International Competitiveness in Electronics

November 1983

NTIS order #PB84-170695

Recommended Citation:International Competitiveness in Electronics (Washington, D. C.: U.S. Congress, Officeof Technology Assessment, OTA-ISC-200, November 1983).

Library of Congress Catalog Card Number 83-600610

For sale by the Superintendent of Documents,U.S. Government Printing Office, Washington, D.C. 20402

Foreword

This assessment, requested by the Senate Committee on Commerce, Science,and Transportation, the House Committee on Ways and Means, and the Joint Eco-nomic Committee, completes a series of three reports on the competitiveness ofU.S. industries. The series began with Technology and Steel Industry Competitive-ness and continued with U.S. Industrial Competitiveness: A Comparison of Steel,Electronics, and Automobiles.

Today, the subject of international competitiveness has more visibility amongthe general public than ever before. It has emerged as one of the primary economicissues facing Congress. Debates over “reindustrialization” and “industrial policy”beginning several years ago have been renewed. This assessment continues OTA’sexploration of the meaning of industrial policy in the U.S. context, while also ex-amining the industrial policies of several of our economic rivals.

Electronics virtually defines “high technology” in the 1980’s. This assessmentsets the characteristics of the technology itself—a technology already of such ubiq-uity that microprocessors and computers outnumber people in the United States—alongside other forces that exert major influences over international com-petitiveness. These factors range from human resources and costs of capital to thepriorities that corporate managers place on manufacturing technologies and thequality of their products. The report concludes by outlining five options for a U.S.industrial policy, drawing on electronics for examples of past and prospective im-pacts, as well as on OTA’s previous studies of the steel and automobile industries.

OTA is grateful for the assistance of the advisory panel for this assessment,as well as for the help provided by many individuals in other parts of the FederalGovernment. OTA assumes full responsibility for the report.

Director

. .///

Electronics Advisory Panel

Katherine Seelman, ChairpersonNew York, N. Y.

Jack C. ActonGreensburg, Pa.

Steve BeckmanAFL-CIO

A. Terry BrixTemar Ltd.

Richard P. CaseIBM Corp.

Ruth Schwartz CowanSUNY-Stony Brook

William Kay DairiesAmerican Retail Federation

Leonard DietchZenith Radio Corp.

Isaiah FrankJohns Hopkins University

F. Willard Griffith IIGC International

Robert R. JohnsonMosaic Systems Inc.

Richard A. KraftMatsushita Industrial Co.

E. Floyd KvammeApple Computer Inc.

Geraldine McArdleReston, Va.

Charles PhippsTexas Instruments, Inc.

K. M. PooleBell Laboratories

Benjamin M. RosenSevin Rosen Management Co.

Kate WilhelmEugene, Oreg.

Robert B. WoodInternational Brotherhood of Electrical

Workers

Michael Y. YoshinoHarvard Business School

International Competitiveness in Electronics Project Staff

Lionel S. Johns, Assistant Director, OTAEnergy, Materials, and International Security Division

Peter Sharfman, Program ManagerInternational Security and Commerce Program

John A. Alic, Project Director

Martha Caldwell Harris

Robert R. Miller*

Contributors

Robert Fisher* Phillip Otterness*

Robert Rarog* Barbara Sachs*

Contractors

L. W. Bergman & Co.Princeton, N.J.

Consultant Services Institute, Inc.Livingston, N.J.

Developing World Industry &Technology, Inc.

Washington, D.C.

Hamilton Herman, et al.Potomac, Md.

H. C. LinUniversity of Maryland, College Park

Mary Ann MaguireUniversity of Maryland, College Park

Mitsubishi Research Institute, Inc.Tokyo, Japan

Richard W. MoxonUniversity of Washington, Seattle

Sterling Hobe Corp.Washington, D.C.

John H. Wheatley, et al.University of Washington, Seattle

OTA Publishing Staff

John C. Holmes, Publishing Officer

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

Glenda Lawing Linda A. Leahy Cheryl J. Manning

* O T A ( ontra[ t p(>rwnnel

Contents

C h a p t e r P a g e

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

Part B: Extended Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

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

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

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

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

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

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

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

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

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

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

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

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

Appendix C: Case Studies in the Development and Marketingof Electronics Products ..,...... . . . . . . . . . . . . . . . . . . . . . . . . 520

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

vii

CHAPTER 1

Part A: Summary

Contents

Principal Findings * * * * o * . .*o*oo. e**o*** .*o. * o * . .eo. .o * o * . . * * * * * * . . * * * * * *U.S. Competitiveness in Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Role of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Policy Concerns in Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Competitive Position of the U.S. Electronics Industry . . . . . . . . . . . . . . . . . . . .Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusion . . . . . . . . . . . . . . . ● . . . . . . . .0.00,.0 .00.0..0 ● .0 .0 . . . . . 0 0 . 0 0 . . . 0 . 0

55779

11111315

19

TablePage

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

List of FiguresPage

Sales Trends in the U.S. Electronics Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.S. Exports and Imports of Computers and Equipment . . . . . . . . . . . . . . . . . . . . . . .Semiconductor Production in the United States and Japan . . . . . . . . . . . . . . . . . . . . . .Increase in Capital Costs for High-Volume Integrated Circuit Production Line . . . .Price Index for Televisions Compared to All Consumer Durable . . . . . . . . . . . . . . . .Market Segmentation of U.S. Computer Sales by Value . . . . . . . . . . . . . . . . . . . . . . . .Japanese Production, Imports, and Exports of Computers and Equipment

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

356

111216

18

CHAPTER 1

Part A: Summary

Is the United States in danger of losing, tothe Japanese or others, in the race to developnew high-technology electronics products—fifth-generation computers, high-density inte-grated circuits, pocket televisions? Does the de-cline of the American consumer electronics in-dustry prefigure that of semiconductors orcomputers? Is U.S. standing in world marketsdeteriorating because of poor management,slipshod Government policymaking, overregu-lation of business? Will work in automobileproduction or heavy industry be permanentlyreplaced by high-technology jobs fewer in num-ber and paying wages at half the level of the$15 to $20 per hour earned by auto or steel-workers? To what extent can electronics standfor other technology-based U.S. industries?Which policies of the Federal Government aremost crucial to the international competitive-

Sales Trends in the U.S.

ness of industries like electronics? Does theUnited States need a more coherent industrialpolicy?

These questions and others like them are ad-dressed in this report, which covers three por-tions of the industry: consumer products (pri-marily color television); semiconductor devicessuch as integrated circuits; and computers. Thefocus of the report is the United States, but con-siderable attention goes to the electronics in-dustries of Western Europe and Japan, as wellas several of the newly industrializing coun-tries.

Electronics in total employs more than amillion and a half Americans; 1982 sales ex-ceeded $125 billion—roughly one-fifth of totalU.S. durable goods output—and have been

Electronics Market

I

Total

1 9 5 5 1960 1965 1970 1975 1980

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

3

4 International Competitiveness in Electronics

growing at nearly 15 percent per year; the sec-tor is an export leader, with a surplus of about$3 billion on a total trade volume of nearly $50billion. The industry’s products feed manyother portions of the U.S. economy. Not onlydoes the Nation’s defense depend heavily onelectronic technologies, but both manufac-turing and service industries—ranging from theproduction of numerically controlled machinetools to banking and insurance—use electronicproducts both directly and indirectly.

The competitiveness of firms and industriesrefers to the ability of firms in one country todesign, develop, manufacture, and market theirproducts in competition with firms and indus-tries in other countries. At several pointsbelow, shares of the U.S. market or of worldmarkets are used as examples of trends in in-ternational competitiveness; in fact, however,competitiveness is a more subtle concept.While market share is one possible indicator,it is only indirectly related to competitiveness,

How an industry will fare in internationalcompetition depends on factors ranging fromtechnology itself, to industrial policies pursuedby national governments, to the human re-sources—technicians to upper-level manag-ers—available in a given country. In somecases, competitiveness is primarily a functionof prices, hence manufacturing costs—them-selves determined by wage rates, labor produc-tivities, the design of both products and man-ufacturing processes. This is the case in con-sumer electronics. In higher technology por-tions of the industry, one firm may be able tooffer products that are beyond the technicalcapabilities of its rivals—e.g., high-density in-tegrated circuits, advanced computer software.Where this is true, costs are less important.

From the Federal perspective, shifts in theinternational competitiveness of American in-dustries have ramifications far beyond mattersof trade balances and foreign economic policy,even military security. The competitive stand-ing of a nation’s industries will determine quite

directly its gross domestic product, and there-fore the standard of living of its citizens.

