During the three decades following World War II, America was the leader in the commercial development and production of semiconductors. Semiconductors, which include early vacuum tubes, transistors, and today's microchips, have been critical components in most electronic products. Today's principal semiconductors are memory and logic chips. Memory chips store information created through mechanical computation; logic chips perform the actual computations that generate the information. These chips are separated into categories based on the amount of memory and computational capacity.
A 256K chip, for example, can hold 256,000 bytes -- or units -- of information, while a 64K chip can hold only 64,000 bytes of information. A 1-meg chip holds 1,000,000 bytes of information while a 4-meg chip holds 4,000,000 bytes. These chips are used in appliances, automobiles, calculators, industrial equipment and machinery, personal computers, video games, and other products.
At the insistence of the United States, in 1986 Japan agreed to limit its exports of semiconductors, mainly the "dynamic random access memory" (DRAM) chips, to America. These chips are used in high- tech consumer electronics equipment like computers and videocassette recorders. The 1986 chip agreement, after all, restricts trade, ostensibly to help some American segments of the semiconductor industry. The agreement in fact has harmed American computer manufacturers, who have found they paying higher prices for computer chips. This makes American computer manufacturers less competitive and drives up computer prices for all Americans.
In 1975, U.S. merchant producers (companies that make chips to sell to others rather than just for their own internal use) had 100 percent of the U.S. DRAM market. In 1986, they had 5 percent of that market. When all chips sold by merchant producers are taken into account, the U.S. producers' market share declined from 60 percent in 1975 to less than 50 percent in 1985, while the Japanese share rose from 20 percent to 40 percent in the same period.
In 1986, the U.S. and Japan signed the Semiconductor Trade Agreement, under which the Japanese promised to take steps designed to alleviate the plight of American chipmakers. In February 1987, the Department of Defense's Defense Science Board issued its "Report on Defense Semiconductor Dependency," which asserted military reasons for protecting and Strengthening America's semiconductor industry; and, finally, in April 1987, in response to Japanese violations of the 1986 Semiconductor Trade Agreement, the U.S. government imposed trade sanctions on Japanese imports; and, currently, the congressional trade bill would authorize $500 million to finance Sematech, a government-industry research consortium to develop new semiconductor manufacturing techniques, a proposal advanced by the SIA and then by the Defense Science Board. This, of course, is not the first time foreign trade and protectionism have been discussed in the United States, and will certainly not be the last. In 1987, however, the industry was in transition.
3. U.S Vs. Japan Market Analysis
U.S enterprises dominated the world market from the 1950s until the early 1980s. At the height of U.S success in the mid 1970s, U.S. firms held close to 70 percent of the world market. During the 1980s, however, the market share of U.S. firms plummeted, falling to 29 percent by 1980, while the share held by Japanese producers rose from 24 percent at the end of the 1970s to 49 percent by 1990.
By the end of the 1980s, the United States was net importer of semiconductor, while 5 of the 10 largest semiconductor products were Japanese. More significantly still, by 1988 Japanese firms had captured more than 80 percent of the world market for the most widely used integrated circuit in digital equipment, the DRAM.
In the early 1970s the U.S. held 60 percent of the world market in semiconductors, 95 percent of the American domestic market and 25 percent of the Japanese market.
By 1982, the U.S. control had fallen to 51 percent of the world market in semiconductors; the Japanese had 35 percent, up from about 15 percent in the early 1970s.
By 1989, the U.S. and Japanese positions were reversed, with American firms holding 35 percent of the world market and the Japanese 51 percent.
This trend of the loss of U.S. market share of semiconductors led to political action in the middle of the 1980s. By 1985, U.S. manufacturers were importing record numbers of computer chips, especially the lower capacity Dynamic Random Access Memory (DRAM) and Erasable Programmable Read Only Memory (EPROM) chips, from Japan to meet their production needs. In that year, Japanese firms accounted for 92 percent of the sales of the 256K chips in the U.S. market.
