate very closely withqualitative aspects of technology.

If shifts in international competitiveness can-not be extracted from statistical series, carefulexamination of business activities can yield in-sights into future prospects as well as pasttrends. In semiconductors and computers, notto mention consumer electronics, Americanfirms--once undisputed leaders in technology,as in sales in their home markets and virtuallyaround the world-face much stronger compet-itive pressures. Foreign enterprises, mostlyJapanese but also entrants with headquartersin other Far Eastern countries, are sellinglarger volumes of electronics products withinthe United States; American corporations arehaving a more difficult time in foreign markets,The sources of these shifts are many, By-and-large, they are not due to mistakes or faultystrategies by American firms or by the U.S.Government. First and foremost, rising foreigncompetition flows from continued rebuildingof the electronics industries of Europe andJapan in the aftermath of World War II. It isnot a new phenomenon. By the mid-1950’s,when much of the basic reconstruction of over-seas economies was complete, companies inJapan and much of Europe found themselvesstill well behind the United States in their abili-ty to design, develop, and produce electronics

products. But they were in a good position tocatch up. The first signs of success came early,when Japanese manufacturers like Sony cre-ated new families of transistor radios smallerand lighter than those offered by Americanfirms. The transistor was invented in theUnited States, the first transistor radios alsomade here, but Japanese firms pushed theirproduct development efforts vigorously andoutstripped their U.S. rivals within a few years.Now that Japan is in the lead with new genera-tions of consumer products it will be difficultfor American or European manufacturers toregain the lost ground.

In computers and semiconductors, WesternEurope came out of the war well ahead ofJapan. The Europeans had good fundamentaltechnology, but were stymied by small andfragmented markets, as well as by manage-ments that had neither the resources nor thevision of their counterparts here. Subsidiariesof U.S. corporations became the backbone ofthe European computer industry---they stillare—and took the lead in microelectronics. Inthe Japanese market, American firms could notmatch their accomplishments i n Europe be-cause of the protective policies of Japan Gov-ernment. Still, if not dominant, the UnitedStates was—and remains—a major force in Jap-anese computer sales, particularly for largemachines, as well as in some types of semicon-ductor devices. Continued efforts by American

firms--backed if necessary by the U.S. Govern-ment--to participate on equitable terms withinJapan, whether by exporting or by direct invest-.ment, appear vital for maintaining U.S. com-petitiveness in electronics. The Japanese elec-tronics market is large and still expandin g

rapidly; it is now more important than Europe.

Japanese industrial policy has been a moresignificant source of support in semiconduc-tors and computers than in consumer elec-tronics. The MITI-sponsored VLSI researchprogram—while not as important as someAmericans have claimed--did help Japanesefirms master process technologies for verylarge-scale digital ICs. In standard devicefamilies like memory chips--where the path oftechnological evolution is clear for all to see,

214 ● International Competitiveness in Electronics— —

and technological success a function more ofpainstaking development and detail designthan highly creative engineering—the Japanesehave excelled. While they cannot as yet matchthe breadth of American product lines, theywill certainly continue to improve their capa-bilities in circuit design as well as processing.If U.S. semiconductor manufacturers can ex-pect intense competition, they too have theiradvantages—a different set than those of Japa-nese firms. If American companies continueto capitalize on these strengths—the besttrained engineers in the world, quick recogni-tion and response to market needs, innovationsin circuit design, applications of computer-aided techniques, specialized products pursuedwith entrepreneurial zeal—the United Statesshould be able to maintain a leadership posi-tion. Still, American companies will not be ableto monopolize world sales as they did a decadeago.

Competitive pressures, evolving technology,and growing capital intensity—along with thecontinuing expansion of captive production byintegrated firms—are changing the structure ofthe U.S. semiconductor industry. New struc-tures bring new strategies. Structure is chang-ing in the computer industry as well, drivenby the technology of computing, itself depend-ing heavily on microelectronics. As computingpower becomes ever cheaper, more and moreapplications become cost effective. These at-tract new firms, designing and developing notonly peripherals and software, but specializedprocessors—minicomputers, personal anddesktop units, business systems, While themainframe is hardly a dinosaur, a “computer”can now be a great many things—many neverenvisioned by the designers of the general-purpose machines sold two decades ago by asmall number of companies such as Univacand IBM. Computing power is now cheap andwidely dispersed, often invisible to users. Asdistributed processing and data communica-tions continue to spread, new firms will try toestablish themselves, entering through win-dows of technological or market opportunity.Some of the older firms will find themselves

hard-pressed to keep up, even survive; theirmanagers will face hard choices in allocatinglimited resources. Few companies—even in-cluding the largest, here or in Japan—will beable to cover more than a small fraction ofproduct markets.

While no one can foretell competitive out-comes in the world computer industry, it is ob-vious for all to see that Japan has made a seriesof explicit decisions—going back as far as the1960’s and involving both government and in-dustry–aimed at claiming a major share ofsales and applications. Based on past perform-ance in other sectors of electronics, the prob-ability of continued expansion by the majorJapanese computer manufacturers is high. Be-cause the characteristics of the market for dataprocessing equipment differ from those forsemiconductors, the United States remains ina stronger relative position. There is no reasonwhy the United States cannot continue to holdan overall lead in both technology and sales.

As events in all three portions of the elec-tronics industry demonstrate, competitive posi-tions in global markets have shifted more-or-less continually over time. Some firms in someparts of the world rise, others decline. Of thosethat decline, a few may eventually revive,others disappear. No country can expect all itsindustries to thrive in international competi-tion; any nation that trades will be more com-petitive in some industries than others, theleaders in competitiveness shifting over time.That U.S. competitiveness has slackened inconsumer electronics does not imply that sim-ilar events will follow in other sectors. Thiscould happen, but there is no reason to expectdeclines in microelectronics or computers par-alleling those in color TV—particularly so longas the technology continues its rapid evolutionand markets expand at high rates. These areconditions under which American firms havetraditionally prospered. When the pace ofevents slows, other sectors of the Nation’seconomy might begin to find themselves far-ing better than electronics in internationalcompetition.

CHAPTER 5 Competitiveness in the International Electronics ...

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