The linkage between competitiveness andemployment—in the aggregate, in particularsectors, or in particular occupational catego-ries—is much looser. Industries can rise incompetitiveness while declining in employ-ment—the case in the U.S. textile industry inrecent years. In other cases, competitivenessmay remain high, output may expand, but do-mestic employment may grow relatively slowlycompared to output; this has been the case inboth the U.S. semiconductor and computer in-dustries. Similarly, domestic employment isonly loosely related to trends in foreign invest-ment or to government policies directed at con-trolling flows of imported goods; trade protec-tion has helped the employment picture in theU.S. consumer electronics industry no morethan it has in the steel industry or the automo-bile industry.

While the competitiveness of a given sectorof the U.S. economy depends on both domesticand international economic forces, the domes-tic context—e.g., people and institutions here,not overseas—generally carries the most weightin determining which industries will grow incompetitiveness, which decline. As a result,public policies with domestic objectives exertthe most influence over trends in internationalcompetitiveness. These are matters of indus-trial policy. OTA uses this term in a neutralsense to refer to the body of regulations, laws,and other policy instruments that affect the ac-tivities of industry and the resources, includinghuman capital, that the Nation’s economy de-pends on. The United States has not in the pasthad a self-conscious industrial policy, in partbecause it had no need for one. The lesson ofthe U.S. electronics industry, along with indus-tries like steel and automobiles that OTA hasexamined previously, is that future internation-al competitiveness may well depend on a morecoherent and consistent approach by the Fed-eral Government to matters of industrial policy,

Ch. 1—Part A: Summary ● 5.—

Principal Findings

U.S. Competitiveness in Electronics

1. Electronics remains a leader among Amer-ican industries. High-technology firms—includ-ing those making microelectronic devices likeintegrated circuits and complex electronic sys-tems such as computers—continue to be lead-ing exporters, second to none in technology aswell as most measures of commercial success.Although the Nation’s imports of semiconduc-tor products exceeded its exports for the firsttime in 1982 (by $160 million out of $3.8 billionin imports) more than three-quarters of theseimports were shipments by American-ownedfirms; computer exports ($9 billion in 1982) farexceed imports.

This is not to say that there is little cause forconcern, or that the waves of publicity giventhe progress made by Japan’s electronics man-ufacturers over the past few years have in allcases been overdramatized. If the U.S. elec-tronics industry is still strong when comparedto other domestic industries, its margins withrespect to electronics industries in other na-tions have shrunk, in some cases vanished.Moreover, the Japanese electronics industry isone of the most productive in that nation’seconomy; this high standing relative to otherdomestic sectors is a major reason for the ex-port strength of Japan’s electronics manufac-turers. In almost all categories of electronicsproducts—office copiers and typewriters, mi-

Year

2

SOURCES 1960-86-Gaps IrI Tectrnology Elecfronfc Computers (Paris Organization for Economic Cooperation and Development,1969), p 50.1967-81 — 1972, 1977, 1980, 1982 editions, U.S. Industrial Outlook, Department of Commerce1982-U.S. Department of Commerce, Bureau of Industrial Economics

6 ● International Competitiveness in Electronics

croelectronics, communications equipmentand consumer goods—the U.S.-Japan trade bal-ance is strongly negative (see ch. 4).

2. Just as the competitive positions of a na-tion’s industries will differ, with some risingand others declining, so competitive positionswithin an industry like electronics will vary.Likewise, within one portion of the industry,such as color television manufacturing, somefirms will at any given time be more competi-tive than others.

Within the U.S. electronics industry, compet-itiveness in consumer products has declinedprecipitously since the 1960’s. The Nation nowimports many of its consumer electronic prod-ucts, while more than 10 foreign-owned firmsassemble and market television sets within theUnited States. In contrast, there are few signsof slackening competitiveness in the manufac-ture of computers, although the U.S. lead in

technology is certainly less than even half adozen years ago. American-owned firms mak-ing and selling semiconductor devices havefaced increasingly intense competition fromJapanese manufacturers, again primarily overthe last half-dozen years; although they havelost market share both at home and abroad insome key products—e.g., computer memorychips—their overall position remains strong.

3. It is not realistic to expect that Americansemiconductor and computer firms will, in thenear future and in the absence of cataclysmicchanges in other parts of the world, return tothe preeminent positions they held at the begin-ning of the 1970’s. Nor can the United Statesexpect to achieve the technological and com-mercial leads of earlier years in other high-technology industries. The capabilities of othercountries have improved; foreign electronicsindustries have risen within their own econo-

5000 -

4,000 -A

3,000 –

2,000 –

A1000 -

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

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

f9T740-Surnrnary of Trade and Tar/ff h?formatlor?: Serrr/cork7uctors (Washington, D. C,: US International Trade Commission Publication841, Control No. 8-5-22, July 1982), p. 28.IMI, 1982—19S3 U.S. /rrdustr/a/ Out/ook (Washington, DC.: Department of Commerce, January 1983), p. 29-7.

Japan—1967.80-Japan Fact Book ’80 (Tokyo: Dempa Publlcatlons, Inc.l 1980), p. 188; Japarr Electronics A/rnarrac 19S2 (Tokyo: Dempa Publications, Inc.,1982), pp. 149, 178.ffMJf, 7MZ-/r?$tat Electronics Reports Feb. 21, 1983, p. 5.

Ch. 1—Part A: Summary ● 7

mies; international economic conditions havechanged.

4. The United States can continue to behighly competitive in electronics and othertechnologically driven industries, with U.S.firms remaining leaders in innovation, in in-ternational trade, and in sales and profits athome and abroad. Not only is this possible, itis necessary if the United States is to maintainits standard of living, its military security, andif the U.S. economy is to provide well-payingand satisfying jobs for the Nation’s labor force.Electronics is indispensable to a broad rangeof manufacturing and service functions, fromcomputer-aided design of the structures of of-fice buildings to the switching of the telephoneswithin those buildings,

5. Congress could take the initiative in devis-ing programs that would actively support theelectronics industry, and others of comparableimportance. The first requisite is broad nation-al agreement on the role of high-technologysectors like electronics as a driving force forfuture economic growth, a greater degree ofconsensus on where the U.S. economy is nowheading and where it should head. The secondis better understanding of how particularpieces of legislation affect the competitivenessof American industry, which in turn requiresdeveloping the capability of the Federal Gov-ernment for analyzing the sources of compet-itive strength.

The Role of Technology

1. One way to establish a competitive advan-tage in an industry like electronics is throughsuperior technology. Better process technology—e.g., automation—can help reduce costs. Forsimilar products, lower manufacturing costspermit lower selling prices, hence a more com-petitive product. Alternatively, higher profitsmay be possible, which can help finance fur-ther improvements. Production technologiesare particularly important in consumer elec-tronics and semiconductors, less so for largecomputers.

2. Superior product technologies may com-mand premium prices in the marketplace, mak-ing manufacturing costs less significant. Prod-uct features—ranging from appearance toquantifiable characteristics such as the per-formance of a computer system in running“benchmark” programs—can contribute tocompetitive advantage; in high-technologyfields as in low, product differentiation andastute marketing can be important.

Understanding customer wants and needs isvital to designing successful products; inte-grated circuits that are functionally similar,perhaps even interchangeable, may be differen-tiated through subtle variations in perform-ance; advertising strategies can be built aroundclaims of high quality or rapid delivery; a broadarray of alternate source suppliers may re-assure prospective purchasers. Manufacturersof computers and peripherals devote con-siderable effort to industrial design and humanfactors engineering; ease of use is vital in sell-ing computer systems to first-time customers,

Rapid technical change creates much morescope for product technology as a competitiveweapon in microelectronics and computersthan in consumer electronics. For many years,American semiconductor and computer man-ufacturers prospered by offering products thatfirms elsewhere in the world could not designor build.

Industrial Policy

1. OTA takes industrial policy to be a neutralterm referring to the group of Federal policiesthat affect competitiveness, productivity, andeconomic efficiency—sometimes directly,sometimes through influences on business de-cisions or on individuals. Industries rise andfall in international competition for many rea-sons. Seldom can single causes be found—moreseldom yet simple, straightforward policyremedies. Plainly, industrial policy offers noquick fixes for the dilemmas of the U.S. con-sumer electronics industry, nor any sure pre-scriptions that can guarantee the future com-

8 International Competitiveness in Electronics——

* .Photo cred/t: Mostek Corp.

Portion of a read-only integrated circuit memory

petitiveness of our microelectronics or comput-er sectors. Just as plainly, competitiveness inelectronics—and in other U.S. high-technologyindustries—will depend on factors including:

●

●

●

●

capable people, hence on Federal policiesdealing with education and training;capital for new business startups and forexpansion, hence on macroeconomic andtax policies;open markets for American products,hence on foreign economic policy; andthe research base that supports domesticfirms, hence on Federal technology andscience policy.

