The MacNeil/Lehrer Report; Japanese High Tech Challenge

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ROBERT MacNEIL [voice-over]: This tiny chip is a crucial building block for the newest generation of computers. It's an American invention, but guess who now dominates this market? The Japanese.

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MacNEIL: Good evening. Earlier this week the Justice Department said it was investigating whether six Japanese companies conspired to fix prices or limit shipment of computer memory chips to the United States. Last month, Japanese businessmen were arrested in California and charged with stealing computer secrets from IBM. Together these developments underline the intensity of a new area of competition between the two countries: the battle for world predominance in high technology. That battle is just heating up but worried American companies say what's at stake is success in the industries of the future: electronics and computers. Until recently, the United States had a clear lead in computers and the semiconductor components that go into them. But then the Japanese began rapidly catching up, and the question being raised today is: will the vaunted electronics industries succumb to the same fate as American cars and steel? Tonight, the Japanese challenge in high technology. Jim?

JIM LEHRER: Robin, the worry centers on something called a 64K RAM. It's the very latest in computer memory chip, a thing the size of a postage stamp capable of storing 64,000 different pieces of information. Until it came along in the late '70s the U.S. dominated the manufacture and sale of each new breed of memory chip, beginning with the first one in 1971 which stored a mere 1,000 bits of information. But the Japanese went all out on the 64K RAM and now have 70% of the world market. That's a problem for the U.S. semiconductor industry in itself, but there's the even worse fear that Japan will grab the lead for the next breakthrough -- the 256K RAM chip which will store more than 256,000 information slices and is already under development. The U.S. manufacturers claim Japan is doing it all unfairly. There have been newspaper ads recently saying that. "We're not going to be quiet about the Japanese anymore. I just don't want to pretend that I'm in a fair fight. I'm not," says the chairman of a California semiconductor company. Here to give us that position is Warren Davis, director of government affairs for the Semiconductor Industry Association which represents 54 different U.S. companies.What's unfair about the way Japan is fighting?

WARREN DAVIS: For one thing the Japanese market to this day is not open. Despite the fact that in the memory chips that you just referred to, Japan has achieved technological parity with the United States and therefore is a world-class competitor, the United States companies are not able to sell chips into Japan which the Japanese have the capability to compete with. And not being able to sell in their market is a serious shortfall for us.

LEHRER: Why aren't you allowed to sell in their market?

Mr. DAVIS: It isn't a legal barrier, it's more subtle than that. When a new memory chip or microprocessor or other type of integrated circuit comes out of the R&D labs of the American companies and is introduced into Japan for purchase by their computer companies or telecommunications companies, it enjoys a very brisk sale. Up until the time that the first Japanese company is able to replicate that design and produce it themselves -- then the demand collapses. And this, we feel, is not a fair trade circumstance. And we're very concerned about that.

LEHRER: What other unfair advantages does Japan have against you all?

Mr. DAVIS: Other unfair advantages we feel that Japan has is that their ability to price at extremely low prices in foreign markets -- in the United States and in Europe particularly. You mentioned the 64K RAM. You mentioned that there have been a generation of memory chips that have been the main computer memory since the early 1970s worldwide. There has been a long record of constantly falling prices in these memory chips with the United States leading the way up until the time of the 64K RAM, as you said. In eight years the price per bit of information in those chips dropped 97%, at a very fast clip.

LEHRER: What's wrong with that?

Mr. DAVIS: It's good.

LEHRER: That's great, isn't it?

Mr. DAVIS: That was our pricing, but when the Japanese entered with the 64K RAM, they went off this steep curve to an even steeper curve at a curve that our companies, to compete, would have had to operate at a large loss per unit. And many of our companies cannot compete.

LEHRER: Is your -- are you saying that Japan is manufacturing the 64K RAM at an intentional loss or selling it at an intentional loss?

Mr. DAVIS: I cannot say for I do not know the cost circumstances of the Japanese companies. I can only say that it's far below the cost of production of the American companies.

LEHRER: Is it possible that they can make them cheaper than the U.S. can?

Mr. DAVIS: We have analyzed that as carefully as we can based on their processes, their parts; and they're substantially using our process equipment and our chip design, so we would say: no, they cannot.