American semiconductor manufacturers, such as Intel Corporation and National Semiconductor Corporation, responded to increased imports by seeking U.S. government restraints on imports. They claimed that to become competitive, they had to be protected from foreign competition. The American firms maintained that their Japanese counterparts engaged in unfair business practices and perhaps were receiving help from the Japanese government. The American firms also claimed that the Japanese firms were "dumping" computer chips in the U.S. and other foreign markets, that is, selling them below the costs of production.
4. Economic Impacts of the Industry
Industry analysts estimated that between 1985 and 1986, U.S companies lost about $ 2 billion, and Korean and European companies each lost approximately $1 billion.
"Americans don't want [a U.S. - Japanese trade war] and the Japanese certainly don't want one," said the late U.S. Secretary of Commerce Malcolm Baldrige. "Japan sells about $85 billion worth of goods to the United States in a year, while America sell about $27 billion to the Japanese. Who has the most to lose?" This presented, of course, a classic mercantilist question and Baldrige clearly implied that the party with the most to lose was Japan -- that the U.S. trade deficit with Japan indicated that Japan was somehow getting the better end of the deal.
4.1 Classical View
Starting with Adam Smith successfully challenged mercantilist analysis by pointing out a simple fact: an informed voluntary trade is, by definition, to the advantage of both parties involved. This is a cliche, but a cliche is merely an often-repeated truth, and this truth is worth repeating. The U.S. doesn't really "lose" $100 million by trading with Japan; it exchanges $100 million for some amount of goods, an amount that is clearly worth more (to the American purchasers) than $100 million. Similarly, Japan does not "gain" $100 million from the trade -- it gains $100 million minus the value of the goods to itself. Both parties gain, or else they would not trade. A cash trade "deficit" usually turns out to be a wealth surplus, since the dollars U.S. give up are more than offset by the goods U.S get in return.
4.2 Microeconomic level
When a Japanese chipmaker sells chips to an American chip user (typically a computer manufacturer), the American clearly gains by getting a better deal than he otherwise could; cessation of international trade would certainly hurt the American computer maker a great deal, since it would drive up its costs and thus its product prices, and drive down profits.
4.3 Unfair" Competition
Naturally, U.S. chipmakers are not willing to simply complain that the Japanese out compete them. The American public has little patience for companies that are failing just because they cannot do as good a job as Japan. In fact, the Semiconductor Industry Association's 1983 report concentrated on several specific allegations of "unfair" competition:
The Japanese merrily export chips to the open U.S. market; they stubbornly refuse to let American exporters return the favor. The great thing about being in favor of fairness is that it is, by definition, so hard to oppose.
4.4 Dumping
The dumping issue has surfaced with retaliation in the U.S.-Japanese "voluntary" Semiconductor Trade Agreement of August 1986. Prior to the agreement, U.S. authorities had declared the Japanese guilty of selling chips below cost, with the intent of driving American competitors out of the market and then recouping their losses using their "unfairly won" market share. In response, Japan agreed to a "worldwide minimum price for Japanese chips determined by the U.S. government". Note the adjective "worldwide" -- Japanese exports to other countries, such as Europe, South Korea, etc. would be controlled by this agreement just as surely as exports to the U.S.
Is Japan's sale of chips below cost to American firms actually harmful to American interests? The mercantilist would, of course, say yes. Mercantilists consider any successful competition by a foreign producer to be harmful. If the foreign producer happens to be unrestrained by considerations of cost, that just makes it all the more likely that the producer can compete successfully.
Looking from a macroeconomic point of view, the situation looks even better. Suppose that the Japanese are selling the United States $100 million of chips that cost them $125 million to make. Presumably, to the American chip consumers, the chips are worth $150 million (or some amount
greater than $100 million or else they would not be buying them). In terms of net change in wealth -- factoring in both cash and product value -- Americans gained $50 million and the Japanese actually lost $25 million. Both American gains and Japanese losses are greater than what they would be if no dumping took place. Admittedly, this is a crude model, but seemingly the only reasonable one -- how can the Japanese (or anyone, for that matter) at all profit from selling a product below cost?
4.4.1 Dumping argument
The consumer benefits from foreign dumping are only short-term; to be followed by long-term disadvantages caused by dumping's destruction of the domestic competition. Dumping, it is said, is actually "predatory pricing," in which dampers sell products at artificially low prices, drive the competition out of business, and then take advantage of their monopoly position to recoup their losses by charging exorbitant rates. Certainly, if this were true, we might well be justified in forgoing the short-term advantages of dumping in order to avoid the long-term harm from the imminent monopoly.