The job of industrial policy is to evaluate, link,and coordinate the many Federal efforts thatdeal with such concerns.

2. While international competitiveness isfirmly rooted in the efforts of private com-panies, public policies set many of the rules of

the game. In the United States and in otherparts of the world, business enterprises com-pete in an environment shaped to considerableextent by government industrial policies (in-cluding elements of fiscal, monetary, tax, man-power, trade, and regulatory policies).

Foreign governments are experimenting withindustrial policies intended to aid and supporttheir own electronics industries; virtually allindustrialized and industrializing nations sin-gle out electronics for special treatment. Amer-ican firms seeking to export or to manufactureoverseas must contend with economic andsocial policies of host governments that aremore complex and sophisticated than in thepast. Rather than outright protectionism orother forms of overt discrimination against for-eign firms, host governments now adopt indi-rect subsidies for their own industries—tax in-centives, capital allocations, funding for com-mercially oriented research and development(R&D). At the same time, governments bargainwith foreign multinationals using carrots andsticks such as investment incentives and per-formance requirements while seeking to ac-quire jobs and technology, or to improve theirbalance of payments.

3. Although a well-designed and supportiveindustrial policy is not, by itself, sufficient tobuild competitiveness in a given sector of a na-tion’s economy, government policies can, un-der some circumstances, tip the balance. TheUnited States can expect no more than verylimited success in negotiations with other na-tions aimed at minimizing the impacts of thosecountries industrial policies.

For this and other reasons, a “business-as-usual” approach is unlikely to prove sufficientto the task of maintaining U.S. competitivenessin electronics, Better prospects for strengthen-ing the U.S. position would come with theadoption of more effective industrial policiesof our own. The American electronics industryfaces only a few major problems, mostly in thetrade arena, that are directly susceptible toGovernment remedy. On the other hand, Fed-eral agencies could support the industry—directly and indirectly–in many ways. Few of

Ch. 1—Part A: Summary ● 9—. —

these would have much visibility. By the sametoken, they would not necessarily cost much.Consistent and careful attention to the manysmaller matters that affect competitiveness—diffusion of technology within the UnitedStates, tax treatment of equipment contribu-tions to universities, the antitrust environmentfor joint R&D, long-term basic research—arethe necessary ingredients in a more coherentand productive industrial policy. A supercom-puter project, to take a current example, maybe glamorous as well as desirable in itself, butis no substitute.

4. The choice of policy tools, and the designof individual measures, depend on overall ob-jectives; an industrial policy is the sum of manyparts that can be put together in different ways,Should Congress wish to pursue a more fo-cused industrial policy for the United States,it could choose from among five broad alter-natives:

A protective strategy aimed at preservingthe domestic market base for U.S. indus-tries, along with preservation of existingjobs and job opportunities.Protection and/or support for a limitednumber of industries judged critical for theU.S. economy or, more narrowly, for na-tional security,Support for the technological base and in-stitutional infrastructure that underlyAmerican industries, with particular atten-tion to structural adjustment (e.g., laborforce retraining and mobility).Promotion of the global competitiveness ofU.S. firms and industries by encouragingexports and open competition in domesticas well as international markets.Deferral where possible to the private sec-tor when choices concerning industrialdevelopment are to be made.

While these five approaches to industrial pol-icy, discussed in chapter 12, are certainly notmutually exclusive, they represent distinctlydifferent thrusts, implying different mixes ofpolicy instruments as well as different goals.

What would be the implications of a decisionto pursue a more coherent industrial policy inthe United States? First and foremost, that toautomatically equate “industrial policy” witha greater degree of Government involvementin the economy is to view the matter from anarbitrarily narrow perspective. Industrialpolicy does not have to run counter to effortsto “get Government off the backs of business. ”Rather, it should be construed as an effort tomake the inevitable—indeed oftentimes desir-able and necessary—Federal involvement amore consistently productive one. It implies aneffort to develop, both politically and institu-tionally, Government policies toward industrythat:

explicitly consider impacts on com-petitiveness and economic efficiency;seek to treat the problems and opportuni-ties of particular industries in the contextof the economy as a whole, rather than inisolation; and,do a better job of relating policy tools topolicy objectives. - - -

Policy Concerns in Electronics

Among the elements of industrial policy, thefollowing are vital for the continuing com-petitiveness of the U.S. electronics industry.They might have rather different places, andbe addressed in different ways, under each ofthe alternatives listed above,

1. High-quality education and training (in-cluding retraining) for engineers, technicians,and other skilled workers,

More than anything else, the competitive po-sition of the United States in high technologyhas been built on the human resources avail-able here. A renewed Federal commitment toeducation and training seems called for (seechs. 8 and 9). Engineering enrollments runningat record levels have swamped the resourcesavailable in colleges and universities; even so,the United States graduated but 63,000 engi-neers in 1981 compared to 75,000 in Japan,

99-111 0 - 83 - 2

10 . International Competitiveness in Electronics

U.S. electronics firms have faced seriousproblems in finding adequate numbers of en-gineers, as well as technicians and service per-sonnel with needed skills and aptitudes. Inade-quate resources in U.S. engineering schools areharming the quality of education as well as con-straining the numbers of new graduates. Train-ing and retraining for technicians and parapro-fessionals varies widely in quality and appro-priateness to emerging needs. Many people inthe United States emerge from high schoolquite unprepared to work in technology-basedindustries.

Despite fluctuations in supply and demandover the years, engineers in principle compriseone of the most employable occupationalgroups in the labor force; it is hard to imaginean “oversupply” of engineers or of people withgood technical training of any of a wide vari-ety of types in an economy like that of theUnited States, provided that people are will-ing and able to shift jobs according to demandwithin the economy and organizations are will-ing to help them do so.

2. A strong technological base—stemmingfrom basic research and applied R&D withlong-term objectives, including the diffusion ofresults, in fields such as solid-state electronics,optical devices, communications technologies,computer-aided design of circuits and systems,and computer software.

The Federal Government could not only con-tinue to fund basic research, it could establishnew mechanisms for diffusing the results ofR&D to the private sector, experiment with thesupport of commercially oriented (rather thanmilitary) research, and strengthen tax incen-tives and other encouragements for successfulinnovators.

3. Economic adjustment policies that smoothflows of capital and labor within the economy,aiding growing firms in their efforts to com-pete while providing well-paying jobs for thedomestic labor force.

Structural change is a fact of life in Americanindustries, driven by the currents of an increas-ingly open international economy (see chs. 4and 5), as well as by technological change (ch.

3). Corporations, cities and regions, and peo-ple must adjust to changes, many of which areoutside their control. Federal attention to max-imizing the positive effective of change—e.g.,stimulating growth industries—while amelio-rating the negative impacts, could be one of thecentral elements in a more coherent industrialpolicy for the United States. Policy initiativesaimed at personnel mobility—whether geo-graphic, inter-industry, or within organiza-tions—are one example.

4. Adequate supplies of investment capitalfor new startups as well as rapidly expandingestablished firms.

As discussed in chapter 7, venture capitalmarkets in the United States function well,although cyclic downturns are likely to recurand risk capital is often hard to find at earlystages of technology development.

Rapidly growing companies, particularly inthe semiconductor industry, do face severefinancial pressures. These stem from increas-ing capital intensity, due both to higher R&Dexpenses and to production equipment that hasgone up in cost by an order of magnitude overthe past decade, coupled with the preferenceof American managers to finance expansionfrom internally generated funds. Tax policieshave a major influence over sources of financ-ing and risk absorption.

While the advantages are not as great assometimes implied, large diversified electron-ics companies in Japan, and perhaps in someWestern European countries, do benefit fromreal (i.e., inflation-adjusted) costs of capital thatare somewhat lower than for merchant semi-conductor firms in the United States. By them-selves, these differences—matters of a few per-centage points—are not enough to weigh heavi-ly in the competitive balance. Constraints onrates of capital spending—due in part to thepreference of American firms for internal fi-nancing—are more likely to be a drag on thecompetitive abilities of U.S. manufacturers.These and other factors, primarily expectationsconcerning inflation, tilt the investment deci-sions of American managers toward the short-er term.