LEHRER: Mr. Davis, as I'm sure you're aware and the things I read today, there are many folks who say the reason Japan is dominating this 64K RAM market is simply they make a better 64K RAM than the United States does.

Mr. DAVIS: Well, one of the criticisms that was leveled at our industry over the last couple of years was that we have inferior quality to the Japanese parts, as a matter of fact in the RAM area, in the high-density memory area. I would only say that the Japanese did come in with a very high quality chip at the 16K RAM level. The American companies have spent the last two or three years putting --

LEHRER: To make sure that -- in case people didn't follow my wonderful explanation, 16K would mean 16,000 pieces of information?

Mr. DAVIS: That is correct.

LEHRER: Go ahead.

Mr. DAVIS: The American companies, as they must do, adapted to this competitive challenge from Japan and we now have from the best arbiter we can get, our customers, our American customers, the fact that after two or three years of effort the American companies have reached parity in quality in the big memory chips with Japan. So, we feel that we are highly competitive with them.

LEHRER: Let me ask you this finally, Mr. Davis. Other than the harm it would do, obviously, to your industry and the people who work in it and the people who invest in it, what other harm would there be if Japan ends up dominating the memory chip business? Goes on from 64K RAM to even greater vistas?

Mr. DAVIS: The problem that we have is that the high-density memory chip is the flagship of the advancing front of semiconductor technology. It is the high-volume commodity part. The 64K RAM is destined to be the first $1 billion chip in history. Much of the research that is done across the board on other types of memory, on logic chips, on microprocessors, etc, is amortized by the tremendous cash flow generated by the 64K RAM, the 256K RAM and so forth. If you're not a strong participant in that as a company or as an industry, and you're not subsidized, as our companies are not, by your government, you're going to have an extremely difficult time raising the capital necessary to do the research and to buy the capital equipment necessary to compete.

LEHRER: Thank you. Robin?

MacNEIL: Not everyone sees the situation in such terms. Paul Aron is an investment analyst and executive vice-president with Daiwa Securities, a Japanese brokerage firm. Mr. Aron follows the Japanese electronics and computer industries from his base here in New York. Did the Japanese win this competition unfairly, Mr. Aron?

PAUL ARON: Well, first I would like to qualify and say that I don't think that the competition has been won. The 64K dynamic RAM represents a very small percentage of total semiconductor production. In addition to that, speaking about the Japanese as having gained 70% of the market, we do that by simply ignoring the production by IBM and Bell that produce 64K RAMs for themselves. This raises a very important question and that is: the American semiconductor manufacturers are largely merchant manufactures, producing semiconductors for other companies. Roughly, semiconductors represent about 70% of their sales. The Japanese semiconductor companies are companies that are huge electronic and electrical companies where semiconductors represent only about 6 or 7 percent of sales.

MacNEIL: What's the significance of that comparison?

Mr. ARON: Well, it explains part of Mr. Davis' concern. Namely that the big manufacturers of computers in Japan, like Fujitsu, Nippon Electric and others have developed these chips in order to provide chips for their own production and the company itself provides a huge internal market. And therefore the chip company in Japan is able to have a very large economy of scale, almost from the very inception from its own internal market.

MacNEIL: So you say the Japanese are not through subtle means, as Mr. Davis said, keeping American chips off the market there?

Mr. ARON: Well, I think the Japanese have a strong preference for their own chips but I think, as Mr. Davis mentioned, although we didn't give the origin of it that quality of American chip. The 64K chip was analyzed by an American company, Hewlett Packard. There were six suppliers, three Japanese and three Americans. The worst Japanese company was better than the best American company in terms of quality. That's a rather shameful thing.Now, it's true that the American companies then spent the next two or three years to reach a quality level. Why didn't they maintain the quality level throughout?

MacNEIL: I don't know. Well, is your point, then, that these American companies represented by Mr. Davis' association, are "crying wolf" too soon? That the wolf is not at the door?

Mr. ARON: Well, at this point, the American semiconductor production reperesents about 60% of world production and I would hardly think that this would indicate that we are number two. It is true that we may be number two at the moment in the 64K RAM, which is a very important RAM, but remember at this particular moment the market for 64K RAM is a very small market. We're talking about a market which, last year, was something like $93 million. And this idea of a market, of a billion dollar market -- we're talking about a market in 1985 and 1986. I think it kind of exaggerates the importance of the 64K RAM now and we certainly have plenty of time to catch up and better the quality and productivity of their chips.