To really profit from predatory pricing, the fiercely competing Japanese companies would have to organize a cartel to keep prices artificially high. But the only people guilty of even contemplating any sort of semiconductor industry cartel these days are the American chipmakers and the American government.
AMBIGUOUS DUMPING CHARGES
American semiconductor manufacturers claim that Japanese firms "dump" their chips into the U.S. and other foreign markets, meaning, generally, sell the chips below the cost of production. Such a practice, however, is not inherently unfair. If an American firm, for example, has a large inventory of some product that it has difficulty selling, it is reasonable for it to cut its prices below the costs of production to dispose of such products and cut its losses. Some of the pricing decisions of Japanese semiconductor firms, in fact, were to meet the competition from lower-priced Korean chips.
The definition of dumping in U.S. trade laws often is unclear and arbitrary. These laws set criteria for determining what is called the "fair market value" of a product. In accordance with these criteria, the U.S. government calculates the costs of production in terms of these criteria in the home country of the foreign seller under investigation. If the product is being exported and sold abroad at a price cheaper than its domestic cost, as determined by the U.S. government, then it is being illegally dumped.
5. Japanese Governmental Subsidies
A more serious fairness issue that has been raised by critics is that the Japanese chip producers supposedly enjoy governmental subsidies that U.S. chipmakers do not have. Therefore, U.S. chipmakers cannot possibly compete without matching subsidies of their own, whether they be direct payments or some sort of artificial price supports. One would not want to argue that the Japanese subsidies were a good thing. In fact, one of the troubles with subsidies is that they tend to reproduce at an amazing rate, with each nation creating subsidies to offset other nations' subsidies and each industry demanding subsidies of its own whenever it is seen that the government is willing to subsidize some other industry. However, the questions we must ask are:
- What exactly has the scope of Japanese that subsidies been?
- Are Japanese governmental subsidies really bad for America?
In the recent debate over protectionism and industrial policy, the name of Japan's Ministry of International Trade and Industry (MITI) has acquired an almost mythical status. Both industrial policies advocates and protectionists have sought to explain much of Japan's economic success as a result of MITI's intervention -- the former to justify a comparable American industrial policy and the latter to justify American retaliation in the name of "fairness." The facts, however, do not justify this point of view. According to David Henderson, former senior staff economist with the president's Council of Economic Advisers, "The idea that central planning is responsible for Japan's success is a myth.
MITI has made no contribution to many of Japan's biggest industrial successes." In fact, in the late 1970s, the Japanese government paid for only 28 percent of Japanese R&D expenditures (including defense); at the same time, 48 percent of U.S. R&D was government-funded. In the computer industry, Japan spent $127 million in the 1976-82 period while the U.S. spent $279 million in the shorter 1978-82 period. The Japan Development Bank's low-interest loans to the electronic machinery industry in 1982 were equivalent to less than 0.5 percent of the total plant investment by the industry.
The Semiconductor Industry Association's report indicates that in 1978, MITI's semiconductor industry subsidies were $45.7 million -- but equipping a single production facility can cost up to $75 million. Note that the Defense Science Board's report recommends that the Department of Defense (DOD) spend $400 million per year to stimulate the U.S. semiconductor industry. According to one study, "When American negotiators complain of the Japanese joint research ventures in electronics, the Japanese quickly point to the Defense Department's VHSIC (Very High Speed Integrated Circuit) program.
In fact, whatever subsidies the Japanese government has provided in the past have had hardly the effect that the protectionists and the subsidy enthusiasts claim. It is certainly not clear that the subsidies actually helped Japan's economy; in fact, the evidence points to the contrary. If the Japanese government chooses to give, say, $100 million to the Japanese semiconductor industry, there is no doubt that the industry will be helped. By using that $100 million to pay for what would otherwise be $300 million of semiconductors, the industry can now profitably sell them for, say, $250 million (while at the same time, even equally productive American competitors would have to charge $350 million to make the same profit). We may concede that American chipmakers will not like this state of affairs (just as they would not like it if the Japanese managed to sell chips for $250 million without any government help). However, the buyers naturally have an entirely different opinion. The $100 million Japanese government subsidy actually goes directly into the American chip buyers' pocket! Without the subsidy, the American buyers would have had to pay $350 million. With the subsidy, they only have to pay $250 million. The Japanese manufacturers still make the same $50 million profit, with the Japanese taxpayer footing the bill -- and there are more American companies buying computer chips than making them.