Ch. 1—Part A: Summary ● 1 1—— —

Increase in Capital Costs for High-Volume IntegratedCircuit Production Line

1970 1975 1980 1985 1990

Year

SOURCE R W Broderson, “Signal Processing Using MOS-VLSI Technology, ”VLS/ Elecfronlcs. Mlcrosfructure Science, VOI 2, N. G. Einspruch (cd.)(New York Academic Press, 1981), p 206

5. An international trading environment thatplaces U.S. firms on a more-or-less equalfooting with their competitors in other coun-tries, including those that have well-developedindustrial policies intended to protect or pro-mote domestic manufacturers.

As discussed in chapter 11, the frameworkfor international trade that emerged in thepostwar era is being overrun by events. Thethrust of industrial policies in many nations istoward indirect supports with effects on pricesand on competitiveness that cannot be quan-titatively assessed (see ch. 10). Japanese in-dustrial policy, for instance, works in part bybreaking bottlenecks; the VLSI project of the1970’s helped train Japanese

The Competitive

engineers, trans-

ferred design and processing know-how to in-dustry, rallied public support behind the struc-tural shifts that were leading Japan toward an“information economy” (or at least helped dif-fuse counterpressures by those disadvantagedby such shifts). The goals of the heavily publi-cized fifth-generation computer project aresimilar, When many of the impacts of indus-trial policies are intangible, how do we coun-tervail them? Over at least the rest of the dec-ade, U.S. trade negotiators can expect to grap-ple with such issues, The prerequisite is an ana-lytical capability by the Federal Governmentadequate for understanding the ways in whichpublic policies—here and elsewhere—affect in-ternational competitiveness.

American electronics firms, particularlymanufacturers of semiconductors and com-puters, may also need the continuing supportof the U.S. Government, via both bilateral andmultilateral negotiations, in securing access onreasonable terms to foreign markets—for ex-ports and for direct investment—if they are tomaintain their competitive position. Only bycompeting aggressively all over the world, tak-ing advantage of scale economies and newopportunities, can American firms expect toshare fully in the growth and expansion thatwill characterize this industry into the nextcentury. As an example, semiconductor salesin Japan already exceed those in all of WesternEurope by more than half; U.S. firms need ac-cess to Japan market comparable to that en-joyed by Japanese suppliers here.

Regardless of the overall approach and direc-tion of U.S. industrial policy, Congress couldact in support of objectives such as those out-lined above.

Position of the U.S. Electronics Industry

Consumer Electronics left the market. Few radios or black-and-whiteTVs are made in the United States. No video

1. American firms making radios, TVs, and cassette recorders are manufactured here. Col-audio products such as stereo receivers and or television production has become largely antape recorders have been under severe compet- assembly operation, heavily dependent on im-itive pressures for years; many have failed or ported components—whether the parent firm

12 ● International Competitiveness in Electronics

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

U.S. sales Imports Import penetration(millions of dollars) (millions of dollars) (percent) a

Color television . . . . . . . . . . . $4,253 $546 12.8%Black-and-white TV . . . . . . . . 507 344 67.9Video cassette recorders. . . 1,303 1,032 100.0a

Home and auto radiosb . . . . 1,579 1,207 76.4Stereo systemsc . . . . . . . . . . 1.754 1,342 76.5

$9,396 $4,471 47.60/oaBeCau~e ~anY lt~~~ Irnpofled In a given year are not soid until the followlng Year, dividin9 lmPo@J during a 9iven calendar

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

bsold in the United States are Imported even though 1962 sales figures exceed 1962 import figures.Includlng auto tape players,

Concluding audio tape units and other component equipment.

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

is American-owned (RCA, Zenith, GE) or for-eign-owned (Sony, Quasar, Magnavox). In tele-vision manufacture especially, the policies ofthe Federal Government have contributed tothe plight of the industry. Dumping complaintsagainst importers going back to 1968 havenever been fully resolved. An industry legallyentitled to trade protection has not received it,

2. Nonetheless, trade practices illegal underU.S. law have been only one factor in the de-clining competitiveness of the American con-sumer electronics industry. More fundamen-tally, competitive advantages have shifted toother parts of the world—first Japan, now new-ly industrializing countries like Taiwan andSouth Korea. These countries have masteredthe technological requirements for mass-pro-ducing consumer products such as TV sets,They have lower labor costs than the UnitedStates, an adequate corps of skilled workersand engineers, supportive government indus-trial policies, and astute corporate manage-ments.

American firms have been reduced to a reac-tive posture; they have lost the lead in productdesign and development while moving manu-facturing operations to foreign countries inorder to keep their costs competitive, Americanproducts in consumer electronics—e.g., colortelevision receivers—continue to be competi-tive in performance, quality, and reliability, butthey are no better than imports. The consumerelectronics market is highly price-competitive;without advantages in technology or productfeatures, American manufacturers will be hard-

Price Index for Televisions Comparedto All Consumer Durables

SOURCES: Consumor Dumblos-Economic Repoti of the Preslderrt 19B2(Waahlngton, DC.: U.S. Government Printing Office, February 1962),p. 294,

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

pressed to keep up with their foreign-basedcompetitors. While U.S. firms may continue toinnovate and to be leaders in consumer prod-ucts aimed at specialized market niches—com-puter games have been a recent example—broadly speaking, product leadership has beenlost, At least in the short term, prospects fortaking the lead in new generations of high val-ued-added mass market products seem slim.

3. The rise of foreign firms together with pro-tracted trade disputes have contributed to a ma-jor shift in the structure of the U.S. consumerelectronics industry. The number of firms hasnot changed greatly since the 1960’s; but whileonce there were 16 or 17 American-owned

Ch. 1—Part A: Summary ● 1 3

manufacturers of TVs, today only 4 of 15 withplants in the United States have headquartershere. Still, the market shares of the traditionalU.S. leaders—zenith and RCA—have notchanged much; together these two companiescontinue to hold about 40 percent of the U.S.color TV market. It is the weaker Americanmanufacturers that have succumbed.

4. At the same time foreign enterprises wereinvesting in assembly plants in the UnitedStates, American-owned firms were transfer-ring labor-intensive manufacturing operationsto low-wage offshore locations. In general, finalassembly for the U.S. market remains here,with subassembly} in Mexico and the Far East.These moves were driven by foreign competi-tion. U.S. color TV manufacturers felt they hadlittle option but to move production abroad ifthey were to cut costs and meet their competi-tor’s prices.

Offshore production substitutes quite directlyfor jobs in the United States. Nonetheless, ifAmerican firms had not moved offshore, it isquite possible that they would have lost evenmore ground to foreign-based competition,with yet more jobs lost over the longer term.In most cases, transfers of production overseashave net impacts on U.S. employment and onthe U.S. economy that appear relatively small;improvements in labor productivity, for ex-ample-also driven by foreign competition—have been at least as important as a cause ofemployment declines in television manufactur-ing. Needless to say, the impacts on individualsand communities where job losses concentrateare often severe and long-lasting; in 10 yearsthe production work force in consumer elec-tronics has been cut by more than 40 percent,from 85,000 to 50,000.

5. Beginning near the end of the 1970’s, Or-derly Marketing Agreements (OMAs) limitedimports of color TVs while encouraging for-eign firms to produce here, The result was toequalize the terms of competition and to mod-erate employment declines in the UnitedStates. Otherwise, the OMAs did little to helpthe U.S. industry rebuild its competitivestrength.

In this regard, U.S. experience with OMAsrestricting color TV imports has paralleledother cases of import quotas, for instance inthe steel industry. Although the ostensible pur-pose may be to give domestic firms time to re-structure and adjust to changing competitivecircumstances, in most cases protected indus-tries continue to react to pressures from abroadrather than taking strong positive steps of theirown; the notion that a respite from import com-petition will, by itself, help corporations restoretheir competitiveness gets little support fromevents in color television.

Semiconductors

1, U.S. manufacturers of semiconductorproducts such as integrated circuits remainhighly competitive in markets all over theworld. American-owned merchant firms--those that produce for the open market-areleaders in circuit design and process technol-ogy. While their share of world sales haschanged little over the past few years, with U.S.firms and their subsidiaries still accounting forabout 70 percent of worldwide output of inte-grated circuits, Japanese manufacturers havebeen catching up in technology, Nonetheless,U.S. companies have the capability to maintaintheir competitiveness in most world markets.The inroads made by Japanese suppliers ofcommodity-like chips, notably random accessmemories (RAMs), portend stronger competi-tion in other types of microelectronic devicesbut do not translate automatically into advan-tages for products such as logic chips or mi-croprocessor families. There is no reason to ex-pect a loss of competitiveness in advanced mi-croelectronic products paralleling that in con-sumer electronics.