MacNEIL: What about Mr. Davis' other point that the Japanese are able to price these things so extremely low in their export markets, including the United States? That they are, in effect, and other people have used the term, dumping them here?

Mr. ARON: I don't think this is true at all. What has really occurred, it seems to me, is that the American semiconductor companies are being hurt, like many other American companies are being hurt, by two factors. One, the very high value of the dollar which not only makes it very difficult for us to compete abroad but even makes it difficult for us to compete in our own backyard. And the second factor is the very high interest rate. So that American companies who have to build up productive capacity have to borrow at ridiculously high interest rates like 15 and 16 percent. The Japanese are able to borrow at somewhere around 7%. Therefore they have a tremendous advantage. In essence we would really say, "We have met the enemy and they are us."

MacNEIL: Thank you. Jim?

LEHRER: You've met the enemy but you don't think it's us. Right, Mr. Davis?

Mr. DAVIS: I do not think it's us.

LEHRER: What about high interest rates and the high value of the dollar? Do you just reject that?

Mr. DAVIS: I think that that is obviously a factor on all American companies, but I think if you look at the -- if you analyze the industry competitiveness, you will find that the macroeconomic factors such as interest rates, exchange rates and the like, are not the fundamental problem.

LEHRER: Well, explain to Mr. Aron. Mr. Aron says that, first of all that he doesn't think the battle has been won, that you all -- he didn't pick up Robin's term "crying wolf," but he at least said you were exaggerating what the problem is.

Mr. DAVIS: The battle has not been won on the 64K RAMs as yet. As long as we in the Semiconductor Industry Association can obtain our objectives through Washington through negotiations and through the Reciprocal Trade Investment Act of 1982 which we are strongly supporting --

LEHRER: But you're saying if you don't get -- I want to ask you about that specifically in a moment, but what you're saying is that if everything stays the way it is right now, no change in terms of Washington or Tokyo or whatever, then your industry is in serious, serious trouble?

Mr. DAVIS: I would say that within two or three years we would be in serious, serious trouble if there were no change. If the external environment to the industry remained unchanged, we would be in trouble.

LEHRER: Mr. Aron, how come you look at it and see something entirely different than that?

Mr. ARON: Well, I guess some people see a glass half full and some see the same glass half empty. It seems to me that the problem is that the Americans seem to be throwing in the towel far too early. We have tremendous technological capability. We have certainly shown that in a whole host of products up to now in the semiconductor area, we've certainly shown that in the various custom chips being developed. I think the major problem is that the American semiconductor companies are simply too small to develop the kind of capital, plant and expenditure in R&D development that these new chips require.

LEHRER: Do you agree with that?

Mr. DAVIS: I disagree vehemently with that. I would say if you looked atthe innovations since the Bell Labs on, the last 25 or 30 years, you will find that most, 75, 80 percent of the innovations in semiconductor processes and semiconductor chips have been by small companies: a hundred million, 500 million, 800 million, not by the big firms. That's the source of the innovation.

LEHRER: But your point, Mr. Aron, is not necessarily innovation, but that they're not able to manufacture it to the economy of scale to compete with the Japanese? Is that what you're saying?

Mr. ARON: Precisely. In other words, the innovations have been developed by the Americans and largely by small companies. I think it's really the responsibility now of the large companies to develop innovations because only they have the capital structure that will enable us to compete. In other words, the problem is that, and I think that this is throughout all industry, that production has not reached the point where the capital investment is so huge that it requires a world market to justify it and requires a huge company to sustain it.

LEHRER: Let me ask you, Mr. Davis, what is it that you want Washington to do to help you out? By the way, I would not bank on Mr. Aron coming and testifying on your behalf, but I'll ask him in a moment. What do you think ought to be done to help you?