5.1 Macroeconomic level
The picture with subsidies is the same as with dumping. Americans acquired $350 million of wealth for $250 million cash; the Japanese acquired $250 million cash but had to give up goods that cost them $300 million to produce. It appears that the U.S. is the real beneficiary here, not Japan; in fact, if these are the real terms of trade, then the answer to Secretary Baldrige's question -- "who do you think has the most to lose from a cutoff of trade?" -- is emphatically the U.S.
Government subsidies are not a good idea, either for the Japanese or the Americans. Though they do indeed help those being subsidized (which includes both Japanese producers and American consumers) they are economically foolish for the subsidizing government and are cruelly unfair to those trying to compete on their own.
What subsidies the Japanese government does provide are -- like all subsidies -- politically entrenched and thus very difficult to remove. Imagine for a moment that a foreign competitor demanded that the U.S. government stop subsidizing its farmers. The U.S. government, American consumers, and foreign competitors would all benefit from abolition of subsidies.
5.2 Japanese Import Restraints
The Japanese have been accused of shutting their markets to American exporters. To the extent that the Japanese do this -- and they do -- their protectionism is every bit as counterproductive as that, which is now being proposed for the U.S. However, the key questions are, first, whether there really are import restraints in the semiconductor industry, and, second, how large a role they play in the troubles of U.S. chipmakers.
The Semiconductor Industry Association's 1983 report discusses alleged Japanese import restraints as well as Japanese government subsidies. One of its recommendations, in fact, is that the U.S. government should insist that U.S. semiconductor firms receive commercial opportunities in Japan that are fully equivalent to those enjoyed by Japanese firms . . .. U.S. firms must receive real, not "cosmetic" market access, reflected in significantly greater participation by U.S. firms in the Japanese market. This will require an affirmative action program to normalize competition in Japan.
The "affirmative action program" recommended by the report -- and then echoed in the 1986 Semiconductor Trade Agreement, which "called for . . . U.S. chip makers to get more than their current 10 percent share in the Japanese market" is not something that is easily forced on a sovereign ally. How exactly does U.S force Japanese chip purchasers -- not "Japan," but private citizens, free to buy what they please -- to buy American chips simply in order to boost American companies' market share? This "affirmative action" is one of the most irrational economic policy proposals imaginable.
6. Industrial Policies
The Semiconductor Industry Association of the US announced a report in early February 1983 charging that the Japanese government is destroying the US microelectronics industry via its rifle shot targeting industrial policies. It charges that the Japanese have taken an unfair portion of the world market and caused US makers millions of dollars of losses, via governmental finance and guidance, particularly for computer memories, the biggest, part of the semiconductor business. In the past other leading American industries have fallen by the wayside due to such practices, such as in consumer electronics, motorcycles, machine tools. The report notes that the semiconductor industry is extremely important for the future of the US industrial base. This is forcing many firms to pull out of the field or cut vital R&D efforts. The Chairman of the SIA noted that the industry had been healthy and growing rapidly until a few years ago "when the Japanese came' into the market and destroyed the profitability of the US semiconductor industry. In 1981 Japan exported 71.2 billion yen in semiconductors to the US while importing 72.5 billion-yen. In January-November, 1982 Japan exported 104.2 billion-yen and imported 77.1 billion-yen. A MITI official noted that Japan's exports to the US are mostly memories whereas its imports are mostly logic ICs and microprocessors. The report included the requests that the industry is seeking from the US government:
- declare that it wil1 not agree with in industrial policies of foreign governments which seek to destroy American leadership in important sectors,
- monitor Japanese government subsidies, issue an early warning when Japanese exports are expected to rapidly increase and take suitable measures against unfair trade practices,
- assure that American companies enjoy equal treatment with Japanese firms in Japan,
- demand that Japan strictly adhere to the provisions of GATT,
- apply similar provisions to other countries like Japan,
- enact legislation granting powers, etc. to carry out this policy.
