CHAPTER 5 Industry-Specific Competitiveness

CHAPTER 5

Industry-SpecificCompetitiveness

— — — . —

Contents

PageOverview. ● .**...***.****.***********.* 69

Steel . * . * . . * * *, . * . . * * * . * . . ., * *.......* 70Prices and Wages . . . . . . . . . . . . . . . . . . . . . . . 70Dumping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Exchange Rate Effects. . . . . . . . . . . . . . . . . . . 73Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Demand Patterns . . . . . . . . . . . . . . . . . . . . . . . 75

Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Consumer Electronics. . . . . . . . . . . . . . . . . . . . 76Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . 82Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89Technical Personnel. . . . . . . . . . . . . . . . . . . . . 90Comparing the Sectors. . . . . . . . . . . . . . . . . . . 91

Automobiles ● . . . . . . ● ....0.. ● . . . . . . . ● .** 92Imports and the U.S. Industry . . . . . . . . . . . . . 92Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Factors in Competitiveness . . . . . . . . . . . . . . . 95Small Car Strategies of U.S. Firms . . . . . . . . . . 99

Summary and Conclusions. . ..............102

List of Tables

Table No. Page13. Potential Influences on Industrial

Competitiveness . . . . . . . . . . . . . . . . . . . . . 6914. Selected Currency Value Changes,

1971-74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7315. Domestic Steel Shipments and

Employment, 1969 and 1979. . . . . . . . . . . . 75

Table No. Page16. import Penetration in Consumer

Electronics, 1978 . . . . . . . . . . . . . . . . . . . . 7717. Areas of Concentration of Japan’s

VLSI Program . . . . . . . . . . . . . . . . . . . . . . . 8418. Comparison of the United States and

Japan in Digital Integrated CircuitTechnology . . . . . . . . . . . . . . . . . . . . . . . . . 85

19. U.S. Automobile Imports by Country ofOrigin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

20. Motor Vehicle Production and SalesFigures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

21. Distribution by Size of Sales in the U.S.Automobile Market . . . . . . . . . . . . . . . . . . . 94

22. Distribution by Size of U.S. AutomobileProduction . . . . . . . . . . . . . . . . . . . . . . . . . . 94

23. Numbers of Dealerships by Manufacturer 9924. Fuel Economies of Domestic and

Imported Automobiles, 1979 . ..........101

List of Figures

Figure No. Page8. indexes for Steel Mill Product Prices,

9

10

Consumer Prices, and IndustrialCommodity Prices. . . . . . . . . . . . . . . . . . . . 71Indexes of Input Costs for the AmericanSteel Industry . . . . . . . . . . . . . . . . . . . . . . . 72Employment in the American SteelIndustry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

CHAPTER 5

lndustry-Specific Competitiveness

OverviewGoing beyond broad trends in indicators

such as productivity, this chapter examinesinfluences on competitiveness that are spe-cific to each industry. Although chapter 4touched on factors such as R&D, these weretreated in a general way. At the level of thespecific industrial sector—even more, the in-dividual firm—competitiveness springs froma diverse and complex array of influences.Some of these act directly [e.g., quality and

reliability of products—themselves depend-ing on other, more subtle factors), some in-directly (e.g., quality of the educational sys-tem, political and economic stability). A selec-tion of these influences is listed in table 13.While many are intangible—and few can bequantified— all are important in determiningthe competitiveness of particular firms andindustries. Public policies are woven intomany; however, policy effects are left largely

Table

Factor

1. Characteristics of industryand market structure.

2 Characteristics of the laborforce.

3. Characteristics ofprofessional personnel

4. Availability of materials andcomponents.

5 Supporting Infrastructure

6. The environment forinnovation.

7. Business and economicconditions.

8 Government Interact Ions

9 International trade relations

13.— Potential Influences on Industrial Competitiveness

ExamplesThe number of firms, their size and production facilities, and degree of concentration

and integration influence competition. Market structure includes the size, availability,rate of growth, and degree of saturation of the market,

Both labor costs and availability of skilled workers are important; Government supportfor the training and education of the work force can be critical, The nature of labor-rnanagement relations, type of unions, and mechanisms for worker participation canalso influence productivity and competitiveness,

Quality of management and technical personnel are significant determinants of competi-tiveness. Important characteristics include: the attitudes and value structure of man-agement; aggressiveness in developing, marketing and exporting products: and thedegree of interaction and cooperation within the firm among R&D, marketing, productplanning, manufacturing engineering, and quality control personnel.

Assured supplies of the inputs to the manufacturing process (iron ore, petroleum, elec-tronics components) are important for planning and long-term stability. Domesticavailability versus dependence on imports can be important.

The infrastructure includes the vendors, subcontractors, other suppliers, and servicesnecessary to support complex technologicalIy based industries. Also Included arebasic research organizations and the level of Government support for generic R&D.

Factors that more directly affect the ability to innovate and the rate of technology diffu-sion Include: the interactions and synergies among firms within an industry (mobilityof personnel. licensing and other Interchanges of technology, openness to inwardtransfers of technology and management know-how); and the existence of clusters ofskills as among the semiconductor firms in Silicon Valley.

Included here are Indicators of overall economic performance such as GNP or GDP,levels of disposable Income, and inflation rates. The nature of capita/ markets (con-centration of banking and credit) affect the ability of firms and industries to expand.Also Important are less tangible factors such as consumer confidence, investment ex-pections, and the general climate of political stability and social welfare,

Government regulations that impinge on factory work, supplies of resources, design andsale of products, tax policies, Government procurement policies, and antitrust policiesand their interpretations all affect the attitudes and decisions of business. In addition.more intangible factors which are nevertheless important include the tradition ofcooperation or conflict within and among Government, business, and labor.

Policies enacted by domestic and foreign governments affecting imports and exportssuch as taxes on overseas profits, tariffs on imports and reimports after offshoreassembly, export credits and subsidies, exchange rates, policies toward technologytransfer, and nontariff barriers set the environment for international competition. inter-national agreements and organizations often provide the framework for such policies.

69

70 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

to chapter 6. In the end, of course, competi-tiveness rests on the capabilities of individualfirms. Even a cursory review of variationsover the past few years in sales, profits, andother indicators of success in industries suchas steel or automobiles shows how greatly theperformance of individual companies canvary.

Each industry and each firm has attributesthat make it unique. Industries and firms de-velop attitudes, even cultures, which shiftover time. These are the backdrop for themore concrete and quantifiable indicators ofcompetitiveness discussed in earlier chaptersand in the sections below. Thus, lagging com-petitiveness in steel has different causes than

lagging competitiveness in automobiles orconsumer electronics.

Just as the causes of shifts in competitive-ness differ, so do the consequences—thoughthe most prominent in each case is loss of em-ployment opportunities. Some of these lossesare irreversible without large increases inproduction— increases that could only comethrough exports. If high volumes of exportsare unlikely—as seems the case in industriessuch as consumer electronics or steel—thealternative is retraining and relocation ofworkers. In fact, American industries such assteel, consumer electronics, and automobilesare experiencing structural unemployment inits classical sense.

SteelPrices and Wages

Chapter 4 compared the steel industry withthe electronics and automobile industries, aswell as with U.S. manufacturing in the ag-gregate. While labor productivity in the steelindustry has improved at approximately thenational average for manufacturing, hourlywages in real terms have grown much fasterthan average. In recent years, the industryhas agreed to wage increases diverging moresharply from other sectors, even while importpenetration has been rising (figure 5). Aschapter 4 suggested, increased labor costsshould be reflected in price increases forsteel greater than price rises elsewhere inthe economy. Figure 8 indicates that this hasin fact occurred.

The chart compares price behavior in steelto other parts of the economy. Beginning inthe 1970’s, steel prices rose considerablyfaster than the general inflat ion rate asmeasured either by the consumer price indexor the industrial commodity price index. Thisis in marked contrast to earlier time periods,when steel prices rose parallel to overallprice inflation. Moreover, prior to 1970, realwage increases in the steel industry werewell below the industry’s productivity gains.

Despite the rapid price increases shown infigure 8, profits for the industry as a wholehave been gradually decreasing; in recentyears the steel industry has been substantial-ly less profitable than other U.S. manufactur-ing sectors.

In addition to wages, many of the other ele-ments of production costs for steel have alsobeen increasing, particularly costs of energy.Figure 9 shows trends for energy and materi-al inputs to ironmaking and steelmaking.While all the indexes show doubling periodsof 10 years or less, these rapid price rises donot affect all firms equally. For example,some integrated firms have their own re-serves of coal and iron ore; nonintegratedsteelmaker are more heavily dependent onprices of scrap and electricity, Nonetheless,figure 9 demonstrates that price increasesfor steel have been caused by rising energyand materials costs as well as wage rate in-flation. Although labor costs, including fringebenefits, tripled between 1967 and 1978, thecosts of metallurgical coal went up more thantwice as fast.

‘Technology and Stee) industry Competitiveness (Washing-ton, DC.: Office of Technology Assessment, U.S. Congress, June1980], pp. 120-122. Profitability varies considerably from firmto firm.

Ch, 5—industry-Specific Competitiveness ● 71

Figure 8.— Indexes for Steel Mill Product Prices, Consumer Prices, andIndustrial Commodity Prices (1967 = 100)

28C

250

200

150x2c—

100

50

0

Industrial commodity pricesAverage annual rates of change

IndustrialStee/ ml// Consumer commodityproducts prices prices

1960-65 0.20/0 1 .3°10 0,20/01965-70 3.2 4,2 2.71970-75 11.5 6.7 9.31975-79 9.2 7.8 8.3

1965 66 67 68 69 70 71 72 73 74 75 76 77 78 1979

Year

SOURCE Bureau of Labor Stat[stlcs

In other countries, real wages for steel-workers have also risen faster than produc-tivity. Comparisons of wage and productivityincreases show that the American steel in-dustry has done well compared to Europe.However, the fraction of steel costs attrib-utable to labor has risen in the United Statescompared to Japan because Japanese produc-tivity improvements have offset wage in-creases. ~

The United States has not exported much

lie~~~~~~ ~~) the President (m Primx (~nt~ (l)st+ in the [Jni~ed

St{lt~\ Steel ]n(iu~tr}r [~$’ashin~t[)n, 1). C.: Cc)unril (m L1’age andPrire Stahility, October 1977], p, 45.

steel in recent years—in the vicinity of 3 mil-lion to 4 million tonnes annually, about half toCanada and Mexico. Imports from these twocountries have been at about the same level,indicating that the Canadian and Mexican in-dustries complement this country’s, each sup-plying certain types of products to particularregions or sectors. For example, about one-quarter of Mexico’s imports from the UnitedStates consist of pipe and other oilfield prod-ucts, In other parts of the world, U.S. exportshave not been competitive, Some observerssay this is because the industry insists on sell-ing goods abroad at prices covering full costsrather than marginal costs.

72 . U.S. Industrial competitiveness—A Comparison of Steel, Electronics, and Automobiles

800

700

600

500

400x

:—

300

200

100

0

Figure 9.–indexes of Input Costs for the American Steel Industry (1967 = 100)

.

.

.

.

.

.

.