Mr. DAVIS: Well, we are -- first of all I mentioned that we have closed the gap on quality. Second of all, we have a program on research that I'll mention later. First of all the industry has to remain competitive on its own behalf. That's number one. Number two is, we feel that there are some structural problems, political intervention in trade and investment in high technology in general, and in semiconductors in specific, that the United States must take the leadership in coming to grips with, with it's trading partners.Not only Japan, but principally Japan because as I said earlier they have technological parity. We are the two dominant nations at this point. The first thing that we are suggesting, and we've worked very hard this year with the Congress and with the administration, is in getting high technology language into the Reciprocal Trade Act of 1982, which was introduced by Senator Danforth into the Senate and Congressman Frenzel into the House and is now far along towards floor vote and hopefully conference and passage this year, and we understand generally is approved by the White House and by the administration. This is a terribly important bill to us and it should be passed this year because it does three things. Number one, it mandates the president to negotiate openness in Japan and other foreign markets --

LEHRER: Hopefully it could free up the market for American-made chips.

Mr. DAVIS: Yes, sir. On a basis of national treatment. Motorola would be treated in Tokyo the same as Hitachi is treated in Tokyo. Number two, for the very first time, it causes the United States government to constantly monitor foreign industrial practices in the high technology area: looking at research cartels, looking at subsidized financing, looking at protective mechanisms, looking at fair competition, exports, markets. And the last thing, it calls for the reduction and eventual elimination of tariffs on semiconductors and computers. We're looking for a free trade solution and time is of the essence.

LEHRER: You think time is of the essence, Mr. Aron? Do you think Washington should do anything to help the semiconductor industry right now?

Mr. ARON: Well, in terms of a tariff, the tariff right now is equal: both Japan and the U.S. have the same tariff. I think we are talking so much about the bar to Japan; we have to realize that American semiconductors, as a percentage of Japanese consumption, is almost twice as large as Japanese semiconductors as a percentage of American consumption. It seems to me very difficult to say that our products have been barred from Japan.

LEHRER: But in a word, then, you do not believe that Washington should come to the rescue of the semiconductor industry right now, at least?

Mr. ARON: I think Washington should come to the rescue of all American industry and that means reduce interest rates and a weaker dollar.

LEHRER: All right, thank you. Robin?

MacNEIL: Now we hear from a man who has just completed a study on Japanese competition in the semiconductor industry for the Joint Economic Committee of Congress. He is John Zysman, who teaches political science at the University of California at Berkeley, and he's with us at Public Television station KQED in San Francisco. Professor Zysman, is this Japanese success in the particular area of the 64K memory chip an isolated one or is it part of a larger strategy?

Prof. JOHN ZYSMAN: Well, in fact, I think that the Japanese over a number of years have managed to organize a strategic development plan. That is, there's been a conscious effort first to move from labor-intensive to capital-intensive industry: from textiles to ship building and steel. From ship building and steel into consumer appliances like televisions, automobiles and the like. And now there is also a concerted strategy of moving into -- to creating comparative advantage, creating national advantage in the area of high technology industries. And I think some of the problem that we've found and some of the questions we had was whether an issue such as the access to Japanese markets, whether the cost of finance that Japanese companies find themselves having, in fact are tied up with a general strategy of creating advantage in these sectors.

MacNEIL: How would they create that advantage, did your study show?

Prof. ZYSMAN: Well, this study, in fact, was one of eight sectors, this particular study was one of eight sectors that we looked at in a look at American industry in international competition, and we found commonalities in all of the sectors that we looked at. That is, that in an initial period, the Japanese market would be relatively closed which would create the market for domestic production to expand; to create the economies of scale that Mr. Aron referred to. During that period the Japanese government would play the role of gatekeeper, forcing, in many cases, American companies to sell technology if they wanted any access at all into the Japanese market, since the access for their product was closed off. Financing the development of the production of that product, and then finally as Japanese companies gained economies of scale and gained advantage from a very large domestic market, encouraging them then to export. The problem here is that many of the elements of this pattern that existed in the future -- in the past, rather -- exist here and conceivably will continue to exist in the future.

MacNEIL: What should the U.S. response be to that, do you think?

Prof. ZYSMAN: Well, my own feeling is, is that the issue of access to the Japanese market is not a secondary one but is, in fact, a critical problem. That is, Mr. Aron refered to the fact that the Japanese companies are large, integrated electronics firms. The fact that they are in large integrated electronics firms leaves out one component of the story which is that, for the most part, these firms only produce a portion of their own product, that is of the semiconductor chips, for their own use. Most of it they sell to other Japanese users. It's almost as if IBM and AT&T were to specialize in specific kinds of products and then sell them back and forth to each other.The concern that we have -- and it's really based on the available data, and the data that we have could be vastly improved if we were able to get better Japanese statistics -- does suggest this pattern of domestic specialization coupled with a very difficult market access creating the possibilities of economies of scale, and creating the possibility of low interest rates. Part of the issue of low interest rates is a difference in macro-economic policy in the two countries. And part is a difference of macro-economic policy in the two countries and part is a product of conscious efforts by the Japanese government over the last years. One -- efforts that I commend them for, actually, to make sure that the growth sectors of their economy get funds and that savings are channeled into investment and not into consumption.