The US industry also asked that the US government file a complaint with GATT, charging that Japan's "targeting" of high technology sectors violate GATTS subsidy provisions. A MITI official noted that Japan gives subsidies, including conditional loans, of only 10 billion yen per year, while the US annually gives more than 100 billion yen for research. Moreover, GATT approves subsidies for high technology development. MITI predicted that the US would not go to GATT on the Agreement covering subsidies that does not limit high technology development. The president of National Semiconductor noted it was better to solve problems step by step and that the US was not seeking protectionism but open markets in Japan. In this relation, the January 15 issue of the ECONOMIST noted that:
Specialist firms in the United States supplied over 70 percent of the equipment used by the Japanese semiconductor industry three years ago. By 1982, however, domestic manufacturers were supplying half of the processing equipment purchased by Japan's chipmakers (BUSINESS WEEK, March 14, 1985, p.83).
6.1 From confrontation to cooperation in the globalized semiconductor
industry
The silicon chip is not only a symbol of miraculous technologies that are transforming industrial production and leisure time in society, but also of trade and technology conflicts while at the same time offering the potential for co-operation.
By the mid 1980s, the changing fortune of the Japanese and U.S semiconductor industries had given birth to a bitter trade dispute between the two countries. After incurring heavy losses, U.S firms claimed they were facing unfair competition from Japan. They accused the Japanese of selling semiconductors, especially DRAMS, in the U.S. for less than there fair market value while simultaneously shutting U.S. firms out of the important and lucrative Japanese semiconductor market.
The dispute was settled by a 1986 trade agreement between the United States and Japan. The agreement specified a firm market value for semiconductors. Japanese companies were not supposed to sell their semiconductors for less than this price outside of Japan.
Due to external economies and slipover effects for other industries, this industry is considered to be a strategic sector, not only in the USA, where the industry came into existence, but also in Japan and Europe. Observing the excessive returns earned initially in this industry in the USA, Japanese companies wanted to shift these profits, at least in part, to Japan, for which the Japanese government provided support.
In order to counteract the loss of competitiveness the US industry reacted, besides by restructuring, by creating, with government funding, the research consortium SEMATECH, while the American government responded by concluding since 1986 bilateral trade agreements with Japan in which Japan initially agreed to "voluntarily" restrict its exports of semiconductors and to "voluntarily" expand the imports of American chips. In the mid-1980s Europe was a marginal player in the global competitive battle and suffered dependence on the USA and Japan. This was a consequence of decisions taken by European firms but part also lies in the fragmentation of the European market and the policy pursued by the European governments. Europe survived through protected markets and was dependent on subsidies. The conventional wisdom was for Europe to give up on semiconductors. But this was not the situation by the end of the 1990s. Today Europe is becoming a major force in the global information age economy. In 1998 three European semiconductor firms were in the world wide Top 10.
The European semiconductor industry shows faster growth rates than international competitors and is more profitable than the industry average. Europe is leading in the development of next generation technology and is dominant in several key global applications of markets. Japan continues to fight neck-and-neck with the USA for number one position, but their cumulative weight will progressively decrease and Asia/Pacific (Korea) may overtake Europe to become third largest chip producer. The exorbitant high R&D cost to develop new generations of semiconductors has forced producers the entire world to form strategic alliances in order to set standards. This implies that the industry has become truly globalized. The emergence of successful global alliances has the potential to shift competition away from the current, predominantly nationalistic focus to a struggle among competing global partnerships. If relationships of this sort prosper, then at least one Japanese-American trade sore may have healed itself.
7. U.S. - Japan Trade Relationship
The trade relationship between the world's two largest and most interdependent economies continues to be troublesome. In 1993 the two sides agreed to start settling their differences under the umbrella of the Framework Talks, which included trade negotiations on automobiles, auto parts, flat glass, and insurance. To that lot were recently added semiconductors, airplane landing rights, and film.