Metallurgicalcoal

Steel scrap

/ ’

iron orea

(pellets)

1 1 1 I I I I 1 1 1 I 1 i I

1965 66 67 68 69 70 71 72 73 74 75 76 77 78 79a1969 = 100, Year

SOURCE Technology and Steel Industry Competitiveness (Washington, D C Office of Technology Assessment, U S Congress, June 1980) p 122, from BLS andAISI data

Dumping

Dumping occurs when export prices areset below home market prices, or in somecases below costs. Since 1959, the U.S. in-dustry has claimed that foreign steelmaker,pa r t i cu la r ly European f i rms , have beendumping steel in the United States,

Incentives for dumping are highest whendemand slackens and substantial excess ca-pacity exists. This is because the incrementalcosts of producing additional output can bequite low, particularly if labor costs in theshort run are essentially fixed (see ch. 3).Under such circumstances, the added costs ofmaintaining relatively high production levelscan be small, and sales at any price covering

variable costs become attractive. At the sametime, firms in this situation prefer to sell theexcess output outside their usual markets, sothat price cutting will not affect establishedpricing patterns. Circumstances thus com-bine to encourage dumping in export markets.Moreover, government-owned steel firms—asin some countries in Europe—can be sup-ported indefinitely from public funds to main-tain employment, even though unprofitable.

Dumping and other unfair trade practicesare restricted under the General Agreementon Tariffs and Trade. Because low prices arepresumed to benefi t consumers, dumpedgoods are allowed to enter the United Statesunless a domestic industry is injured. If injury

Ch. 5—/ndusfry-Speciflc Competitiveness ● 73

is found by the International Trade Commis-sion, the Department of Commerce (formerlyTreasury) assesses an antidumping duty in-tended to raise prices to the U.S. marketlevel.

The steel industry, along with other domes-tic industries, has maintained that processesfor establishing both dumping and injury areexcessively complex and time consuming, andthat the injury test is overly strict. As a conse-quence, industry leaders assert, the law isunworkable and does not effectively protectthem from unfair trade practices by foreignfirms. In 1977, largely in response to suchcriticism, the so-called trigger-price mecha-nism (TPM) for steel was instituted to supple-ment existing antidumping laws (see ch. 6).The TPM allows imported steel to enter theUnited States as long as prices are a certainpercentage above the costs of the most effi-cient producer in the world market—then asnow Japan,

Whether U.S. antidumping remedies areinadequate— in general or just for steel—istoo involved a question to discuss in depth,but one or two points deserve mention, First,the evidence compiled for OTA’S steel studysuggests that European mills, but not Japa-nese, do have higher average costs thanAmerican steelmaker. On the other hand,European firms historically have cut prices athome and abroad when they have excess ca-pacity. American producers, in general, havenot decreased prices in such circumstances,preferring to follow full-cost pricing strate-gies. As long as there is excess world steelcapacity, producers in a t least some coun-tries will have incentives to dump. However,if world steel demand grows to meet capac-ity— as the OTA steel study finds possible{—then dumping will cease to be a serious threatto the U.S. industry. The real problem wouldthen be the lack of cost (and therefore price)competitiveness with respect to the Japaneseand, potentially, with respect to new mills inthe developing world.

Exchange Rate Effects

The deteriorating competitive position ofthe American steel industry in the late 1960’simproved beginning in 1971 when the dollarwas allowed to float against other currencies.For some time, the United States had persist-ent balance-of-payments deficits, in part be-cause the dollar was overvalued with respectto other currencies. When fixed exchangerates were replaced by a floating exchangerate system, the dollar fell against most cur-rencies (table 14), improving the competitiveposition of the United States in steel andother industries. As the accumulated effectsof inflationary imbalances dissipated, therelative prices of many American productsbecame more competitive.

Since 1971, exchange rates have beenlargely market-determined. Over time, rateshave tended to mirror differences in inflationamong various countries. Although govern-ments sometimes try to influence exchangerates—because holding them below the mar-ket level will make their exports more attrac-tive—such a strategy is difficult to maintainfor long in open currency markets.

Short-term fluctuations in exchange ratesabout the long-term equilibrium level can alsoinfluence competitive position. Between thefall of 1978 and the spring of 1980, the aver-age production costs of Japanese steel, con-verted to dollars, fell from about 8 percentabove U.S. costs to 23 percent below U.S.costs as a result of swings in the yen/dollar

Table 14.—Selected Currency Value Changes,1971-74

Par value— Rate—August 1971 June 1974$/currency $/currency Percent

Currency unit unit changeBritish pound $2.40 $2.36 – 1 8°0F r e n c h f r a n c 0180 0.203 12.9G e r m a n m a r k 0273 0373 364J a p a n e s e y e n 0.00278 00035 26,6

SOURCE: R H Mason R B. Miller. and D.R. Weigel The Economics of Interna

t ional Bus iness {New York: John Wiley & Sons. 1975} p 9 0

74 ● U.S. Industrial Competitiveness —A Comparison of Steelj Electronics, and Automobiles

exchange rate, q Similar effects occurred in Employmentother industries, with obvious consequencesfor the cost/price competitiveness of Japaneseimports in U.S. markets. While the JapaneseGovernment may have influenced such shiftsin the past, as Japan’s capital market be-comes more closely linked to world capital

When competitive advantages shift, em-ployment levels may change. Declining em-ployment in the domestic steel industry hasoften been blamed on increased competitionfrom abroad.

markets—an explicit goal of their govern- As figure 10 shows, total employment inment—currency rate pegging will become the American steel industry has fallen moremore difficult. than 20 percent since peaking in 1965. The—. -—..

“~. F. Marcus and K. M. Kirsis, “Tbe Steel Strategist, ” Paine rate of decline has been more than twice aswebber ~lit~hel] Hutchins, Inc., ]une 1980, p. 1. Quoted in u.s.- rapid for hourly workers as for salaried. Two)opun Trade Report (Washington, D. C.: Subcommittee onTrade, Committee on Ways and Means, U.S. House of Repre- questions are most important: 1) To what ex-sentatives, Sept. 5, 1980), p. 10. tent have imports been the cause of employ-

Figure IO.— Employment in the American Steel Industry (annual averages in thousands)

600

550

500

450

400

350

300

250

200

150

100

50

0

.

.

Total employees

Hourly employees

Salaried employees

1 I I I I I 1 I 1 I 1 I i 1 1 1 1 1 11960 6 1 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79

Year

SOURCES Annual Statistical Report, American Iron and Steel Institute, 1978, 1979

Ch. 5—industry-Specific Competitiveness ● 75

ment decreases? and 2) What would be theemployment effects of higher domestic pro-duction?

Rising imports always decrease job oppor-tunities. However, this is not the only factorat work. Table 15 gives steel production andemployment for a pair of years a decadeapart. Shipments were higher in 1979, buttotal employment fell by more than 100,000because of increased productivity. Had do-mestic production replaced some or all of theimports in either year, employment wouldhave been higher. But the basic conclusion re-mains: the most important cause of decliningemployment has been rising productivity, notincreased imports.

This conclusion has significant policy im-plications, For the competitiveness of thesteel industry to improve, its productivitymust continue to increase, thus cutting costs.However, the inevitable result would be fur-ther employment losses unless total produc-tion could be substantially increased. At cur-rent production levels, the goals of improvedinternational competitiveness and stable orrising employment are fundamentally op-posed,

The fact that policies intended to maintainemployment often work against increased ef-ficiency is illustrated by the European experi-ence. In Europe, despite subsidies or directgovernment ownership, steelmaker have notin general been able to achieve costs as lowas in the United States or Japan. Moreover,the least competitive industries appear to bethose where political pressures for maintain-ing employment have been greatest. For ex-

Table 15.— Domestic Steel Shipments andEmployment, 1969 and 1979

Domestic Tonnesshipments Total shipped(thousands employment per I report

Year of tonnes) (thousands) worker penetration1969 85,165 554 154 14. 2%1979 90,958 453 201 16. 1%

ample, the British steel industry, largelyowned by the government, lost $1.3 billion inits latest fiscal year, and is reported to beplanning new layoffs totaling more than50,000 workers.5 Enhancing the Americansteel industry’s international competitive-ness, while certainly desirable, will not havelarge positive impacts on employment,

Demand Patterns

The structure of demand for steel is chang-ing in ways that are important to the competi-tiveness of the industry (ch, 7). Economicgrowth is the most important determinant ofworldwide steel demand, but steel use doesnot necessarily rise as rapidly as gross na-tional product, For example, steel consump-tion in the industrialized world is now signifi-cantly less than in 1973, At the same time, inthe developing world, increased steel demandhas spurred the expansion of capacity. SouthKorea, although still a minor producer on theworld scale, has quadrupled its steel outputin the last 5 years. Mexico and Brazil havebeen adding steel capacity much faster thanthe industrialized nations. In the future, allthree countries could be efficient producersand potential competitors in world markets.

Even under the best of circumstances,therefore, the American steel industry is like-ly to continue to diminish in importance rela-tive to the rest of the world. It will share thisfate with the steel sectors of virtually all in-dustrialized economies,

The developed countries appear to be in amuch stronger position in alloy/specialtysteels than in carbon steels. In part this isbecause the demand mix for steel productshas also been changing in these countries. De-mand for alloy and stainless varieties is risingrapidly. Specialty steel use will continue toincrease—production of synthetic fuels, forinstance, will depend critically on specialtyalloys. Shipments of alloy steels now accountfor over 10 percent of U.S. tonnage. There

‘Y. hl, Ibrahim, “British Steel Reports $1.3 Billion Loss,”’New York Times, July 30, 1980, p. D 1. Some of the loss was dueto a strike: losses the previous year were only $735 million.

76 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

has also been a shift towards high-qualitysheet products as opposed to structural steelin most of the developed world. Thesechanges partly reflect increases in the pro-duction of manufactured goods at the ex-pense of construction, partly changes in ap-plications. For example, increased demandfor fuel-efficient automobiles is affecting thesteel industry. Less steel is being used in eachcar due to down-sizing and the substitution ofl ighter materials such as aluminum andplastics. The move to lighter cars is also stim-ulat ing demand for high-strength steels ,which are higher valued.

Despite the tradeoff between productivityand employment, the decline in size of theU.S. industry relative to the rest of the world,and continuing pressure by other steel-prp-ducing nations, there are factors operating tothe advantage of the U.S. industry,

C h a n g e s i n d e m a n d t o w a r d h i g h e rstrength, higher priced steels give the in-dustry an opportunity to advance throughR&D. High-technology products, particularlyalloy/specialty steels, may offer new exportopportunities. Nevertheless, while the U.S. in-dustry is probably on a par with other ad-vanced nations in product technologies, it isgenerally somewhat behind Japan and thebest of the European producers in the in-stallation and use of process technologies.G

As the OTA steel study also shows, theremay be significant opportunities for processinnovations in the future—timely adoption of

‘Technology and Steel industry (Competifiveness, op. cit.,ch. 9.

Photo credit: American Iron and Steel Institute

Electric furnace

which might give the United States importanttechnological advantages (some process inno-vations might, however, benefit other nationsmore), In any event, modernization and up-dating of facilities would cost several billiondollars per year— capital that does not seemcurrently available because of the generallypoor profitability of the industry in recentyears.’ Attracting capital is a challenge thatthe steel industry shares with electronics,automobiles, and other sectors of U.S. indus-try—all of which compete for investmentfunds,

‘Ibid., ch. 10,

ElectronicsConsumer Electronics

More than any other segment of thesethree industries, foreign competition has hadmajor impacts on consumer electronics. Asnoted in chapter 4, large percentages of vir-tually all consumer electronics products soldin the Uni ted S ta tes a re manufac tu redabroad. Table 16 gives figures for 1978; im-

ports would have taken much more than 18percent of color television sales for that yearif the Orderly Marketing Agreement (OMA)with Japan had not caused Japanese firms toswitch to assembly in the United States, Fur-thermore, table 16 understates the signifi-cance of imports because many products as-sembled in the United States and counted asdomestic production include substantial

. . — -

Ch. 5—Industry-Specific Competitiveness ● 77

Table 16 .—Import Penetration inConsumer Electronics, 1978

Imports as 0/0 ofProduct U.S. consumption

Videotape players/recorders . . 100%Household radios ... . . . 100CB radios ... ., ... ., 90Black and white TVs ., 85Electronic watches . . 68High fidelity and stereo components 64Phonographs and compact stereo systems 43Audio tape recorders 35Microwave ovens ., ., . 25Color TVs ., . . . . . . 18

S O U R C E The U S Consumer Electronics Industry and Foreign Competition.E x e c u t i v e S u m m a r y f i n a l r e p o r t u n d e r E D A g r a n t N o 0 6 2 6

07002 10 Department of Commerce, Economic Development Admin-istration May 1980 p 2

foreign value-added. Not only componentsand subassemblies such as circuit boards,but complete chassis are often imported,though most picture tubes are still made inthis country.