Although foreign manufacturers may some-times have advantages—e.g., supportive gov-ernment industrial policies, as in Japan orWestern Europe—the U.S. merchant firmshave their own strengths, Among these are theability to rapidly develop and commercializenew technologies, to anticipate and design forshifting customer needs, and to adapt to chang-ing realities of international competition by

14 International Competitiveness in Electronics

entering into joint venture and technologytransfer agreements with both domestic andforeign firms when this is advantageous.

2. The structure of the merchant portion ofthe U.S. semiconductor industry is changing.A number of well-established semiconductorfirms founded during the 1960’s or early 1970’shave been acquired by larger, diversified enter-prises, either American- or foreign-owned. Inpart, these structural shifts are associated witha trend toward captive production by end-prod-uct manufacturers.

Companies that design and build systemsranging from computers and communicationsnetworks to automobiles increasingly see needsfor internal capability in the design, develop-ment, and manufacture of state-of-the-art mi-croelectronic devices. The acquisition of mer-chant semiconductor firms by larger corpora-

Photo cradit: General Motors

Microcomputer for controlling an automobile engine

tions is a predictable trend in the evolution ofthe industry.

3. At the same time that relatively maturecompanies like Intersil—purchased during1981 by General Electric—are being acquired,new entrants continue to repopulate the mer-chant semiconductor industry. While thedownturn in venture capital markets during themiddle and late 1970’s virtually halted start-ups, new firms are again being established.Since 1980, several dozen small firms produc-ing custom integrated circuits, gate arrays,specialized memory chips, and other nicheproducts have entered the industry. Aiming atportions of the market where the knowledgeand expertise of their founders can be broughtto bear, some of these start-ups will be suc-cessful and expand, some will remain small,others will be acquired by larger enterprises.

4. Captive manufacturers of semiconductordevices make vital contributions to U.S. com-petitiveness. Such companies include IBM, thelargest producer of semiconductors in theworld, and Western Electric, which moved intothe merchant market in 1983—an action madepossible by the settlement of the Government’santitrust suit against AT&T—as well as a num-ber of aerospace and defense contractors. Com-panies that produce for internal use not onlyprovide a major part of the technological foun-dations for microelectronics, they spawn start-ups and give training and experience to peo-ple who later move to other companies.

5. Just as important for continuing interna-tional competitiveness are firms that design,develop, and build production equipment forapplications ranging from annealing siliconwafers to automated testing and assembly.

While the United States maintains the leadamong open-market suppliers of many typesof processing equipment, notably in lithog-raphy, other countries are catching up. Gov-ernment-sponsored R&D in Japan has focusedon production equipment.

6. R&D—particularly that with relativelylong-term payoffs—will remain a critical forcein support of U.S. semiconductor firms. In the

Ch. 1—Pari A: Summary ● 1 5.- ——-—

past, much of the technology base has comefrom larger firms such as IBM and AT&T. Gov-ernment support for research has not been sig-nificant in recent years, although the VeryHigh-Speed Integrated Circuit program of theDefense Department will have commercialspinoffs.

The U.S. semiconductor industry can nolonger rely on past approaches to R&D andtechnology development. The industry recog-nizes the changing situation, and is develop-ing new mechanisms for strengthening itstechnical foundations; these include closer in-teractions with universities, along with jointventures and cooperative research efforts. Con-gress and the Federal Government could ac-tively support and encourage both basic andapplied research with longer run payoffs. Thisis one of the surest ways of supporting contin-ued U.S. competitiveness in microelectronics.

Computers

1. American manufacturers of digital com-puters have dominated world markets formany years. Much as U.S. semiconductor firmshave demonstrated the ability to rapidly capi-talize on new technological and market oppor-tunities, so have American computer firmspioneered most of the design concepts thathave driven information processing: network-ing and distributed computing, small businessmachines and minicomputers, time-sharingamong multiple work stations, cheap massstorage, desktop microcomputers.

There are few concrete signs that thisdominance by U.S.-based firms is threatened.Nevertheless, relative positions within theworld computer industry will continue to shift,stimulated in many cases by new applicationsof computing power, As the industry continuesto evolve, the technological leads of Americanfirms are likely to shrink, and competitive posi-tions may become more difficult to maintain.Nevertheless, the U.S. lead in worldwide mar-keting of data processing systems is so largethat prospective challengers such as Japan can-not hope for more than modest success overthe rest of the century.

2. American firms have done a much betterjob than their foreign competitors of balanc-ing what the available technology can doagainst what customers for data processing sys-tems have wanted to accomplish. This has beenan important element in patterns of competi-tive success, which have depended as heavilyon software that could be easily used by neo-phyte purchasers and was reliable—i.e., free of“bugs’’ -as on raw hardware performance.

In fact, foreign computer firms have some-times been able to match the United States interms of hardware; by and large, Japan’s com-puter manufacturers can at present. But theirsystems are still behind, mostly because thesoftware—at all levels—is not as good, More-over, foreign firms—whether European or Jap-anese—have not been as adept as Americansat finding new ways to apply their hardware.For example, U.S. firms remain well ahead inoffice automation, point-of-sale terminals forretail merchandisers, and many other applica-tions of distributed intelligence.

3. The ongoing structural alterations in thedata processing industry will be deeper andfarther-reaching than those in microelectronicsor consumer electronics.

Most of the recent technological innovationsin consumer electronics have come from large,well-established firms; new products fromsmall companies have seldom reached massmarkets. In microelectronics, while start-upshave resumed in the United States—many striv-ing to establish themselves with the aid of in-novative products—the path of technologicalevolution seems, for the moment, well charted;there are few signs of sudden change thatwould seriously unsettle the industry. Com-puter technology—which depends on micro-electronics, but also on other feeders, primarilysoftware—is potentially more volatile. As newapplications of computing power open win-dows of opportunity for firms in many partsof the world, American manufacturers willface more intense competitive pressures. Dis-tributed intelligence will transform a broadrange of other industries as well.

16 ● International Competitiveness in Electronics—.—

While the era of the mainframe computer is ness systems, personal computers, and “smart”hardly over, the increasing importance of devices that do not even look like computers—smaller machines—minicomputers, small busi- will continue to provide the greatest oppor-

Market Segmentation of U.S. Computer Sales by Value

1980

1985(projected)

SOURCE: “Moving Away From Main Frames: The Large Computer Makers’ Strategy for Survival,” Business Week, Feb. 15, 1981, p. 78

Ch. 1—Part A: Summary ● 1 7

tunities for growth and expansion. The multi-tude of prospective applications of computingpower will offer new openings for overseasfirms as well as American companies. In someportions of the data processing equipmentindustry—especially those still in relative in-fancy, such as desktop machines and standard-ized office automation products—foreign firmsmay eventually achieve a greater presence thanthey have managed in mainframe systems orgeneral-purpose minicomputers. To the extentthat computers become mass-market products,manufacturers in other parts of the world arelikely to emerge as more formidable competi-tors.

4. In the computer industry, as in microelec-tronics, U.S. employment is rising much lessrapidly than output. Although new jobs are be-ing created making, operating, and maintain-ing “smart machines, ” other jobs are beingdestroyed; the net effects on U.S. employmentmight be positive or might be negative, Whilethere is little meaningful evidence on eitherside of the job creation/job destruction ques-tion, there is no question that skill requirementsare changing rapidly. In some cases, automa-tion—aided by electronics—lowers the skill re-quirements associated with the remaining jobs;in other cases, “upskilling” rather than “de-skilling ” results. A readily predictable conse-

Photo credit Ur7/rnaf/on

Industrial robot at w o r k

quence has been serious labor market disloca-tions; these seem bound to intensify. Even iflabor market shifts cannot be predicted verywell, the need for adjustment is clear. To theextent that labor market shifts—geographical,in terms of skills, in terms of wage levels—areunexpected (and some will always be), the im-pacts will be more severe. An obvious implica-tion is that policy responses must emphasizeflexibility.

5. Japan’s computer manufacturers will notbe content with narrow or specialized markets.Following strategies similar to those that havesucceeded in consumer electronics and semi-conductors, Japanese computer firms will at-tempt to establish themselves in selected dataprocessing markets and expand from there.Backed by government efforts such as the fifth-

generation computer project, Japan’s industryis bent on achieving technological and com-mercial parity (or superiority) in machinesranging from desktop processors to supercom-puters. Still, Japan’s rising export strength incomputers differs in a major way from the pat-terns visible in consumer electronics or semi-conductors: the leading Japanese exporter ofcomputers, by a large margin, is IBM-Japan—despite the fact that it has been barred frommany of the government programs that haveaided other computer manufacturers.