Two most recent trade issues that have caused a row between the US and Japan are insurance and semiconductors. Back on July 31,1986 the two partners signed the Semiconductor Agreement stating that the foreign share of the Japanese microchip market would be 20 percent. Since that time, the foreign share (mostly American) rose well above that mark, reaching 30.2 percent in 1995. The US alone sold $8 billion worth of chips in Japan.
7.1 Protectionism.
As in all forms of trade protection, one U.S. industry has been "helped" at the high expense of others. American computer manufacturers found themselves less competitive due to higher prices and even shortages of the low-end chips that they incorporate in their products.
The Bush Administration and the Congress should assess the damage being inflicted on American computer manufacturers and on consumers by the current agreement. If the Administration and Congress genuinely wish America to be competitive in semiconductors and other industries, policy makers should create the macroeconomic environment for this. They, for example, could remove the disincentives created by the tax system on investment, savings, and innovation.
7.2 "Voluntary" Restrictions.
The U.S. government acted on these complaints in 1986 and threatened legal action against Japanese firms selling computer chips in America unless the government of Japan agreed "voluntarily" to a set of trade restrictions. The U.S., for example, threatened to file anti-dumping cases against Japanese semiconductor manufacturers. Such cases could have resulted in high import tariffs on computer chips. As a result of the U.S. threats, Tokyo negotiated an agreement with Washington in 1986 that runs for five years.
In it Tokyo promises:
- To monitor the exports of Japanese firms to ensure that they do not sell semiconductors at prices below the cost of production;
- To regulate sales by Japanese semiconductor firms in third countries;
- To set the price at which Japanese firms sell semiconductors in conjunction with the U.S. government;
- To promote the sales of American-made memory chips in Japan in an effort to gain at least 10 percent of the Japanese market for the Americans. If needed, implies the agreement, the Japanese government will force its industry to limit production, thus creating a shortage that could be filled with U.S. chips.
7.3 Trade Restriction Effects
The U.S.-Japan agreement in essence is a government- established and -enforced cartel, which attempts through trade restrictions, price setting, and even production controls, to force buyers to pay higher prices for the product. This sets an alarming precedent for world trade. As bad, it has
harmed American computer manufacturers by forcing them to purchase higher-priced chips, thus raising their costs of production.
As a result of the agreement, Japanese DRAM chips cost American computer makers 30 percent to 40 percent more than they cost European computer makers. Example: the European minimum price for a 1-meg DRAM chip is $3.90; the price in the U.S. is $5.00. The 4-meg chip costs $18 in Europe but $30 in the U.S. (The Japan Digest, July 25, 1990, p. 1.)
These higher prices led American computer manufacturers to ask the U.S. Department of Commerce to abandon the cartel arrangement with Japan.
American computer manufacturers, while still the world's best, are in tough competition for global markets. In 1980, American firms had 82 percent of the world market in computers while the Japanese had only 10 percent. Some projections suggested that by 1992, the American share shrunk to 38 percent and Japanese firms increased their share to 42 percent. (Computers and Other Targets," New York Times, May 5, 1990, p. A 34.)
7.4.Business Strategy
The different investment and business strategies of American and Japanese companies have varying effects. Japanese companies tend to invest in modernization and expanded production over long periods of time. By contrast, the American firms tend to invest mainly when they anticipate upturns in market demand, and to defer investments when downturns are expected. In the late 1970s, for instance, a slump was anticipated for lower-end DRAMs and EPROMs. As a result, many American firms invested in other products like high-end computer chips. The Japanese, however, kept investing in low-end DRAMs during this period and thus better were able to increase production when the market again began to expand. The American firms had to catch up, putting them at a serious disadvantage in these product lines.
7.5 Market Decision.
By contrast, in the late 1970s and early 1980s, when demand for low-end DRAMs declined, some American semiconductor firms decided to get out of the DRAM business, not because of Japanese competition, but to focus their resources elsewhere. For example, two years after dropping the production of low-end DRAMs, the American Intel Corporation made $600 million in profits from selling other high-end chips. These high-end microprocessing chips are still moneymakers for American producers.