Because of rising imports, increased pro-ductivity, and the movement by U.S. firmstoward overseas production to control costs,employment in consumer electronics has de-clined dramatically since the mid-1960’s. Thework force today is barely half the size of 15years ago, Employment has recently in-creased slightly, but this has been the resultof OMAS insulating the U.S. TV market.

The Move Overseas.—TV receivers—col-or and monochrome—account for nearly halfthe total market value of consumer electron-ics products in the United States; this seg-ment typifies the factors affecting the entireindustry.

The first major threat to American manu-facturers of TV sets came from Japan, WithinJapan, the Ministry of International Tradeand Industry (MITI) encouraged and helpedto finance the development of transistorizedTV designs during the 1960’s.8 While much ofthis work was carried out in the laboratoriesof Japanese firms, the basic color TV technol-ogy was licensed from U.S. consumer elec-tronics manufacturers.——

“E. Sugata and T. Namekawa, “Integrated Circuits for Tele-vision Receivers, ‘“ IEEE Spectrum, hlay 1969, p. 64.

Phofo credlf RCA

Worker uses an air pressure lift to hoista 25-inch picture tube Into a console cabinet

Replacing vacuum tubes with semiconduc-tors complemented the overall strategies ofJapanese manufacturers. These strategies in-cluded the development of large export mar-kets, creating economies of scale. The advan-tages of transistorized chassis designs (whichwere developed at the same t ime in theUnited States by Motorola) included:

1. Lower manufacturing costs (though atfirst the transistors themselves weremore expensive than the vacuum tubesthey replaced), the benefits tending to bemagnified at higher production levels be-cause assembly could be automatedmore readily.

2. A far more reliable product [primarilybecause of the intrinsic reliability oftransistors), reducing the servicing re-

78 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

quired. Japanese firms thus did not needextensive networks of repair facilities intheir export markets.

The initial Japanese penetration into theUnited States focused on particular marketniches, notably small-screen sets and privatebrands (sets sold under the trade names ofretailers such as Sears), where low price wascritical. Sony, the one exception, chose in-stead to stress high quality and a prestigiousimage. Import penetration was accompanied,as for steel, by dumping complaints broughtby American firms. The dumping issue is dis-cussed in more detail in chapter 6. Whiledumping has been proven under U.S. law, ithas not been an overriding factor in the suc-cess of Japanese TVs in the marketplace.

Prior to the rapid sales gains of importedTV sets, the American market had been domi-nated by franchised dealers carrying well-known brand names. However, the Japanesechose to sell through alternative channelssuch as discount outlets where price was im-portant . Here their rel iabil i ty advantagecame into play, because discount stores rare-ly offered servicing. The strategy was notwithout risk, since reliability problems wouldhave reinforced the rather skeptical view ofJapanese products then held by many con-sumers.

As imports found increasing success,American manufacturers responded to thecompetition’s strengths: quality, reliability,and low production costs. American firmstypically combined rapid adoption of transis-torized chassis designs—more rapid thanmight otherwise have been planned—with asearch for lower cost production methods.Given the spectrum of available productiontechnologies, most U.S. firms chose to lowertheir costs by moving some of their manufac-turing to foreign countries. Low wages werethe driving force. While tax havens offeredby foreign governments-and U.S. tariff pol-icies that limit duties on reimports after off-shore assembly to the value-added overseas—may have encouraged transfers abroad,the basic motivation was to reduce laborcosts.

Photo credit RCA

Robot handling TV picture tubes

As if to emphasize that American manufac-turers had little choice but to transfer pro-duction overseas, the Japanese now findthemselves in a similar competitive bind.With wages in Japan rising rapidly, Japaneseelectronics firms are losing their cost ad-vantages. Faced with increasing competitionfrom rapidly industrializing nations such asTaiwan and South Korea, the Japanese areestablishing assembly facilities elsewhere inthe Far East. To some extent, moves to othercountries were stimulated by OMAs, whichat first applied to Japan alone. But evenwithout OMAs, the transfer of productionwould have become necessary. The UnitedStates is not alone in being affected by chang-ing patterns of comparative advantage: Japanhas also been a victim—now in consumerelectronics, earl ier in text i les and ship-building, soon perhaps in steel.

Japanese TV manufacturers now haveproducts that rank among the best in features


and performance, as well as reliability andfreedom from service,9 Thus there now seemsrough technological parity, with Japan equiv-alent to the United States in product technol-ogies, perhaps superior in process technol-ogies, (Some observers claim that the Japa-nese are ahead in the use of automation, butlittle directly comparable data exist,)

Success in the TV market has also giventhe Japanese an easier entree into marketsfor other electronics products, as well as car-ryovers into different industries, Consumersnow seem to perceive many Japanese prod-ucts as good values—well designed and ofhigh quality for the price—whether electron-ics, automobiles, cameras, or motorcycles.

Research and Development.—R&D leadingto transistorized chassis designs was an im-portant part of Japanese success in TVs. Inthe United States, consumer electronics firmshave not recently seemed vigorous in theirR&D efforts, although firms such as RCA andGeneral Electric have high overall levels oftechnological capability. In any event, thereare signs that consumer electronics R&D hasdeclined in the face of falling profits, Fewerthan 1 percent of the employees in the U.S.radio and TV sector, for example, are en-gaged in R&D. In the electronic componentssector, which includes semiconductors, thefigure is 3 percent, Significantly more R&Dpersonnel evidently work on consumer prod-ucts in Japan. In some respects, the Americanindustry seems caught in a downward spiral—low profits leading to cuts in R&D, which in

— — —,’ ‘ 1 (]. [ll(l, ( :t)]t)~ ‘{’\’ S,’ ‘ (l(~fli[]nl[~r fie~)orf~, ]:lnu;)r} 1981, p.

.14, ill)[j ‘‘Srrl[ill III; )( k-; lIl(i-\l’tl] !(] ‘l’[:IIJI ]s1011 S(; ts, ” (;on~urn[~rlif~])f)r(i, \f,ir( t] 1 ‘180, p. 205. f;{;:]tl]rt>s [sll(ll ;IS rcn]{)lf~ I uning):) ncj pfj r ft ) r-m: I n ( I ! ( p i c ~ 1 II r[~ ( h; I r{i ( ~ I t!r]s tits ) :1 r~l m [ ls t I \ m;1 t t [;rs( I f f’l]g I II (;or) IIR (i I )SI q t), (.. ) u ; ! I I I \ I n t (:rnls I ) f f r[?f:(l( )m fr( )m (i(3-f(:(ts, {In(i r(:l];lt)illl} (Is m(~(i~ur(vl t)~ n)(?;ir]-tlnl(~-t)(~tyf (~[~[) f:]il-ur(~ or sin) IIii r 1)[1 r(i n]f~tf;rs, {1 r(~ i) 1s( ) (if’pf~n(i(~n I ( )11 (I(:slsn. I i( )m -

(:v(; r, (1 (I ii I i t ~ :1 n(i r(~l 1;) 1)1 I i t \ (i(!p[~n(i ;is \\’(?] 1 [ ]11 f:] (t{) rs sll(’h :1sn) :i 11 (1 fi I (‘ I 11 r i ng mf~t h ( I(IS, I mf)l,1 n t (1 (1 i] I ] t \ (’( )n t r( )] pr( )(’(?(ill rf?s,

i) 11(] m,) I), ) ~(’nl 1111 t ii II( ] ( ) r,~,l n iz: I I i( III I )f pcrw )11 I]t?l. p: I r t I (u I i~ r 1 L:Iss(’m t)l \ ])(~rs( IIln(’1 ‘1 h(’s(’ :1 r(’ (I ftl; n mor(~ n[~ii rl~ m il l)ilg[?Ill(’11 tl});Ir) (Jl)qir](lorir)p fun(l II) I)s. Qu:]llt\ ;lnd r(:li:] [) II] IL, ;In(t tt](’lrs{ )ur((’s. u 11 I I)(’ (i is( (l~s(’( i ] 1) ( 1(’[ ii 11 In tt)(’ f{ )rt 11 [ (Im 111~ ( )’1 A(~]()( t r( III I( s s t U( j v. 1 n t h [I [~,i r] L I I I m I(i - 1 {I 70”\, J,) p, I n (I>IJ “1’t’ss(?f~m II) tl,lk’f~ h:l(i t) f:ll[~r rf!lr; lt)lll t}: whilf~ [1, S. pro(iu(ls hi)l’(~sin(() lmpro~’(; (i, J;i~)iir)[~s[~ firms Il;iv(’ r~rd(~ntli t)(~[:n :it)l[~ tom:{ I r] t{{ ir) t hoi r (’[IH(I Irl r(’lr, ~ t)i I I 1 \

turn may lead to fewer product innovationsand still poorer performance. The question is:Can the situation be turned around?

The answer may be no, The United Statesis the world’s largest market for video cas-sette recorder/players, a technology thatoriginated in this country; but these products,even when so ld under Amer ican b randnames, are all made in Japan. The next majornew consumer electronics product will be thevideo disk player. Although the technology re-mains in flux, Japanese firms are working onall three of the systems being developed.Given their demonstrated ability to rapidlybring new products to market in volume andat low cost, the Japanese may eventually dom-inate this technology as well. Even if U.S.video disk technologies such as the RCA sys-tem emerge as winners in the marketplace,production may move overseas—either toAmerican-owned offshore facilities, or to for-eign companies manufacturing under license.

Why are American firms—apparently atthe forefront of electronics technologies—displaced when products move from R&D tocommercialization, and especially to manu-facturing and marketing? One common re-sponse centers on production costs, and sug-gests that the United States simply cannotmatch Japan in the manufacture of high-qual-ity products at low cost; it is an old answerwith some new dimensions. At one time, formany industries, it was claimed that Japan’scompetitiveness was based on cheap labor,Today this seems less important. Instead,Japan’s ability to produce at low cost is oftenattributed to scale economies and experience(the learning curve phenomenon), and to ad-vantages gained through horizontal and ver-tical integration— as well as to abundant sup-plies of investment capital, The export orien-tation of Japanese firms, and home marketsthat have been protected—more so in thepast than currently—are also factors.

The overall scale of the leading Japaneseconsumer electronics firms is considerablylarger than that of their American counter-parts because the Japanese market their

80 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

products worldwide.’” Manufacturers in Ja-pan thus have potential advantages in econo-mies of scale and experience, regardless ofwhere their production facilities are located,To raise production volumes to match the Jap-anese, American firms would have to com-pete worldwide with the Japanese—and theTaiwanese and Koreans. At this late date,that seems unlikely,

The structural characteristics of Japanesefirms may also contribute to their perform-ance. Major consumer electronics manufac-turers in Japan also make other electrical andelectronics products. This integration can inprinciple yield R&D synergies, as well aslearning economies in component production.Most Japanese TV-makers produce their ownsemiconductors; at least in theory, semicon-ductor developments can be closely coupledto the needs of the consumer division. At thesame time, consumer goods provide a ready-made market for new semiconductor devices,removing much of the risk from their devel-opment.