While IBM has abundant resources and tech-nology to compete effectively against Japanesecomputer firms, other American manufactur-ers may face increasing difficulty in the future.Although the U.S. industry is not immediate-

Japanese Production, imports, and Exports of Computers and Equipment, includingProduction and Exports of U.S.-Owned Subsidiaries

1

1

1

1

T3

,800

,600

,400

,200

,000

800

600

400

200

0

I -1 8

7

6

5

4

3

2

1

01960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCES: ffM7-78-Ja@n Fact Book ’60 (Tokyo: Dempa Publications, Inc., IWO), pp. 173, 174.f87840-@mn Hectrorrlcs A/marrac IWJZ (Tokyo: Dampa Publications, Inc., 1962), pp. 58, 59,f88f, IfJ&-Department of Commerce, Bureau of Industrial Economics.

——..———

—

ly imperiled, the Federal Government couldhelp ensure future competitiveness through abetter developed, more consistent industrialpolicy, particularly one supporting technologydevelopment and technical education,

6. As computers and their applications con-tinue to spread through the U.S. economy, theFederal Government might act to strengthenthe competitiveness of the industry both direct-ly and indirectly:

“Computer literacy"—the ability to effec-tively utilize smart machines and sys-tems—will be a critical skill for the laborforce. Education and training in fieldsranging from traditional modes of quanti-tative thinking (arithmetic, algebra) to soft-ware engineering deserve renewed sup-port. Congress could provide leadership aswell as direct and tangible aid.Federal support aimed at critical bottle-necks in data processing, mostly in soft-ware, could be a vital long-term stimulusfor the American industry. Productivity in

A natdustries at once. Not only will

Ch. 1—Part A: Summary ● 1 9

software development has gone up onlyslowly over the years. Financing for educa-tion and training in software engineering,as well as R&D directed at computer archi-tectures, new programing languages, andartificial intelligence appears appropriate.

• Smaller firms striving to establish them-selves in the data processing equipment in-dustry–particularly those developing soft-ware, peripherals, and innovative applica-tions of computing power—have the sameneeds as do U.S. microelectronics firms:not only people with highly developedtechnical skills, but adequate supplies ofcapital for investment in R&D and produc-tion capacity and access to foreign mar-kets.

If effectively implemented, industrial policiesin support of such needs could pay vast divi-dends throughout the U.S. economy becauseof the multitude of ways in which applicationsof computing power can enhance the compet-itiveness of firms in industries of all types,

Conclusion

on can never be competit ive in all in-some rank

higher than others, but places will change overtime. Economies need to adjust; adjustmentbrings pain and distress to firms that encountertrouble, people who lose their jobs, the commu-nities affected. Even within an industry likeelectronics—in the United States, highly com-petitive as a whole—some parts, such as con-sumer electronics, face a far more problematicfuture than others. That such events are inevi-table does not mean that at least some of theproblems cannot be anticipated, and some ofthe distress ameliorated by Government action,Moreover, the Federal Government can takepositive actions to support the developmentand diffusion of technology, human resources,the infrastructure that companies depend onwhen pursuing their individual competitivestrategies. Government policies can aid grow-ing sectors, help people and institutions adapt

to change. The dynamic of international com-petitiveness is continuous, and calls for a con-tinuing series of policy responses.

People can and will argue endlessly about thesuccesses and failures of industrial policies inother countries, but the primary lesson to bedrawn from foreign experience is simply this:industrial policymaking is a continuing activityof governments everywhere. In the UnitedStates, industrial policy has been left mostlyto the random play of events. Improvement isclearly possible; policymaking can be a pur-poseful activity characterized by learning frompast experience within a framework of empir-ically based analysis. Developing a more effec-tive industrial policy for the United States mustbegin in this spirit, while recognizing that theprocess is inherently political. There is no onething that the Federal Government can do thatwill make a big difference for the future com-

20 . International Competitiveness in Electronics

petitiveness of the U.S. electronics industry, Until the Nation begins this task, Americanbut there are many specific policy concerns firms will continue to find themselves at a dis-that deserve attention. Only by linking and advantage when facing rivals based in coun-coordinating these more effectively can the tries that have turned to industrial policies asUnited States expect to develop a coherent and a means of enhancing their own competitive-forward-looking approach to industrial policy. ness.

CHAPTER 1

Part B: Extended Summary

Contents

PageTechnology *.. *.. .a. *.** 0.*. .**. ... *.*. .*** ... ... ..*m*. be**. .**.*******Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Finance ..0.000 ● 0 0 0 . . 0 . ● 0 0 0 . 0 0 0 ● . * * * * * * ● . . . . 0 . . ● O * * * * . * ..0.00.. ● 0 0 0 . 0 . 0Venture Capital. . . . . . . . . . . . . . . . . . . . . . 0 . . . ...0..... . . . . . . . . . . . . . . . . . . . . . . . .Financing Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .International Differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Human Resources .0...0. ● * * * * . . . ...0.00. ● 0 0 0 . 0 . . . * * . . . . . .000.0.0 ● 0 0 . 0 s .Quantity and Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Continuing Education and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preparation for Work in Technology-Based Industries . . . . . . . . . . . . . . . . . . . . . . . . .Management and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Trade . . . . . . . ......00 .**..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Antidumping Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Environment for World Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

23232428

31313232

3434353737

39

424242

46

List of TablesPage

Color TV Imports into the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . .World Integrated Circuit Output by Headquarters Location of ProducingPredicted Growth Rates by Occupational Category in the

United States OverSemiconductor Sales

List of Figures

Japan’s Production and

. . . . . . . . . . . . . .States, Western

of Video. . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . .Europe, and Japan . .

(VCRs) . . . i. . . . . . . . . .

. . . . . . . . .Firms . . .

. . . . . . . . .

. . . . . . . . .

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

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

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

U.S. Employment in Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.S. Employment in Computer (and Peripheral Equipment) Manufacturing . . . . . . .U.S.-Japan Trade in Integrated Circuits . . . +, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Distribution of U.S. Semiconductor Sales by End Market.. . . . . . . . . . . . . . . . . . . . . .

2427

4144

2526293339404446

CHAPTER 1

Part B: Extended Summary

Part B of chapter 1 expands upon, withoutrepeating, the findings in the Summary. In par-ticular, the sections below highlight the role oftechnology as a force on competitiveness inconsumer electronics, semiconductors, andcomputers, along with factors such as capitalfor investment in research and expanded pro-duction capacity, human resources and theirdevelopment, and industrial and trade policiesboth here and abroad.

The several meanings that can be assignedto the rather amorphous concept “international

competitiveness’ are discussed in detail inchapter 5. The viewpoint adopted below is firstthat of the manufacturer, Private companiesdesign, develop, produce, and market goodswhich may have more or less success in themarketplace, more or less positive impact ona nation’s competitive position. Later the viewswitches to that of governments and their pol-icies, which act on competitiveness directlyand indirectly—by influencing business activ-ities, supporting education, subsidizing ex-ports, through the climate for capital formationand economic growth.

Technology

Chapter 3 covers electronics technology insome detail (also see the Glossary, app. A, forexplanations of technical terms). Here the in-teractions between technical capabilities andmarket success are explored,

Consumer Electronics

In consumer electronic products such as col-or TVs, both product and process technologiesare well-understood and widely diffused. Prod-uct differentiation strategies are more impor-tant than technical differences; componenttelevision, stereo sound, and digital chassisdesigns illustrate the frontiers of this now large-ly routine field. Japan’s consumer electronicsmanufacturers have benefited from the econo-mies of higher production volumes and per-haps from more extensive automation, but bothproduct and process technologies in consumerelectronics tend to be standardized, technicalchange to be incremental. Companies any-where in the industrialized world have accessto much the same pool of knowledge—the ex-ceptions being newer product families likevideo cassette recorders (VCRs). Color TVswith similar product features are made notonly in Western Europe, the United States, and

Japan, but in developing countries like Taiwanand South Korea, Manufacturing technologiesare similar wherever TVs are built, with labor-intensive operations carried out in low-wagedeveloping countries by European and Jap-anese firms, as well as American. The resultis a competitive environment in which Ameri-can firms have few unique advantages,

Differences in both product and process tech-nologies for televisions were greater during thelate 1960’s and early 1970’s when Japanesefirms were beginning to invade the U.S. mar-ket, Then, firms in Japan moved more quicklythan their American counterparts toward solid-state chassis designs. By using transistors andintegrated circuits (ICs), they were able to im-prove the reliability of their products, and moreeasily automate portions of the productionprocess. Automation helped compensate forcomponent costs that at the time were higherfor transistorized designs than for those rely-ing on vacuum tubes. Reliability was particu-larly important to Japanese firms because theydid not have service organizations or dealernetworks within the United States. To increasetheir market shares, they needed to sell throughretail outlets such as discount chains. To

23

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

Color TV Imports Into the United States

Number of color TVs importedby origin (thousands)

Imports from all sourcesas a percentage of

Year Japan Taiwan Korea Totala U.S. consumption

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

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

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

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

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

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

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

1981 . . . . . . . . . . . . 727 514 393 1,946 15.6alnClu&~ ,~POfl~ from Countries not listed indivldualb

SOURCES 1987, 198f)-Te/ewis/on Receivers and Cer?ain Parts Thereof (Washington, D C U S Tariff Commission Publication 438, November 1971), p. A%2.