When U.S. demand for DRAMs increased in the 1980s, Japanese firms filled the gap, not due to unfair trade practices, but due to earlier investment decisions. By delaying investment during slow growth periods in the market, U.S. firms had lost much of their competitive edge. Now, many of these American firms want the federal government to cover losses they might have suffered from not investing in DRAMs. It is ironic that if some of those companies had invested in DRAM production, they would have sacrificed the greater profits gained from producing the larger chips.
Industry Structure and Competition
Globally, there were 150-200 firms making semiconductors in the mid 1980s. Total market sales of semiconductors, excluding those chips made by vertically integrated firms for their own in house use, were approximately $ 27 billion in 1986.
The top 50 merchant firms accounted for more than 90 percent of global merchant sales, and the top ten almost 60 percent.
However, U.S. share of world semiconductor sales dropped to 43 percent, down from about 60 percent in 1980, while Japan's share rose from 33 percent to 45 percent over the same period.
Some American semiconductor firms argue that the Japanese government's supposed aggressive industrial policy is responsible for its superiority in computer chip production. But a closer look at the Japanese economy suggests that natural market forces, not government planning, were responsible. In some cases the difference in the structure of the semiconductor industries in Japan and the U.S. accounts for the difference in competitiveness in semiconductors.
8.1 U.S. firms
Today, the American semiconductor industry is split into three levels of competitors. At the top are a few very large companies that make semiconductors as well as some end products such as calculators and cellular telephones. Those include Motorola Corporation and Texas Instruments Corporation. There are several medium size companies, including Intel Corporation and National Semiconductor Corporation, which produce a variety of semiconductors. At the bottom are scores of small firms that have gained a market niche by producing only one or a few high quality products at competitive prices.
8.2 Japan Firms
The Japanese semiconductor industry developed mainly as divisions of the large consumer electronics industry and, in contrast to the American industry, has remained this way. Thus, the Japanese industry is made up of a number of large producers such as Fujitsu, Ltd., Hitachi, Ltd., Mitsubishi Corporation, NEC Corporation, and Toshiba Corporation. These firms manufacture semiconductors mainly for their own internal use in the various electronic products they manufacture.
8.3 Competitive Analysis
A number of attributes of the American and Japanese industries suggests why they are in different competitive positions and reveal that unfair policies are not to blame. The larger Japanese integrated producers tend to be highly competitive in their own market as well as in foreign markets. Most are selling to themselves by supplying their consumer products division. They tend to be most competitive in low-end computer chips. Since most American firms produce only semiconductors, they do not have a guaranteed market for many of their products. They do, however, tend to have a comparative advantage in producing specialized, custom-made chips.
The Japanese market has been very competitive, with most companies competing directly with each other in end products. By contrast, only a few American semiconductor manufacturers produce end products as well. This suggests that the Japanese government did not play a key role in helping the industry develop. Harvard Business School's Michael Porter, in a study on competitiveness, notes that "among the strongest empirical findings from the research is the association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry."
(Michael Becker, "Semiconductor Protectionism: Goodbye Mr. Chips," Citizens for a Sound Economy, Issue Alert No. 9, August 27, 1986, p. 1.)
8.4 Domestic Rivalry.
Japan has companies that compete with each other across an array of product areas. From 1982 to 1987 not only were there several large firms competing with each other, but also there were several new "entrants" that increased domestic rivalry. By the end of 1987, nine Japanese producers were competing with each other in four different products areas.
Even though firms were allowed to coordinate efforts to raise venture capital, competition was maintained through rivalry in end product areas. Each company had to market aggressively such products as videocassette recorders and other consumer electronic products. This refutes the competition that Japan maintains a cartel in semiconductors. Normal market forces and competition were the primary factors resulting in the dominance of the low-end computer chip market by Japanese firms.
Japanese manufacturers, meanwhile, are facing increasing pressure from semiconductor producers in South Korea and Taiwan. This has made the Japanese industry better able to compete in international markets. This growth suggests that market forces rather than industrial policy have helped Japanese firms.
9. Strategic Role of the Semiconductor Industry
Some American semiconductor manufacturers and their supporters in government have argued that direct U.S. government assistance, in addition to trade restrictions on foreign competitors, is necessary if the U.S. industry is to remain competitive. They maintain that the free market has failed in the semiconductor industry and that the new emerging international economy requires government guidance.