Vertical integration linking consumer prod-ucts and semiconductors also has negativeaspects. The strength of the United States insemiconductors has often been attributed tothe dynamic, entrepreneurial character ofdomestic merchant semiconductor firms. Inthe United States, large integrated electron-ics companies such as RCA and GE have notbeen notably successful in semiconductors,Often, a lack of flexibility is blamed.

Large integrated firms in Japan have devel-oped their own ways of achieving flexibility:use of supplier firms, affiliates, and subcon-tractors; extensive training programs for em-ployees; and a wage system in which a sub-stantial fraction of annual pay may come as abonus. Combined with employment policieswhich give many employees high job security,Japanese firms can move into new areas with-out creating anxiety in their work force ordestabilizing existing activities. Further con-

tributing factors are management systemsthat diffuse responsibility widely, so that cor-porate risk-taking need not imply personalrisk-taking; managers do not feel tied to theincome statement for the next quarter.

While vertical integration in any countrycarries both advantages and disadvantages,it does appear that long-term success in theconsumer field will require at least some in-ternal capability in semiconductors. ICs arenow central to the development of new prod-ucts. Digital audio, digital TV (the Philipsvideo disk uses digital encoding), electronictoys and games, calculators, home comput-ers—all depend on semiconductor technol-ogy;11 many of these products are inconceiv-able without large-scale ICs. (Texas Instru-ments is an example of a vertically integratedU.S. firm strong in nontraditional consumerproducts while not making Tvs at all,)

The Future. —Consumer electronics manu-facture in the United States has declinedmarkedly; the remaining production is oftenlittle more than final assembly. Firms such asRCA, with its video disk, and Zenith, which isentering the home computer market, are cer-tainly not conceding consumer products toforeign competitors: both have also main-tained their historical market shares in colorTVs. Nonetheless, the traditional home enter-tainment sector of the industry seems lessthan dynamic.

When other U.S. firms—mostly semicon-ductor manufacturers—have at tempted toenter consumer markets, they have not al-ways succeeded. The difficulties encounteredby new entrants with products such as handcalculators and electronic watches resultedpartly from foreign competition, partly fromlack of experience in consumer markets, Insome cases, products have been designedwith little marketing research—perhaps be-cause the companies involved were accus-tomed to dealing with technically sophis-ticated purchasers whose needs they under-

‘Whe U.S. Gmsurner Electronics Indmstry (]nd Foreign CorI-petition, final report under EDA grant No. 06-26-07002-10, De-partment uf Gmmerce, Economic Development Administration, Nfa}’ 1980. p. 27.

‘[hf. Kikuchi and Y. Kawana, “VLSI in Ccmsumer Electr(m-ics, ” IEEE Trwnsuctions on Electrfm Devices, vol. ED-26, April1979, p. 279.

Ch. 5—industry-Specific Competitiveness Ž 81

P h o t o c r e d i t N a t i o n a l S e m i c o n d u c t C o r p

Workers in a clean room testing semiconductor wafers

stood. The Japanese have made such mistakes enter markets, such as radios and TVs, al-in the past, but are now more careful in their ready served by other companies, but devel-efforts to anticipate consumer preferences. oped entirely new products. Such patterns

will probably continue because this is whereWere forward integration by U.S. semicon- the greatest opportunities lie. New products

ductor manufacturers to continue—and be offer rapid market growth and the chance tosuccessful—the structures of both consumer establish a strong position ahead of the com-and component markets would change. In the petition. Costs of production are not so impor-past, semiconductor firms seldom tried to tant when a firm can market unique products

82 ● U.S. Industrial Competitiveness— A Comparison of Steel, Electronics, and Automobiles

or otherwise attain a technological advan-tage.

At the same time, today’s new product istomorrow’s mature one, and maturity tendsto bring intensified competition. The U.S.market remains the largest in the world andwill always be an attractive target; so long asJapanese consumer electronics firms are safefrom foreign competition in their domesticmarkets (and in many other parts of theworld) they will be a formidable presencehere. American semiconductor and computerfirms have demonstrated the advantages—perhaps now the necessity—of competing ona world scale, The same may be true in con-sumer electronics.

SemiconductorsThere are really two semiconductor indus-

tries—one consisting of firms selling in theopen or merchant market, the other com-prised of the semiconductor divisions of inte-grated companies. The latter may produceexclusively for internal use (captive produc-tion), or sell on the outside as well.

Most of the firms in the merchant marketbegan as independent, entrepreneurial con-cerns. Many have since been acquired byother companies; but the industry is still typi-fied by manufacturers such as Intel (whichremains independent), and Fairchild (nowowned by Schlumberger, a French concern).Headquarters for most of the merchant firmsare in “Silicon Valley, ” near San Francisco.

The largest of the captive producers areIBM and Western Electric; each is strong in avariety of product and process technologies.Most computer firms design and producesome of their own semiconductors, often low-volume custom ICs; many other companiesare also integrating into semiconductors to beable to supply at least some of their ownneeds and to have in-house R&D capability.Some vertically integrated electronics firms—e.g., Texas Instruments and Motorola—also sell large numbers of semiconductors inthe merchant market. Other systems-orientedfirms which make and sometimes sell ICs

include Lockheed, Rockwell, and Westing-house.

The number and diversity of firms whichdesign and produce semiconductors attest tothe importance of this technology, A strongcase could be made in favor of semiconduc-tors and their applications as the technol-ogies most vital to a modern industrial econ-omy.

Although captive semiconductor opera-tions are a substantial source of technologi-cal strength for the United States, there is lit-tle data available for captives that bears di-rectly on competitiveness. Thus, as in chapter4, much of the attention below focuses onmerchant firms. Nonetheless, captives ac-count for 40 percent of domestic IC produc-tion.12

Despite recent large increases in semicon-ductor imports from Japan and the Far East,particularly ICs for computer memory suchas the 16K RAM, the indicators examined inchapter 4 revealed no evidence of competitivedecline by the United States. The 16K RAM isa high-technology device, demanding state-of-the-art processing capability, but at the sametime is a standardized, commodity-like prod-uct, As mentioned in chapter 4, Japanesefirms evidently have claimed more than 40percent of the U.S. market for these circuits.The Japanese achieved this penetration by of-fering high-quality, competitively pricedparts at a time when U.S. manufacturerscould not meet the demand, The most impor-tant reasons for capacity shortfalls by U.S.firms were a reluctance to add new capacityin the wake of the 1974-75 recession, andm a r k e t d e m a n d t h a t w a s c o n s i d e r a b l ygreater than projected.13

While semiconductors continue to epito-mize U.S. competitiveness, there is concern

‘G)mpetjtive Factors Influencing World Trude in lntegr(]ted

Circuits, publication No. 1013 (Washington, D. C.: U.S. Inlerna-tiorml Trade Commission, November 1979), pp. 82, 84. The per-centage has been relatively stable over the past few years.

‘ “’Effect of RAM Imports Into U.S. Disputed; Shortages NfavTrigger Increases in Prices,”’ Electronics, Nov. 8, 1979, p. 40.

. . - — -


Photo credits Texas Instruments

Scanning electron micrographs of memory cells fora 64K random access memory (RAM)

for the future of even this sector.’” It is notbased on any perception of imminent distressin the domestic industry, but rather on the ex-traordinary efforts by companies and govern-ments elsewhere to match or exceed theUnited States. Production of ICs in Japan hasrecently grown even faster than in the UnitedStates. Through May 1980, Japanese IC pro-duction was up 50 percent over 1979: invest-ments by Japanese semiconductor firms dur-

], ~jrcsscr, }{lgh ‘[’p~ hn~Il~I,q~ fImi jfI]J(IrIP~e ln{iuttr]fll PojIrLI:A S t r( J t[> x \ f~ ~r [‘ S Pf JIlf ;’m ~Ihr r> (\\’;) sh i I]E t ( )n, 1), C 1.: Sut]t’[ ~m-ml t tcc on ‘t’r:\{it; . ~~(~mm ] t tce t )n Llravs i~nd hleans, [~,S. I I []us[; ofRt;[)r[:sf?rllilttk(;s. [)(t, 1, 1 980),

ing the 1980 fiscal year were scheduled to in-crease their production capacity by a further60 percent. 1’

Foreign Competitive Efforts.—As a resultof the importance of semiconductors, bothcommercially and for nationalernments in virtually all indutions have been concerned lestbecome a U.S. monopoly.

Such worries have not bee

defense, gov-strialized na-he technology

1 entirely un-founded. World semiconductor sales grew 23percent last year— ICS even faster—and areexpected to increase another 15 percent in1981, ’t) When technology-intensive productsexperience market growth at rates this high,it is quite possible for some firms—and somenations—to fall behind and never catch up(until the technology stabilizes). Many of theearlier entrants in the U.S. semiconductormarket experienced this fate—including anumber of large and capable f irms—andeither accepted a secondary position in theindustry or withdrew from the marketplace.

In 1978, nearly one-half of European semi-conductor needs—and well over half in ICs—were supplied by exports from the UnitedStates or by European subsidiaries of Ameri-can firms. Many European governments havebeen concerned lest they fail to maintainviable indigenous semiconductor industries; anumber have established government supportprograms, as has Japan.’; These programshave sometimes included protective tradebarriers, as well as government-funded orsubsidized R&D. For example, in Japan, MITIhas sponsored a 4-year cooperative R&D pro-gram aimed at very large-scale integrated cir-cuits (VLSI), one of a number of government-supported efforts to enhance the technologi-cal capability of the Japanese electronics in-dustry.

—.‘ ‘‘Ilmming S~?nll((J1l[i~]ftor Inclust r]~?s, ‘1’hclr h’uturt~ E\,~nl-

lned,”’ J(I~)(In Rr])f)rt, Joint Pul]l]r:ltions R[’s{’:~r[h Srrvi(e, JI]RS1, !l:i 14, Sept. 26, 1980, p 41.

‘t 1981 \\’lm]{] hi/I rkct F’orc(’[]st, J~)m;lr(mic,\. J:]n. 13, 19B 1,pp. 121-144, ‘1’ht? pcr(f?nlci~cs IIr(: for the United St:] tes, }:]pan,

d nd tl’es t crn F,u rtjpc, w h] (h [~ (’roun t for most sales.‘ ,tf][r[)[Jl[~(tr(~rllcs Into [hf~ [\(J’\ (I,utorl, En~land: Nlarkintosh

Publi( at ions I,to., Scpternb[:r 1‘179~.


Japan’s VLSI cooperative program in-volved five leading electronics companies; thegovernment-sponsored portion of the effortended in the spring of 1980 after expendi-tures reported at about $250 million—sharedbetween industry and government. Some ofthe MITI funding is supposedly to be repaid inthe event of commercial success; other gov-ernment funding came in the form of loans. Afollow-on project aimed at the commercializa-tion of the VLSI technology developed hasnow begun.18 Scheduled to take 3 years, no di-rect government funding is involved, althoughincentives such as tax writeoffs are beingcontinued.

Government support programs in othercountries tend to follow similar patterns.Some emphasize applications of ICs ratherthan R&D on the devices themselves or onprocesses for making them. Because theJapanese program appears to have been themost successful, and because the Japaneseare widely perceived as the only real threatto U.S. supremacy in semiconductors, U.S.and Japanese IC technology are compared inthe next section, with particular attention tothe outcomes of the VLSI program. (This sub-ject will be treated in more depth in the forth-coming OTA electronics study. )

U.S. and Japanese Semiconductor Tech-nology. —Both discrete semiconductors andICs were invented and commercialized in theUnited States. Virtually all major innovationsin semiconductors have originated in thiscountry. 19 American firms have also domi-nated worldwide sales, still holding morethan 60 percent of the world market—a clas-sic example of a technology gap creating theconditions for an internationally competitiveindustry, Note that this world leadership bythe U.S. semiconductor industry occurredwhile domestic companies competed fiercelyamong themselves— a competition that has

1ti’4Seven Private Firms Turn Attention to M?iking VLSI Cir-cuits. ” )qmn Econ(~mic Journol. Aug. 12, 1980, p. 7.