1971, 1973—Te/evision Receivers, Co/or and Monochrome, Assembled or Not Assembled, Fin/shed or #of Fin/shed,and Subassemblies Thereof WVashington, D C. U S International Trade Commission Publication 808, March 1977),pp. A-XI, A-99

1975-79—Co/or Te/ev/sion Receivers and Subassemblies Thereof (Washington. D C U S International Trade Corn.miss!on Publication 1088, May 1980), p D-8.

f980—Te/evision Receiwrru Sets From Jaoan (Washington, D.C U S International Trade Commission Publ!catlon1153, June 1981), p H2{

198f-information from Department of Commerce

achieve credibility, they had to supply TVs thatdid not need frequent service. Japan’s con-sumer electronics manufacturers succeeded inthis far from riskless strategy.

If technology is now a secondary factor forTVs, in more recently introduced product fam-ilies—not only VCRs, but video disk players,home computers, and related applications ofelectronic technologies to consumer goods—designs are evolving at a faster pace. Japaneseentrants spent many years and a great deal ofmoney on engineering development of VCRs—Matsushita even reached production in 1973with a design that was shortly thereafter judgednot to be good enough—before achieving com-mercially viable products. But otherwise, com-petition in consumer electronics is largely amatter of prices and marketing, brand loyaltiesand customer perceptions. While Japanese ex-porters have established themselves firmly inAmerican markets for TVs and audio products,individual companies have suffered frequentreverses in consumer goods ranging fromstereo receivers to CB radios and pocket cal-culators, where markets have been unpredict-able and competition always stiff.

Semiconductors

Microelectronic devices, in contrast, are in-termediate products sold in accordance withdetailed technical specifications to sophisti-cated customers who design them into finalproducts ranging from TVs and electronicgames to missile guidance systems and power-ful computers. To be successful, semiconduc-tor firms must not only meet the current re-quirements of such customers but do a goodjob of anticipating their future needs.

Technological Factors in Competition

As explained in chapter 3, the interdepend-ence of product and process technologies inleading-edge microelectronic devices—verylarge-scale ICs–is unusual even for a high-tech-nology industry. Circuit designers must under-stand the nature and capabilities of the fabrica-tion process—including proprietary details—to optimize the performance of a chip. Productand process technologies advance together,with process capability a restriction on devicesthat can be fabricated with acceptable yields(the fraction of circuits that function). The in-

Ch. 1—Part B: Extended Summary ● 2 5

Japan’s Production and Exportsof Video Cassette Recorders (VCRs)

12

11 -

10 -

9 -

8 -

7 -

6t

2 -

1

0 1 11 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 1 9 7 9 1 9 8 0 1 9 8 1 1 9 8 2

Year

SOURCE “VTR Product Ion Demand,” Japan Report, Joint Publications ResearchService JPRS Lll 1100, Jan 28, 1983, p 35

tractions go in both directions. Clever circuitdesign can compensate for some kinds of proc-ess limitations. Among the examples are simplydoing more with fewer transistors or other cir-cuit elements and incorporating on-chip testingand redundancy. Some American firms addedredundant circuit elements to their 64K RAM(random access memory) designs, a step whichmay pay dividends in the future as they moveto still higher levels of integration,

Competition in standardized products likeRAMs depends on both price and technology–chapter 5. When 64K RAMs were first intro-duced, they sold in sample quantities for about$100 each. From this level in early 1980, pricesfell to $10 to $15 by the end of that year. Afteranother year, 64K RAMs could be purchasedfor $5 or less. These rapid price declines, typi-

.——-—— ——.—

cal of the semiconductor industry, are drivenby intense competition to improve processyields, reduce manufacturing costs, and cutprices to build market share. As the prices of64K RAMs dropped, prices also fell for the pre-vious-generation 16K devices, which by 1982sold for about $1 each. Similar patterns will befollowed as 256K RAMs, in pilot productionin both Japan and the United States during1983, take over from 64K chips.

Despite the intense price competition inthese commodity-like circuits, product technol-ogy continues to play a role. Not only is a goodcircuit design essential for high yields and lowcosts, but a high-performance RAM can com-mand a greater price. While the most commonvarieties of 64K RAMs have access times (theaverage time to retrieve the contents of a mem-ory cell) in the range of 200 nanoseconds [200x 10–’ seconds), otherwise comparable cir-cuits with lower access times sell for more;during 1982, 64K RAMs with access times of150 nanoseconds brought prices a dollar orso above those for 200 nanosecond circuits.Nonetheless, RAMs—and most other memorychips —are in essence standardized items. Asfor consumer products like TVs, progress is in-cremental and predictable, at least at present—although the pace is much swifter.

If process technology is vital for RAMs, prod-uct technology—i.e., circuit design—carriesgreater weight in competition involving othervarieties of ICs. Foreign firms have been lesssuccessful in microprocessor families and thearrays of support chips designed to be usedwith the processors themselves, as well as sometypes of linear circuits, logic families, semicus-tom chips, interface circuits, and the manyother varieties of specialized microelectronicproducts, In contrast to memory chips—inessence “brute force” devices—circuits that im-plement logic depend more heavily on creativeengineering design, on anticipating user needs,and on recognizing new opportunities madepossible by developments in either process ordevice technology, A well-designed micro-processor—one with an architecture that takesmaximal advantage of the circuit elements itemploys, with an instruction set that pro-

26 ● International Competitiveness in Electronics— — — ————-—— ——.

U.S. Semiconductor Sales by TypeLinear

Standard Iog icfami l ies

Linear 1975

1980

Standardogle fami l ies

ICs Microprocessors /m i c r o c o m p u t e r s

SOURCE 1975–E/ectronlcs, Jan 8, 1976, pp. 92, 931980 -E/ectronlcs, Jan 13, 1982, pp. 124, 125.1966 -E/ecfron/cs, Jan 13, 1983, pp. 128, 129; Mar. 10, 1983, p. 8

gramers find easy to use, a convenient busstructure and input/output ports—could be acommercial success even if developed by acompany with only mediocre process technol-ogy. Were this the case, however, alternatesource manufacturers might end up with moreof the market and/or higher profits.

International Positions inMicroelectronics Technology

While Japanese manufacturers now makeand sell many types of microprocessors andlogic circuitry, and have always had excellent

Linearand

otherICs Standard Iog ic

f am i l i e s

Microprocessors /m i c r o c o m p u t e r s

Ics--Memor i es

1986(Projected)

technology for linear ICs, they have not beenable to match American semiconductor firmsin design-intensive products. For instance, themicroprocessors that Japanese semiconductorfirms sell in large volume on the world marketare U.S. designs. Such patterns will probablycontinue to hold, although here as elsewherethe magnitude of the U.S. lead is likely to shrinkas the Japanese get better at circuit design, andas Japanese semiconductor manufacturers hireengineers from other countries,

In semiconductor processing, Japanese firmsare often on a par with the United States and

Ch. 1—Part B: Extended Summary ● 2 7—

may be better in some cases. One reason hasbeen the VLSI research project and its severalfollow-ens, orchestrated and partially fundedby Japan’s Government. By 1983, Japanesemanufacturers were, as a group, further alongin production plans for process-intensive 256KRAMs than their American competitors. Proc-ess control also exerts a major influence overquality; nevertheless, if a few years ago thequality of some types of Japanese ICs—specif-ically, RAM chips—was higher than suppliedby American firms, today any differences aremuch smaller (see ch. 6).

Semiconductor manufacturers in Japan havemade great strides as well with complementaryMOS (metal oxide semiconductor) circuitry,one reason being its attractions for certain ofthe consumer applications in which Japanesesemiconductor firms for many years spe-cialized. In contrast, companies in WesternEurope are generally behind both the UnitedStates and Japan in all varieties of MOS. Euro-pean nations are making determined efforts tocatch up, in several cases with strong govern-ment support, Despite underlying technologi-cal abilities that in many cases are excellent,European manufacturers have not been as suc-cessful as American suppliers at convertingtheir technology into successful commercialproducts. In circuit design, neither the Jap-anese nor the Europeans seem able to matchwits with Americans. This is an advantage—asource of “technology gap’’—that the UnitedStates should be able to maintain. To do so,

U.S. firms must continue to vigorously pursuenew markets and American engineeringschools must retain their preeminent positionin fields related to microelectronics.