MacNEIL: Do you see from the result of your study and your awareness now of the potential Japanese competition, do you see this area of future American industries as vulnerable as automobiles and steel were?

Prof. ZYSMAN: Well, the problem is very different. That is, autos and steel were already developed industries; that is, we had existing plant in place, we had existing model lines in place. In steel, for example, when the American companies expanded from, let's say 1955 on, the rate at which they introduced the most competitive production technologies was in fact higher than their Japanese competitors. But their Japanese competitors started from scratch so they ended up with a mostly modern plant and we ended up mostly with a backward plant. The problem in autos is also very different. This is an industry and it's critical character is that it is in fact not an industry in which the Japanese are attempting to catch up but in which both of us are attempting to create the future.

MacNEIL: Thank you. Jim?

LEHRER: Mr. Aron, do you see the semiconductor industry, the electronics industry as vulnerable to complete Japanese domination, as they do now in appliances and in automobiles?

Mr. ARON: I really don't think so, but I would like to preface my remark with a statement that the previous speaker made about specialization of Japanese companies. For example, the 64K RAM is being manufactured by at least six different Japanese companies who are in intensely competitive with each other. And the second point I wanted to make is I just wondered what is so terrible about IBM and Bell manufacturing semiconductors for the entire United States, not just for their own consumption. And I think this relates to the question that you asked me. Namely that if America and American companies would take upon themselves the responsibility of meeting the challenge, they have all the means to meet and meet it successfully. At the same time, we have a tremendous advantage in the small companies who can develop custom chips, working very closely with their customers and develop specialization in chips which would make them really impregnable to the Japanese thrust.

LEHRER: Yeah. Mr. Davis, let me ask you about some of Professor Zysman's points. He went through his analysis of why the Japanese have been able to do what they've been doing in your area. Does what he laid out come out unfair to you? Is that an unfair strategy that Japan is following?

Mr. DAVIS: It depends on your perspective. I would say probably one could put themselves in the perspective of the Japanese government and say that it's not unfair, that they're trying to develop their high-value-added, research-intensive industries of the future based on their resources -- high on human resources and low on natural resources. It makes a great deal of sense. However, we've had occassion to reap the MITI vision for the future which makes the basic assumption that --

LEHRER: The what?

Mr. DAVIS: The MITI -- Ministry of International Trade and Industry --

LEHRER: I see.

Mr. DAVIS: -- vision of the future which has as its basic assumption something that we can't accept. It presumes during the 1980s the continual decline economically and politically of the United States. The second thing that it says, that it is absolutely essential for the furtherance of Japan within this environment of a declining U.S. competitiveness worldwide, that the funds, research and so forth be plunged into the high technology industries. Now, the next thing --

LEHRER: What's wrong with that?

Mr. DAVIS: Nothing, but let's get to the next point. Public Law 84, passed in 1978 for the machine tool and information industries does have some things which we think are fundamentally unfair. It gives to MITI, aforementioned Ministry, the right to set aside the fair trade laws with respect to the high technology industries and to form research cartels and any other combinations necessary to further the industry.

LEHRER: We've just got a few seconds. I wanted to ask Professor Zysman, just in a word, Professor, based on your analyses, the strategy Japan is following, is it unfair, just on the face of it, to American industry trying to compete?

Prof. ZYSMAN: Well, I think the question isn't whether it's unfair. The question is whether it --

LEHRER: That's my question.

Prof. ZYSMAN: I understand. And I think the question is whether it poses serious public policy problems. It requires a response by us domestically and it requires a response by us to insure that the trade laws are mutually applied.

LEHRER: Thank you. Robin?

MacNEIL: Professor Zysman, thank you for joining us in San Francisco, Mr. Davis in Washington, Mr. Aron in New York. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.