‘‘A Itep~jr/ on the Lr. S. %miconduct[)r lndustr}’ (Washington,L).(;.: Department of Commerce, Industr}r and Trade Adminis-tration, September 1 979), p. 100.

embraced price cutting as well as rivalry indevice designs and process technologies.

Although the United States had at one timea technological lead in semiconductors overthe rest of the world amounting to severalyears—a lead that the United States stilllargely possesses over Europe—the Japanesehave managed to close the gap. They are nowin many cases at or near technological paritywith the United States, and their marketpower is rapidly increasing. One importantforce in Japan’s ability to catch up was thecaptive market for semiconductors providedby her strong consumer electronics industry.However, the discrete devices and linear ICsused in consumer products are not as criticalto competitive success in semiconductors asthe digital ICs that go into computers andother advanced systems. Japan’s VLSI coop-erative program was intended to strengthenher capability in digital ICs, with the goal ofcreating a technological base in VLSI ade-quate to support a globally competitive com-puter industry.

The VLSI cooperative program concen-trated on process technologies, as shown bytable 17, rather than device technologies.One reason for the Japanese to emphasizeprocessing may have been to get better coop-eration among the participating firms. Al-though process technology is critical to com-petitive success in ICs, there is less proprie-tary knowledge than for product designs.

While it is difficult to locate sufficient in-formation for sound judgments on the techno-logical results of the VLSI program, there

Table 17.—Areas of Concentration ofJapan’s VLSI Program

Process technologies–

Electron-beam and X-ray lithographySuper-clean facilitiesLarge-diameter perfect crystalsImproved evaluation techniques for crystalsOxide growth and removal techniques

Device technologiesLogic designSimulationCircuit layout—

SOURCE: VLSI Technology Research Association


seems to be a consensus in the Americantechnical community that the Japanese havemade substantial progress. Although theyprobably did not reach the goals originallyset, the work of the VLSI laboratories inlithography and lithographic equipment isparticularly well known.

Nor is it clear to what extent the VLSI pro-gram itself was responsible for advancingJapanese capabilities, as compared to theprogress that would have been made anyway.The five firms involved are leaders in the Jap-anese industry, with active R&D programsand excellent capability. Most likely, thecooperative program did not have extraordi-nary impact— at least in terms of direct tech-nological payoffs, For one thing, the fundinglevel—somewhat more than $50 million ayear—was simply not that high (only half ofwhat some individual companies in the UnitedStates, such as Texas Instruments, spend an-nually on R&D),

In judging the results of the VLSI program,one might also question the extent to whichthe participating firms would have contrib-uted their best people and best ideas. Japa-nese firms normally compete strongly withone another, There is no reason to believethat they would willingly share knowledgethat might give competitive advantages. Be-cause of the goal-oriented nature of govern-ment-industry relations in Japan, the psycho-logical influence of the VLSI program wasperhaps as important as the technical out-comes. That is, by providing a highly visibleunifying locus for Japan’s semiconductor R&Defforts, the program may have helped stimu-late the technological progress of the entireindustry, The anxiety aroused within theUnited States by the VLSI program wouldhave strengthened this effect.

What, then, is the current state of Japa-nese IC technology relative to the UnitedStates? While not an inclusive listing (e.g., itrefers primarily to digital MOS technologies),table 18 gives comparisons on several dimen-sions, based largely on discussions withAmerican engineers. Comparisons, as in thistable, always come down to matters of judg-

ment, and there are bound to be disagree-ments; for example, some sources claim thatJapan is ahead in silicon materials—i.e,, theability to understand and control the proper-ties of the crystals from which ICs are made.The breadth of the categories also obscuresimportant distinctions—for example, U.S.firms clearly lead in some types of memorycircuits. These caveats do not alter the pri-mary message— that Japan has made consid-erable progress toward closing the technol-ogy gap in ICs.

The United States is ahead of Japan in 2 ofthe 10 categories included in table 18, behindin only l—deep ultraviolet lithography, atechnology American f irms have largelychosen not to pursue. (The quality question isdiscussed more fully below.) The majority ofthe categories in the table deal with process-ing. Much of the equipment used to makesemiconductors is designed and built by inde-pendent firms— mostly American—selling ona worldwide basis, Therefore the Japanesehave access to essentially the same processtechnology as U.S. semiconductor manufac-turers. However there is a good deal of knowl-edge and experience needed to use the equip-ment to best advantage; the table refers inlarge measure to this sort of capability.

The judgments in the categories for designof memory circuits (e. g., RAMs) and micro-processors are generalizations concerning

Table 18.—Comparison of the United States andJapan in Digital Integrated Circuit Technology

..—. -Process technologies – - ‘ -

.

Electron-beam lithography . . . . . . . . . . . . . . . =X-ray lithography ... . . . . . . . . . . . . . . . . ., . . . . . =Deep ultraviolet lithography ., . . . . . . . . . . . . . . –Resists . . . . . . . . . . . . . . . . . . . . ... . ., =Quality control . . . . . . . ., . . ., ., . . ?Silicon materials ... . . . ., . . . . . . . . . . . . . =Automated assembly, . . . . . . . . . . . . . ... . . =

Product technologiesComputer-aided design capability ., . . ., ., ., . . +Memory circuit designs. . . . . . . . . . . . . . . . . . . . . . =Microprocessor designs . . . . . . . . . . . . . . . . ., +

+ United States ahead

U n i t e d S t a t e s b e h i n d

= Rough pa r i t y

~ See tex t

SOURCE H C Lin for OTA electronics study


relative capability to design and develop new product in which the Japanese have oftencircuits, not to manufacture them. Designing proved their strength. At the same time, newand building memory circuits is demanding; standard memory circuit designs have al-nonetheless, these ICs are relativelyardized, commodity-like devices—the

stand- ways come from U.S. firms. While Japanesesort of manufacturers have proved they can keep up

Photo credit Intel Corp.

8-bit microprocessor


in this technology, they have yet to design ac i rcu i t tha t has become accep ted as astandard,

Microprocessors are more difficult to de-sign than memory. The evolution of memorycircuits is relatively predictable, at least atpresent. Microprocessors make greater de-mands on ingenious design, capacity to inno-vate, and marketing ability, One of the keys todesigning and marketing a successful micro-processor is anticipating the needs of theuser; programing ease and f lexibi l i ty ofapplication —which in turn depend on factorssuch as instruction sets, architecture, andspeed—are important attributes. The UnitedStates has always been strong in these areas;thus, it is no surprise that it leads Japan inmicroprocessors, While it would be wrong toassume that the Japanese cannot innovate inmicroprocessors or digital logic, there is littleevidence that they have yet done so.

One other technology in table 18 might besingled out—computer-aided design (CAD).Designing ICs becomes much more complex,time consuming, and expensive as levels of in-tegration go up. CAD can improve design pro-ductivity. This technology—which uses com-puter software developed especially for cir-cuit design applications—is also one in whichthe United States is now ahead. CAD will beextremely important for future competitive-ness; the present lead is reassuring but needsto be maintained,

The question of IC quality and reliabilitywill be treated at length in the OTA elec-tronics study, but also deserves mention here.Quality refers to the percentage of ICs whichmeet specifications and function properly ondelivery. Reliability refers to frequency offailure in service or average life before fail-ure. Ample evidence exists that, in the past,Japanese ICs sold in the merchant market hadhigher quality. ’(’ However, the reliability ofU.S. as compared to Japanese ICs is a moreclouded issue. American firms claim that—

I tll’ [11051 (1[’,l[lliitl( [!,1 I,i tlri> 1)[’(:11 [)r(}~(~])l(’(! i)~ ,11) (’X()( 11-

IIV(I of ;II) An][’r(( ,111 firm. 11(IwIII1 t-P;lfk;ir(i. S(x’ R. ( :I)I)I]IIIIL.‘“ l~IP;In~wI: kl:lk~’ Qll(llll~-[:olllr(ll Plt(h,” f,lo~ (r(ml( ~. Apr. 10,1‘)80, I). 81. Alst~ ‘‘11[)’s Anderson ( ;;] Ils Qu:II i IV ( ;omp(~l i I Ion ;]

‘f lors(~ R:I( (I. ’ }lfI( lrorlff \ \l(I\ I (1, 1981. p. 128,

their reliability has always been as good asthe Japanese; however, the Hewlett-Packarddata—as well as some but not all of the datadeveloped for the OTA electronics study—indicate that Japanese firms may also havehad better reliability (for RAMs). Unfortu-nately, no information is available concerningthe quality and reliability achieved by large-sca le cap t ive p roducer s in the UnitedStates—one reason for the question mark intable 18. Firms making semiconductors fortheir own use have high incentives to maxi-mize quality and reliability because the costsof downstream failures escalate rapidly.

While almost everyone concedes that Japa-nese quality was at one time better, the U.S.industry claims now to be matching Japaneselevels of quality, This assertion cannot beverified; but it does seem that the Japaneseremained slightly ahead into early 1981. Thereasons for the (past) differences are several,but in the end come down to the strength ofmanagement’s commitment to quality as agoal of production. Whether improvements inquality add significantly to net manufactur-ing costs is an important question but onethat cannot be answered without a great dealof proprietary data.

The most important facet of the qualityissue for competitiveness in semiconductorsis the parallel with Japanese penetration ofU.S. TV markets. There too, Japanese firmsentered the United States with higher quality(and higher reliability) products that helpedthem gain market share. Although the U.S. TVmanufacturers eventually caught up, the Jap-anese had already established themselves—and remain strong competitors. It appearsthat the same pattern is being followed inICs—at least for memory products. (Japanesesuccess in automobiles is also linked to quali-ty and perceptions of qual i ty as sel l ingpoints. )

Although quality does not appear to havebeen a particular goal of the Japanese VLSIprogram, several of the technologies listed intable 17 are important for making ICs to highstandards of quality and reliability, And,regardless of final judgments on the success

79-491 0 - 91 - 1

88 . U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

of the VLSI program, table 18 indicates thatJapan is at or near technological parity withthe United States in many important aspectsof semiconductor technology. It seems unlike-ly that Japan will outstrip the United States inR&D-intensive devices such as microproces-sors. However, in the more straightforwardmemory circuits— and in productivity andquality control— the Japanese have alreadydemonstrated their technological competi-tiveness. Where success depends heavily onthe ability to mass produce semiconductors tohigh standards, Japan will be strong.

In addition to the privately funded follow-ons to the VLSI program mentioned above—aimed at applications —MITI is sponsoring anew Japanese cooperative effort in computersoftware. Like VLSI technology, software iscritical for competitiveness in computer sys-tems. Japan has been weak in software; thiseffort is further evidence of her intent to be-come a strong global competitor in comput-ers. Japanese firms already have adequatecapability in hardware, as discussed below.

The U.S. Government also funds semicon-ductor R&D. The Defense Department has re-cently begun a major effort in VLSI, the VeryHigh Speed Integrated Circuit (VHSIC) pro-gram. VHSIC is to be funded at about $210million over 6 years; thus, it is comparable inspending level to Japan’s VLSI effort, Thebasic difference is that VHSIC emphasizesapplications to military systems. The Japa-nese program —as with government supportfor semiconductor technology in other na-tions—is directed at commercial technol-ogies, Some of the VHSIC R&D will yield spin-offs in the commercial portion of the U.S. in-dustry; however, it is too early to judge theirpotential significance.