Research and Development

Despite the continued prowess of Americancircuit designers, the comfortable lead once en-joyed by the United States in the underlyingtechnology of semiconductor devices is nowspotty at best. American merchant semicon-ductor firms devote most of their R&D effortsto product and process developments with im-mediate application to end-products; relative-ly small companies with limited resources, theyhave had little choice but to place the greatestpriorities on R&D that will help them in nextyear’s marketplace battles.

In the United States, more basic research—ranging from studies of the physics of electrondevices to the development of process toolssuch as ion-beam lithography—has beenfunded and performed elsewhere. Some of thework has been supported by the Departmentof Defense—e.g., research on high-speed gal-lium arsenide devices, In other cases, large or-ganizations such as IBM or AT&T’s Bell Labo-ratories have carried much of the burden; BellLabs, in particular, has been responsible formany of the seminal developments in solid-state electronics. In the past, Bell diffusedthese widely to both U.S. and foreign enter-prises, Now, with AT&T entering new markets,

World Integrated Circuit Output by Headquarters Location of Producing Firms

1978 1982a

Product ion Share of Product ion(millions of dollars) world output (millions of dollars)

United States. . . . . . . . . . . . . . . . . . . . . . $4,582 - 68.3% $9,700Merchant . . . . . . . . . . . . . . . . . . ... 3,238 6,450Captive ., . . . . . . . . . . . . . . . . . . . . . 1,344 3,250Captive percentage. . . . . . . . . . . . . . . . 29.30/o 33.5 ”/0

Western Europe . . . . . . . . . . . . . . . . . . . 453 6.7 620Japan ... . . . . . . . . . . . . . . . . . . . . . . 1,195 17.8 3,440Rest of the worldb ., . . . . ... . . . 482 7.2 190

$6,712 $13,950aEstlmated

--

blncludes the Soviet Union and Eastern Europe for 1978 but not 1982S O U R C E S 1978–Stafus # A Reporf on the /n fegrafed C/rcu/f /ndustry (Scottsdale Ariz Integrated Ctrcu{t Englneerlng Corp 1980), p 4

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

Share ofworld output

69.5%

4,424714

28 ● International Competitiveness in Electronics— — — —————

including merchant semiconductor sales, andcompeting under new conditions, the companymay no longer feel that it has the luxury of sup-porting basic research so heavily; at the least,it will guard its technology much more close-ly (as IBM always has). Other forces at workinclude growing software demands on micro-electronics firms—an area constrained by per-sonnel shortages, low productivity, and weaktheoretical foundations. Furthermore, thehighly competitive merchant firms have per-haps been taking advantage of new technolog-ical opportunities faster than the stockpile hasbeen replenished. The need for new sourcesand mechanisms of technology developmentand diffusion is plain.

Along with continued Federal support andincentives for R&D, particularly more basicwork, institutional innovations that would helpto build the technological base for continuingU.S. competitiveness in microelectronics—aswell as in computer systems—appear worthyof congressional attention. U.S. competitive-ness in electronics has depended heavily on thetechnical strengths of American firms, So longas the United States held a substantial overalllead in electronics technology, smaller com-panies could successfully design and developtheir products and processes without doingmuch research on their own. The foundationprovided by large companies, military spend-ing, and the universities sufficed. Today, notonly is this base eroding, but the overall tech-nical edge of the Nation has diminished, Inparticular, research capabilities in Americanuniversities have deteriorated because of obso-lete equipment and shortages of graduate stu-dents and faculty. A redefined Federal role inR&D could address the need for better mech-anisms of technology diffusion within theUnited States, as well as encouraging inflowsof technology from overseas,

A number of promising models exist, begin-ning with domestic ventures such as the Semi-conductor Research Cooperative and Micro-electronics & Computer Technology Corp. andincluding a number of experiments in othercountries. Some of these are aimed at enhanc-ing the diffusion of technology as well as at en-

couraging basic and applied research with po-tential commercial, rather than exclusively mil-itary, applications, The Fraunhofer Gesell-schaft in West Germany, as well as Japan’s jointR&D programs, both discussed in chapter 10,come to mind. The U.S. electronics industry,including but not restricted to microelectron-ics, could benefit from institutional mechan-isms more closely linking R&D efforts in Gov-ernment laboratories, industry, and universi-ties. A relatively large but decentralized sys-tem of centers-of-excellence, directed towardcommercial developments—with ample scopefor local funding and entrepreneurial partici-pation—would fit American traditions. Givensome fraction of funding, perhaps 30 or 40 per-cent, from the Federal Government on a con-tinuing basis, the time horizons could be longerthan those for R&D programs funded entirelyby industry.

Computers

If manufacturing technology is critical forcost control in consumer electronics, and bothprocess and product technologies are vital insemiconductors, the computer industry exem-plifies reliance on product technologies, Par-ticularly for larger systems, manufacturing isless significant for competitiveness becauseproduction volumes are modest compared toTVs or semiconductor devices. For small com-puters sold in large numbers—and particular-ly the desktop machines offered by companieslike Apple—or for peripherals such as printersand terminals, manufacturing technologies areof greater and growing importance.

Technological Competition

What are the major factors in marketing com-puters? First and foremost, performance/costratio: the computing power per dollar that amanufacturer can supply. This depends heavilyon system design—both hardware and soft-ware—i.e., in doing more with less rather thancutting production costs. For most computersystems, assembly is labor-intensive, costs in-creasing with overall complexity, The com-pany that can design a system offering higher

Ch. 1—Part B: Extended Summary ● 2 9—

performance at a given cost has the advantage.IBM, as in so many other instances in the com-puter industry, provides something of an ex-ception because its higher sales volumes meanmore pronounced scale economies. A furtherexception has developed at the lower end ofthe market, where personal machines, smallbusiness systems, and micro or minicomputerssold to original equipment manufacturers arebuilt in much greater numbers. In both cases,greater production volumes increase the sig-nificance of manufacturing technologies but inno way diminish the role of system design.

Because of these characteristics, the comput-er industry is just as design- and R&D-intensiveas microelectronics, but computer engineersare seldom as constrained by manufacturingprocesses as chip designers. They are, how-ever, constrained by the performance charac-teristics of available components, principallyICs. Microelectronic devices are the buildingblocks for processors as well as essential ele-ments in many other parts of computing sys-tems, from controllers for disk drives to semi-conductor memories themselves. Because sys-tem performance depends so heavily on ICs,many computer firms have established captivemicroelectronics R&D and production facili-ties. While component technologies ultimate-ly limit what can be done, computer designershave considerable latitude in configuring sys-tems; the many alternatives from which theycan choose are affected in different ways bythe characteristics of both hardware and soft-ware,

Systems Aspects

Although firms located in other countries arenibbling at U.S. market share, our dominancein computer manufacture still continues, builtlargely on the abilities of American producersat system design and integration. Conceivingand developing new applications of computingpower depends on engineering design and onunderstanding user needs—including fieldservice and software support. American manu-facturers opened the personal computer mar-ket, not through technical advances, butbecause they perceived a potential market

U.S. Production of Computer Equipment

35 t

Year

SOURCE: 1972, 1975, 1977, 1980, 1983 editions, U S /ndustr(a/ Ouf/ook, Depart.ment of Commerce 1981 and 1982 sh Igments estimated

where others did not. Substantial penetrationby Japanese imports may eventually follow, butbased more on low prices–stemming from thewell-established capability of Japanese elec-tronics firms to manufacture in high volumeat low cost—than unique product features.Nevertheless, so long as technical evolution israpid, and software one of the keys to sales,American entrants with creative product de-signs should have little to fear from overseascompetitors. At least at first, the more suc-cessful Japanese personal computers will bebased on U.S.-designed microprocessor or mi-crocomputer chips, as well as software devel-oped in the United States—e.g., the popularCP/M or Unix® operating systems and themany applications programs that run on them.

This is only one example where Americancomputer manufacturers have been at the fore-front in spotting new applications of comput-ing technology. Among the other examples are:

Small machines suited to the needs ofbusinesses with a few dozen to a few hun-dred employees.Fault-tolerant systems that can be usedwhere reliability is critical.Specialized data processing installationsfor banks, insurance companies, and Gov-ernment agencies.Dedicated processors to be integrated into

30 “

●

●

Intemational Competitiveness in Ele