Some advocates of managed trade and government subsidies argue that the semiconductor industry is "strategic," that is, vital to America's national security. Therefore, goes the argument, the industry merits federal funding to maintain its viability. This seems to assume that the American semiconductor industry would disappear completely if faced with international competition.
The fact is, many smaller versatile chip companies are competitive, as well as some larger ones. Newly opened markets would not cause them to shut down. Further, there is not necessarily a problem receiving supplies from other countries, even during times of war. Only in the most extreme situation in which the U.S. was cut off from its pacific allies would this be a problem with low-end semiconductors. Even if the U.S. were cut off, however, there are options open to it, short of resorting to protectionism. The federal government stockpiles any strategic material that is not in abundance. This stockpiled supply is used during periods of crisis to give industry enough time to gear up production. The U.S. strategic reserves in oil and other minerals are examples. Semiconductors, especially the low-end DRAMs, in the most extreme case -- war -- could be stockpiled in much the same way.
10.0 Conclusion & Recommendation
The purpose of this paper is to show that the semiconductor industry has moved from being highly confrontational to being much more co-operative as is evidenced by the emergence of cross-national strategic alliances between companies, spanning R&D, product development, production and distribution.
Over the last three decades the semiconductor industry has experienced novel reversals of competitive fortune in which the USA dominated in 1970s, then Japan entered in 1980s, and in 1986 surpassed the USA as the largest producer of semiconductors with most US firms abandoning DRAM production due to price competition. Since the early 1990s the Americans are on top again but with the Koreans and the Taiwanese coming on fast. With China and perhaps India coming on line in the present decade or so, these reversals in competitiveness will continue to play themselves out in the market.
The 1986 U.S.-Japan semiconductor agreement is a legalized, government-supported international cartel in which prices are fixed and by which down-stream industries, like American computer manufacturers, and consumers are hurt. The weak position of American producers of low-end semiconductors had very little to do with unfair trade or production practices by the Japanese. Rather, U.S. companies walked away from DRAM production, sometimes because of bad decisions and other times because they correctly saw more profitable opportunities in high-end or custom chip production.
The U.S. semiconductor industry was successful in the long run because the foreign share of market in Japan was much higher by 1996, while the share of the DRAM market held by Japanese firms declined due to competition from other firms (albeit not necessarily U.S. merchants but U.S. captives, Koreans, Europeans, as well as the U.S. firms Texas Instruments and Micron Technology.
The Japanese industry lost its momentum and, in 1997, was attempting to regain it by extensive industry/government cooperation in applied research and in establishment of businesses in emerging countries such as China.
The Bush Administration should help American computer manufacturers in particular and world trade in general by announcing that the cartel will be allowed to expire in July. This will help break the self-destructive cycle of protectionism that has plagued the U.S. and the world, and promote instead a prosperous world economy.
Several American chip manufacturers could profit by developing a competitive strategy similar to that of the Japanese. Rather than form strategic alliances with other chip manufacturers, they could seek joint ventures with consumer electronics producers such as Zenith Electronics Corporation.
To improve the U.S. - Japan situation the policy makers of both might do well to study the adverse effects of the semiconductor cartel on American and Japan computer manufacturers. More detailed data might well provide important ammunition in the fight for free trade and against protectionism, and prevent such counterproductive economic policies as the semiconductor cartel in the future.
BIBLOIOGRAPHY
Hill, Charles W.L, International Business Competing in the Global Marketplace, 4th ed. Mcgraw-
Hill, Companies, Inc. 2003
UNISA, MBLE01-B/101, Case Studies & Articles for MBL 1 (2003)
BUSINESS WEEK, March 14, 1985, p.83
Computers and Other Targets," New York Times, May 5, 1990, p. A 34.
The Japan Digest, July 25, 1990, p. 1
Michael Becker, "Semiconductor Protectionism: Goodbye Mr. Chips," Citizens for a Sound Economy, Issue Alert No. 9, August 27, 1986, p. 1.
http:// www.semichips.org
http://www.commercialdiplomacy.org/case_study/case_semicond.html
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