Vertical Integration. —As discussed previ-ously, considerable forward integration hasbeen taking place in the U.S. semiconductorindustry. While firms such as Texas Instru-ments and Motorola have always been inte-grated, other merchant manufacturers arealso moving into end-product markets. At thesame time, other companies have been inte-grating backwards into semiconductors, usu-

ally to be able to supply some fraction of theirown needs. And, in several recent cases,formerly independent semiconductor firmshave been purchased, sometimes by foreignconcerns. The purchased companies—e. g.,Mostek, Fairchild, Intersil—are expected toremain in the merchant market. But the lossof their independence, in the view of some,may threaten the spirit of aggressive entre-preneurship and innovation that has charac-terized the merchant semiconductor sector inthe United States. Although many observerswelcome vertical integration as a positivecompetitive response to changing marketconditions—bringing with it infusions ofcap i t a l and management exper ience—toothers it represents a potential loss of thecharacteristics that have made the U.S. in-dustry so successful,

There is little question that integration willcontinue; it is in the strategic interests of themanagements of firms that are now in themerchant market, as well as those makingend products. More basic questions deal withthe capabilities of semiconductor firms tofinance further expansion, including forwardintegration and entry into new markets.

Capital Supplies. —The semiconductor in-dustry has been growing so rapidly that somefirms have been hard pressed to generate suf-ficient cash flow to keep up with internalneeds. At the same time, according to manyindustry spokesmen, external capital has notbeen available or has been too expensive.

In many respects, the capital needs of thesemiconductor sector follow the classical pat-tern of an industry expanding so fast that itoutstrips its capacity for internal funding.Cash flow shortfalls are compounded by VLSIprocess technologies that are increasinglycapital intensive. The capital needs of theU.S. semiconductor industry for the decade ofthe 1980’s have been estimated at $25 billionto $35 billion, compared to $4 billion to $5billion for the 1970’s, 21 This level of funding

“J. F’. Bucy, “Semiconductor Industry Challenges in the Dec-ade Ahe~d, ” IEEE Solid-State Circuits Conference, San F’r~n-cisc(], Calif., E’eb. 13-15, 1980.

Ch. 5—industry-Specific Competitiveness Ž 89

may not be available from the capital marketon terms the companies find acceptable, In-dustry leaders contrast this situation withthat of their Japanese competitors. Not onlydoes the Japanese Government provide directR&D assistance for commercial technologies,but capital is said to be less costly than forAmerican electronics firms,22

The same basic argument—that capitalcosts in Japan are low compared to the UnitedStates, in part because of policies followed bythe Japanese Government—is made by otherAmerican industries. At its root, the argu-ment rests on the structure and organizationof the Japanese financial system, its impacton capital formation and, not least , thecapital structure of Japanese firms. 23 Theseare complex topics, which are deferred to theforthcoming OTA electronics study. Here it issimply suggested that while external sourcesof capital—primarily debt—do seem avail-able on more favorable terms, the advantagesof Japanese f irms in terms of internallygenerated capital may be overstated—exceptas a function of their relative size (large firmshave more flexibility in allocating capital in-ternally). For example, the cash flow avail-able to Japanese electronics companies—basically the sum of net profits and deprecia-tion—appears generally comparab le toAmerican firms. The low profits characteris-tic of Japanese industry are in many casescounterbalanced by rapid depreciation, Thatthe government channels funds—primarily inthe form of bank loans— to support some sec-tors of Japanese industry is another matter,While this is certainly an important aspect ofJapanese industrial policy (see app, D), capi-tal allocation by the Government is a mecha-nism which U.S. industries would presumablyoppose. Likewise, the high debt/equity ratiosstill characteristic of Japanese firms—thoughuse of debt has been gradually decreasing—

~ ‘‘[;,S, and ]ap:inf?sc S[?mic(~l](l~][t(Jr Induslri~s: A Financial~;f)mpa risf]rl. ” prcp:i reel f~]r the Semir[]r]cfuct(}r Industry AssfJ-~ia [ion })} fjh;lw F’in.]n{i:i] PI~licL. Jun[~ 9, 1980.

‘Or] th[; fl rst (If t hf;sf>, sf~f: }’, Suzuki, hll)nf~; ~Jn(i }lf~nking inf;f]n t~mf)f)r(lrk )~l~)(jn (Nf?w I Iaven, C(Jnn,: Y;]lf; Univf;rsitpPress, 1980). F’[Jr the l:~t tf:r. J[l])(lncsc [l~r[]f~r~l te F-inflr7ceJ 977-j f)~[) (j,on[j[)r]: III tprna ti[)n:]l F3us]nf;ss IJI forma tion In{.,‘1’hf? Fin:]n(:i:]] ‘Iimf?s I,t(i,, 1977].

would be unacceptable to both managementsand lenders in the United States.

Computers

The international computer industry is sim-ilar to the semiconductor industry in severalrespects. Both have depended for many yearson technologies developed primarily in theUnited States. In both industries, U.S.-basedmultinationals operate manufacturing facil-ities in many parts of the world, althoughthere is far less reimporting of computersafter foreign assembly than for semiconduc-tors or consumer electronics, Computers, likesemiconductors, have been targeted by for-eign governments as sectors in which inde-pendent strength (i.e., independent of theUnited States) is a matter of national interest.Although the world computer industry hashistorically relied on technology licensedfrom the United States, foreign governmentshave been uncomfortable with this relation-ship, Thus, for computers as for semiconduc-tors and steel, there has been considerablegovernment intervention in other parts of theworld.

Efforts by foreign countries to strengthentheir computer industries have had mixed re-sults, In Europe, despite financial assistanceand government-fostered mergers, Americanmanufacturers retain about two-thirds of allsales, U.S. computer technology is more ad-vanced, with European manufacturers oftenemulating older American developments.Even in Japan, which has restricted both im-ports and direct foreign investment, U.S. com-puter firms still account for 45 percent of themarket .24 If there is an industry in which theUnited States is internationally competitivepar excellence, it would have to be com-puters.

Any significant changes in these long-standing patterns of competition are againlikely to emanate from Japan. The Japanesestrategy in computers parallels that used inconsumer electronics and semiconductors (as

-“’(;ompu ters: CaJl the U.S. Rwaplurc Its Japanesf? hlarket, ‘“Business M’wh, Aug. 25, 1980, p. 72,


well as automobiles). Japanese firms havestarted by building a basic technological ca-pability, largely through licensing arrange-ments with U.S. firms, They have then pro-ceeded to establish a viable presence in par-ticular market niches, from which more com-plete market coverage can be attempted. Incomputers, countervailing s t r a t eg ies byAmerican firms have made this more dif-ficult.

To illustrate, Japanese firms (Mitsubishi,Fujitsu, Hitachi, Toshiba) began by licensingcomputer technology from the United States,as well as from Europe, In 1960, IBM appar-ently exchanged its patent rights for permis-sion to begin manufacturing computers inJapan.25 IBM now accounts for some 30 per-cent of Japanese computer sales, a low figurecompared to its share in other industrializednations—where IBM typically has half themarket—but impressive for Japan. Thus, theJapanese did not succeed, as they had in con-sumer electronics, in using entry barriers toprotect their fledgling computer industryfrom foreign competition.

Still, the Japanese have managed greatstrides since 1970, when they began givinggreater at tention to computers . Japanesehardware now seems to be largely competi-tive with American, although until recentlytheir main strength had been in small- andmedium-sized systems. 26 While, in contrast tothe consumer and semiconductor sectors,Japanese computer firms have yet to estab-lish any real presence in the U.S. market, theyclearly intend to try,

Although Japanese firms have achievedparity or near parity in hardware, they lagsignificantly behind the United States in soft-ware. Because software is a major source ofcompetitive strength in the computer indus-try, American companies retain an importantadvantage. Software, and software support,along with customer service in a more gener-

“Y. Kimizuka, Densunki Gyokoi (The Computer Industry)(T{JkV{): KVoikusha, 1977), pp. 98-99.

-(’A. Durniak and C. Cohen, “U.S. Beachhead for JapaneseComputers Is Only the Start, ” E]e(; trwnics, h4ar, 27, 1980,p. 113.

al way, have always been among the strongpoints of the U.S. industry, especially IBM.”

As one might expect, the Japanese werequick to recognize their weakness in soft-ware. It is too early to judge the success of theMITI-orchestrated software R&D effort. Theplan, which began during 1980, centersaround the cooperative Computer Basic Tech-nology Research Association, which has a 5-year budget of about $235 million and in-volves the leading Japanese computer manu-facturers. Among the thrusts of the programare networking and data base management,as well as operating systems and Japaneselanguage information processing capability.”Based on their past success with other tech-nologies, it seems probable that Japanesecomputer firms will, one way or another, suc-ceed in largely rectifying their software defi-cit. Software technology is widespread inter-nationally; just as Japan’s automakers havebegun to hire American and European styl-ists, so its computer manufacturers couldhire software specialists from other countriesif they have difficulty developing indigenouscapabilities.

Technical Personnel

Before leaving electronics, one other poten-tial constraint on the competitiveness of U.S.firms should be mentioned—the supply oftechnical manpower, particularly electricalengineers, computer scientists, and techni-cians. This has perhaps been of most concernto semiconductor firms, but also applies to

——~ h~tiny observers have attributed IBNI’s market positinn to

nonhardware factors. See, e.g., B. T, Ratchforcf and G. T. Ford.“A Study of Prices and Nlarket Shares in the Computer Main-frame Industry, ” ]ourna) of Business, vol. 49, Apri l 1976,p. 194.

}’4’Electronic Computer Industry, ” )(]p(ln Heport AJ(J. I IS,Joint Publications Research Service, JPRS 77203, Jan. 19, 1981,p. 58. Software costs, particularly for applications programing,are escalating rapidly compared to hardware costs (in all partsof the world) because the productivity of programmers has notbeen increasing, Generation of software is becoming a signifi-cant entrepreneurial activity in the United Slates, with manynew en t rants striving to establish themselves in the market-place. Major innovations in software might tend to unsettle theindustry: on the other hand, new programing languages such asPascal, and now Ada, are forces for standardization and slabil-itv.


computers, indeed to all high-technology sec-tors of the industry.

At present, recent college graduates inelectrical engineering and computer scienceare in short supply, The problem is one of ab-solute numbers; but there are also shortagesof graduates with particular skills—e.g., theability to deal with both hardware and soft-ware. Demand by employers for new gradu-ates in electronics and computer specialtiesis expected to rise by as much as 35 percentin 1981.29

Part of the reason for the current short-ages can be laid to the relatively poor jobmarket for engineering graduates during theearly to mid-1970’s. The widely publicizedslump discouraged many students from en-rolling in technical fields. While enrollmentshave now picked up, the cutbacks in engi-neering school faculties and facilities that ac-companied earlier enrollment declines havenot been reversed, in part because engineer-ing enrollments have proven cyclical in thepast. Shortages of faculty and teaching equip-ment presently exist in many fields of engi-neering —a situation which, if allowed to per-sist, could have serious long-term conse-quences for competitiveness in virtually allU.S. industries, a s we l l a s fo r na t iona lsecurity.

Japan is now graduating signif icantlylarger numbers of electrical engineers thanthe United States—one-third more for 1977-–the reverse of the situation at the beginning ofthe decade, and a foreboding sign. 30 However,the United States has large numbers of mid-career engineers, some of whom are under-utilized. There appears to be ample scope andincentive for retraining efforts which wouldhelp meet the needs of U.S. industry whilealso improving career prospects for such peo-ple. Many of these engineers missed the ICrevolution, and, more importantly, the soft-ware revolution. They could benefit greatly

‘~. }I:irnilton, ‘‘ 1981 outlook seen as B o u n t i f u l , ” E;lfx; tron]cs,

](III. 27, 1981, p. 174,

‘I” “The F:lect rir:]l ~;n~lne[;rlng (;:~p: ‘1’he [Jnitwi St:] tes \’crsus]:ipan, ”’ The Rown F,’le{,trl~nlrs let tcr, F’eb. 21, 1980, p. 7,

from retraining that emphasized a mix of ad-vanced hardware/software skills.

Comparing the Sectors

Several of the more important similaritiesand differences among the three sectors ofelectronics that have been examined arelisted below:

1. The United States no longer has an over-whelming technological lead in any ofthese sectors, but semiconductor andcomputer markets are still rapidly grow-ing and volatile; technological change ismuch faster than in consumer electron-ics. Major innovations in consumer elec-tronics might or might not upset the cur-rent competitive situation in that sector.But the pace of technical change in semi-conductors and computers virtuallyguarantees future shifts in the competi-tive positions of some firms—e, g,, thosemaking products such as microcom-puters,

2, In the sectors experiencing rapid growthand technical change—semiconductorsand computers —U. S. firms remain highlycompetitive, Important reasons are theirlong-standing strength in innovation andtheir skill at adapting to changing condi-tions. In contrast, American consumerelectronics firms are having difficultycompeting on a cost basis in mature pro-ducts with Japanese and other Far East-e r n producers— a similar problem tothat afflicting the U.S. steel and auto-mobile industries,

3. Again because of the rapid marketgrowth in semiconductors and comput-ers, employment is rising despite produc-tivity increases. In the mature segmentsof consumer electronics markets, suchas TVs , employment has declined—though it may now have stabilized. Newgenerations of consumer electronicsproducts could change this, but no! ifforeign firms take the initiative and be-come the successful innovators.

4. American semiconductor and computer~irms are competing aggressively on a


worldwide basis with all comers. Fur- tively compete inside Japan—whichthermore, major U.S. firms, particularly from time to time may demand the sup-in computers, have achieved a signifi- por t o f the U.S . Government - theycant presence in the domestic Japanese should be able to remain competitive,market. This may be a necessary ingre- though perhaps not dominating worldclient for maintaining global competitive- markets as in the 1960’s.ness. As long as American firms can ac-

AutomobilesThe motor vehicle (automobile and truck)

industry in the United States entered a deeprecession in sales and employment in 1980,when domestic automakers lost more than $4billion. Production of passenger cars hasbeen falling since 1977, much more steeply in1980, Sales of domestic cars were lower in1980 than in any year since 1961. Severalhundred thousand autoworkers found them-selves laid off. For trucks, the decline waseven steeper, with production off by 46 per-cent. Even for subcompacts, domestic capaci-ty utilization fell; the U.S. industry could haveproduced as many as 1 million more subcom-pact and compact cars during 1980. 31 But assales of American-made cars dropped, im-ports from Japan continued to rise (table 19).

While sales of Japanese cars increasedsteadily through the 1970’s, imports fromEurope remained more-or-less stable (in thecase of West Germany, they have decreasedconsiderably—in part because Volkswagennow assembles cars in the United States). As

“’’The Automobile Crisis and Public Policy: An InterviewWith Philip Calciwell, ’” Hurvard E?usiness Review, Janu-ary/February 1981, p. 73.

table 19 shows, Japan’s proportion of importsto the United States doubled from 40 percentin 1973 to 80 percent in 1980.

The past year was exceptional because inprevious depressed markets, sales of both do-mestic and imported automobiles dropped.For 1980, total passenger car sales fell 13percent—but import sales went up by 3 per-cent, while domestic sales were down by 21percent (table 5 in ch. 4). Sales of Japaneseimports increased by 8 percent. Even domes-tic subcompacts experienced 5 percent lowersales (U.S. full-size cars were down 37 per-cent). ~z Such a rise in sales of Japanese carsin the face of recession is striking—and tosome observers prima facie evidence of theAmerican industry’s loss in competitiveness,The next section considers this question inmore detail.

Imports and the U.S. Industry

Large declines in output are not unusual inthe motor vehicle industry, which has a longhistory of such behavior—associated with

‘Wurd’s Automotive Reports, Jan. 12, 1981.

Table 19.—U.S. Automobile Imports by Country of Origin (thousands)-—....—— . .

Year United Kingdom West Germany Italy Sweden Japan Other ‘- Total——.——1973 . . . I . . . . 64 677 56 59 625 84 1,566-1975 . . . . . . . . , 67 370 102 52 696 54 1,3411977 . . . . . . . . . 56 423 55 39 1,342 23 1,9401978 . . . . . . . . . 54 376 70 56 1,563 33 2,1231979 . . . . . . . . . 46 323 72 66 1,617 29 2,1561980 . . . . . . . . . 32 305 43 70 1,908 40 2,398

NOTE West German figures exclude production by Volkswagen of America Totals may not sum due to rounding Since 1977, most of the Other’” Imports have beenfrom France 1980 figures are for sales

SOURCES 1973.79—Department of Commerce, Bureau of the Census1980—Ward’s Automotive Reports, Jan 12, 1981


the business cycle. Furthermore, productiontends to fluctuate more than sales, as dealerinventories periodically increase and de-crease.

Table 20 and the discussion following treatautomobiles and trucks together. The tableshows domestic production, plus sales of bothdomestics and imports, for 1978 through1980. The peak sales year for passenger carsand trucks together was 1978, slightly above1973 (1973 was the peak for passenger carsalone). F rom 1978 to 1979 , to t a l s a l e sdropped by 1.4 million (9 percent). Sales ofAmerican-made cars and trucks fell by 1.76million (14 percent), production by somewhatless because of inventory buildups. Thusmuch of the decrease in production and salesof domestic vehicles was the result of slack-ening demand; regardless of imports, salesand production in 1979 would have dropped.

Much the same was true last year, thoughthe decline in domestic production and saleswas steeper. For 1980, total sales, includingimports, fell a further 17 percent. However,sales of American-made cars and trucks fellby 23 percent (table 20), Again, a slackeningin total demand is responsible for much of thedrop in domestic production and sales.

If import penetration had remained at the1979 level of 19.8 percent, domestic car andtruck sales during 1980 would still havereached only 9.2 million—assuming domes-tics substituted for all the extra imports, Thiscompares to the actual level of 8.6 million, Ifimports displaced a maximum of 600,000American cars and trucks, then they can ac-count for only one-quarter of the decline indomestic production and sales.

The 23-percent sales decline for Americancars and trucks in 1980 is large compared to

the decline from 1978 to 1979 but comparableto that associated with the 1974 recession.Likewise, sales fell by 21 percent from 1969to 1970. Thus, the drop in sales of domesticvehicles during 1980 is not by itself unprece-dented, A major difference is that importsales continued to increase in 1980, while inthe earlier recession of 1974-75 they de-creased along with sales of American cars.As table 5 showed, import sales fell 20 per-cent between 1973 and 1974,

A primary reason for increases in sales ofimports— even in the face of recession andoverall slackening of demand—is the shift inthe market to small, fuel-efficient cars trig-gered by rising gasoline prices, as well asshortages and gas lines during 1979. This is achange with important implications for thecurrent and future competitiveness of Amer-ican firms. Tables 21 and 22 give distribu-tions by size of sales of all passenger cars inthe United States—domestics and imports—and of production by U.S. firms. The datashow that domestic production (table 22) hasbeen heavily skewed toward large vehiclescompared to market demand (table 21). In1980, 45 percent of sales were subcompacts,but these accounted for less than 30 percentof U.S. production. Small cars have alwayspredominated among imports, When this seg-ment of the market became more important(table 21), foreign producers—particularlythe Japanese, who have done a better joboverall than the Europeans in building strongdealer networks and meeting the desires ofAmerican consumers—found themselveswith, in effect, a windfall.

The shift of the U.S. automobile markettowards small cars has not been clear-cutand unambiguous, There was a movementtowards small, high-mileage vehicles as a

Table 20.—Motor Vehicle Production and Sales Figures (thousands of cars and trucks)—

Sales

Year U.S. production - Domestics ‘— —

lmports – ‘-Tot al Import penetration1978 ... 12,875 - 12,890 2,320 15,210 15.3%1979 . . . . . . ., 11,471 11,132 2,743 13,875 19.81 9 8 0 . . . . . , 8,012 8,581 2,883 11,464 25.1

SOURCE Tables 5 and 6 in ch. 4

94 Ž U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Table 21 .—Distribution by Size of Sales in the U.S. Passenger Car Market(domestics plus imports, percent of total sales)

.—Year - Subcompact’ Compact Intermediate Full size Luxury——.1967 . . . . . . . . . 9.3% 15.7% 23.6% 47.9% ‘3.1 0/0

1970 . . . . . . . . . 17.1 19.8 23.5 36.8 2.9

1973 . . . . . . . . . 26.6 16.8 23.4 29.8 3.91974 . . . . . . . . . 26.5 22.7 24.4 22.7 3.71975 . . . . . . . . . 30.6 22.9 23.9 17.9 4.71976 . . . . . . . . . 24.7 24.1 27.8 18.8 4.71 9 7 7 . . . . . . . , 27.1 21.2 26.4 20.4 5.01978 . . . . . . . . , 26.4 22.9 26.6 18.4 5.61979 . . . . . . . . . 34.7 20.9 23.8 15.1 5.51980 ...., . . . . 45.3 18.6 20.5 12.0 3.6

alncludes all Imports

SOURCES Through 1979—Automotwe News 1980 Market Data Book issue, p 161980– Ward’s Autornotlve Reports, Jan 12, 1981

Table 22.—Distribution by Size of U.S. Passenger Car Production (percent of total production)——.

Year S u b c o m p a c t ‘- C o m p a c t I ritermed i ate Full size Lux-u ry

1973 ......, . .1974 . . . . . . . . .1975 .., . . . . .1976 . . . . . . . . .1977. , . . . . . . .1978 ..., . . . . .1979 . . . . . . . . .1980 . . . . . . . . .

10.20/.15,412.7

7.67.7

16.423.828.3

18.8°\027.530.633.626.924.423.429.6

28.0°\028.427.230.832.030.125.924.0

sF.~O/o

23.623.022.226.522.520.413.3

5.1705.16.65.97.06.56.54,7

——SOURCES 1973-79—Pet/t/on for Relief Under Section 2~1 of the Trade Act of 1974 From Import Compet/t/on From Imported Passenger Cars, L/ght Trucks, Vans, and

Ut//lfv Vehfc/es submitted by the International Union, United Automobile, Aeros~ace, and Aclncultural lm~lement Workers of America (UAW), before the U SInternational Trade Commlsslon, June 12, 19801980— Ward’s Automotive Reports, Jan 12, 1981

result of the “energy crisis” of the mid-1970’s—when subcompact sales reached 32percent—then a reversal, as the market forlarge cars picked up again. This is evident inthe domestic production figures for subcom-pacts and full-size cars in table 22, as well asin the sales figures.

U.S. automakers have made lower profitson small cars than on large because costs—both fixed and variable—have not been asstrong a function of size as prices. This situa-tion is changing as new small cars begin tosell at higher prices than the larger modelsthey replace. Despite a reluctance to losesome of the profitability that came with bigcars, the failure of American manufacturersto move more rapidly and consistently intosmall cars was not so much poor judgment asa reflection of contradictory market signals.These signals resulted in part from two con-current Governmental policies-corporate

average fuel economy standards, and con-tinued price controls on oil (as well as lowtaxes on gasoline) which in turn held downgasoline prices (ch. 6). These juxtaposedpolicies confused the market and heighteneduncertainty among the automakers. The re-sult in 1980 was a mismatch between domes-tic production and market demand—which isnow strongly oriented toward small cars, theJapanese mainstay.

Some American firms have also had diffi-culty marketing their small cars—particular-ly those of older design. Ford and Chryslerhad considerable unsold dealer inventory insubcompacts during 1980.J] High inventoriesof small American cars existed despite lowerprices for some U.S. models—a price differ-ence which was even greater when discounts

{ ‘Auttj Situ{] tion: 1980 IWashington+ D.(:,: Subcomrnit tee onTrnde, Committee on Ways and Means, U.S. House of Repre-sentatives, June 6, 1980], pp. 25-26.


for American cars, and surcharges for Japa-nese imports (occasionally as much as $1,000)are included. 34 But while sales of domesticsubcompacts actually dropped in 1980, therehave been few signs of slackening demand forJapanese cars. American manufacturers arecounting on newly designed 1981-model andlater small cars to reverse these trends.

Employment

Production cutbacks such as those that oc-curred in the U.S. industry in 1980 arealways accompanied by layoffs—the unem-ployed autoworker is not a new phenomenon.From the peak production work force in 1973to the 1974 trough, employment in the auto in-dustry declined by one-third. This is not tominimize the very real problems created byunemployment in this industry, accentuatedby the concentration of automobile manufac-ture in the industrial Midwest. Furthermore,it is quite possible that the current round ofunemployment is more than a short-termproblem, But from a policy standpoint, thispoint is important: Restricting imports ofautomobiles (from Japan) might amelioratecurrent employment decline, although the ex-tent of this is by no means obvious (it dependson the number of consumers who would pur-chase American cars if imports were notavailable). Restricting imports will not alterin any fundamental way the highly cyclicalnature of the industry, nor will it necessarilyblunt the difficult, longer term competitiveproblems faced by U.S. automakers and partssuppliers.

Long-run employment expectations for au-tomobiles are similar to those for the steel in-dustry; the same basic conflict exists be-tween productivity and job opportunities.Were domestic motor vehicle production torecover completely, maintaining or improvingU.S. competitiveness would still imply raisingproductivity —which reduces employment op-portunities. Based even on optimistic assump-

““(:urr(;nl Prf)blcrns of the [1. S, Automobile” Industry nnd P(ll-](i[x+ to A(id rcss Them, s t off workin~ paper-, ConHrcss]( m:{ 1Hu(igot of flcc, Nalur:ll Rcst)ur(es and (i)mmcrcc I)ivision, Ju]}1980, pp. 16-17.

tions for future sales, some analysts believeauto industry employment could drop perma-nently by 100,000 or more workers over thenext 10 years—to which job losses in supplierfirms would add. Slower than expected mar-ket growth, along with cyclical down-turns,could raise the figure substantially, Note thatthis potential employment loss is comparableto totai employment in the U.S. consumerelectronics industry.

Factors in Competitiveness

Consumer purchases of Japanese cars areresults of product mix, perceived value interms of design features and equipment, styl-ing, perceptions of differences in quality, andother factors— as well as fuel economy. Thecompetitive situation in automobiles appearsto be similar in a number of respects to that inconsumer electronics, especially TVs, In bothcases, the Japanese entered the United Statesin particular market niches—small screens,small cars, They established a reputation forwell-designed, high-quality products at rea-sonable prices. In this, they have succeededin ways that European automakers haveseldom managed (Volkswagen is the principalexception), The Japanese have also estab-lished strong dealer networks—an importantsource of their ability to steadily increasesales in the United States.

Much of the product appeal of Japaneseconsumer goods in general—whether TVs,automobiles, motorcycles—does seem to benonprice. The Japanese are aggressive mar-keters—at home, in the United States, and inother parts of the world. They now hirestylists from Europe and the United States,and have rapidly moved from producing carsthat were perceived as overornamented andunderfunctional to being among the leadersin design.

At the same time, there is nothing newor unusual about Japanese automobiles—whether in appearance and packaging, or en-gineering. Many of the more successful im-ports are quite conventional , with frontengines and rear-wheel drive, While Japa-nese firms are now building more front-wheel


drive models, they lagged the Europeansmarkedly in this trend. However it has nothurt them in the American market. Toyota didnot have a front-wheel drive car in the UnitedStates until 1980. Datsun entered a few yearsearlier, but with a car—the F-10—which waswidely considered a poor design and whichdid not sell. The F-10 was quickly replaced bythe 310—a model perceived as considerablysuperior. This is a typical example of Japa-nese response to consumer preferences.Products that meet with poor response aredropped, generally to be replaced by betterones. The Japanese did not quit the Americanmarket when their first offerings proved un-

appealing to American consumers; they per-sisted, and steadily improved their sales. Thisis the real significance of table 19.

Except for fuel economy, the success ofJapanese imports does not then rest on theirtechnology. In fact, relative technologicalcapability—as opposed to engineering design—does not at present play a major role in theworldwide automobile market. Both productand process technologies are well diffused,with developments such as three-way cata-lytic converters or robots for automated spot-welding available to all manufacturers. Inthis respect, the automobile industry is more

Photo credit Ford Motor Co

Automatic transaxle assembly

Ch. 5—industry-Spec\fic Competitiveness ● 97

like steel than it is electronics. In steel, thetechnology is also a universal one, althoughthere are always pockets of special knowl-edge. In contrast, for semiconductors andcomputers, the United States has maintaineda technological lead in some areas. This givesU.S. electronics firms competitive advantagesthat do not exist in automobiles.

Japanese automakers do appear to havesignificantly lower costs of production thantheir American counterparts. A cost advan-tage gives flexibility in developing competi-tive strategies; for example, quality can beupgraded through better paint and trim, ormore standard equipment included for thesame price. Most important, lower produc-tion costs mean greater margins for cuttingprices when sales are slow, as well as higherpotential profits for reinvestment or attrac-ting outside capital.

The actual magnitude of the Japanese ad-vantage is uncertain. For subcompact cars,the manufacturing cost differential appearsto be of the order of $1,000. While shippingmay add $500 or more, many Japanese im-ports would still have lower delivered coststhan cars made here.

Lower manufacturing costs in Japan stemin part from lower wage rates— especiallyamong suppliers and subcontractors, but alsoin the Japanese automobile firms themselves—in part from labor productivity that may besomewhat higher than in the United States,and perhaps also from economies of scale.Wage rate differences are probably most im-portant. Other cost elements also vary be-tween the two countries—for example, theJapanese can take advantage of their cheapersteel, Moreover, costs depend critically onproduction volume—cost curves for automo-bile manufacture are notoriously steep. Thehuge losses sustained by U.S. automakers in1980 stem in large part from low productionlevels.

For such reasons, estimates of cost dif-ferentials are complex and should be ap-proached with caution. Even “comparable”subcompact cars are not the same; costs can

be cut by careful engineering design, as wellas a good working relationship between prod-uct engineering and manufacturing functions.Costs also depend on the extent of vertical in-tegration within a company, which variesconsiderably between and within the twocountries, Japanese automakers subcontractmuch of their manufacturing; just as forAmerican Motors and Chrysler, they are gen-erally not highly integrated. In Japan, evenassembly may be subcontracted. 35 Japaneseautomakers rely on extensive networks of af-filiated firms and suppliers; they also use con-tract labor within their own plants. The rela-tionships between the manufacturers andtheir suppliers are certainly different fromthose in the United States; in some cases theties may be close enough that the operationsshould be considered functionally integrated.But arms-length relationships such as arecommon in the United States also exist inJapan. Both wage levels and labor productivi-ty are likely to vary among the parent firm,its subsidiaries and affiliates, and other sub-contractors and suppliers. Within a givenfirm in either country, there will be differ-ences from plant to plant and car line to carline.

In the absence of better information, sever-al past estimates of manufacturing cost dif-ferentials have assumed that labor content(essentially productivity) for U.S. and Japa-nese cars was roughly the same, and thatmost of the Japanese cost advantage camefrom lower wage rates. On this basis, manu-facturing costs in Japan would be $500 to$1,000 lower than in the United States, 36

““’][]pttn”s Big Autom;ikers E’ar-m Out Lt’ork,’” l~~pcln fie~)~)rt,J(jlnt Publications I?csearch %;rvi(e 1, 92Y0. S e p t . B, 1‘180,p. 34.

“R. A, Leone, \f’, J. Almrn~] [h~, S, P. Br[idle\. iInd J. A,Ilunkcr, ‘‘Rc~ul;i tit)n /In(i ‘1’echn[)]ogi( ;)I Inn(NT;i ti[)n in thr .4{] t(}m(hilf? lndustrv, ” report to 0’1’,4 un{l[?r ((lnt r<)[t N(),9333800.0, ~la] 1980. pp. 52-53; A. h~~t~,. “Sl:]tcnlent {)f tl][~Depnrtmenl of (:[mlmerce,’ 11’~)rl~i A u to ‘J’r[I~i[’ (;u rr(~n t ‘J’rcn[i>urrd Strurtu r(ll Prf)hlcrns, he:~ r]ngs [[1’;]shlngt( )n, 1). (;.. Suh(om-mittee on Trade. C[Jmmi t t cc on U’:ivs and hleans, U.LS, [ {(IUSC ofRcprescntat iv~’s, hl:]r. 7, 18, 1980), p. 232. one An~(:ricijn firm11{1s estim:l ted Iiit)or pr(][iurtivil~’ 111 !}l[’ ]:lpanese industry to Ix?10 per(wnt higher than in the United Stat[?s—’4Resp(~rls[~ ofE’(lrd hlotor” Comp{]nt,’” ~t’f)rl~i Auto ‘l-r(l(ic, op. rit., p. 96, ‘1’heFcrif:r:41 ‘1’rt~(ic commission” M as uni]hle to verifv ;; prncfu(tivit~


More recen t ly , some obse rve rs haveclaimed that Japanese subcompact cars em-body substantially lower labor content, hencea production cost advantage of $1,200 to$2,000. 37 Such estimates are based on reportsthat Japanese automakers achieve markedlysuperior labor productivity and manufactur-ing efficiency through a variety of productionengineering and quality control techniques.This seems contrary to the implications of thepatterns of productivity growth in motor vehi-cles shown in table 8 (ch. 4)—36 percent forthe United States for the period 1970-79, 77percent for Japan. Mindful that productivityfigures of this sort are not directly compara-ble, it still appears that the more rapid in-crease in Japan would, on the average, bringthe absolute labor productivity for automo-bile manufacture in that country closer to,but not necessarily ahead of, that in theUnited States. Nonetheless, the very highrates of capacity utilization in Japanese autoplants over the past 2 years—coupled withlow capacity utilization in the United States—could result in substantially greater cost ad-van tages fo r Japanese au tomakers thanwould exist if the two industries were oper-ating at comparable levels.

Although there is currently no real consen-sus on whether labor productivity in the Jap-anese automobile industry is significantly dif-ferent than in the United States, some of theconcerns now emerging are remarkably simi-lar to those expressed earlier for industriessuch as s teel and consumer electronics.There too, the apparent competitive advan-tage of Japanese firms was at first attributed

(( ontlllll(vl /1’011) ~)flg(’ !)7/

;idvii n tage far the Ja pa nese —hl. P, t,ynch, e t a 1., ‘‘Comments ofthe Sla ff of the F’ederal Trade Commission Before the Intern~-tional Trade Commission, Certain hlotor” Vehicles and CertainChassis and Bodies ‘1’herefor, ’” Oct, 6, 1980, p. 9 and app. A,pp. 11 ff.

‘ The Department of Transportation estimate is $1.500 to$2,000—The US. Au t(]mobil[’ Irr(fustr-}r. 1980: ~e[mrt (O thePresi(ienf F’r(~m the Secre(ar~’ of Tr’~]rl,s~j(]rt(lti(~rl, publicationNo. D(YI’-(3-1O-8 1-2 (Washington, D.(~.: DOT, January 1981), pp.40-44: Prnfessnr W. J. Abernathy of the Harvartf BusinessSchool now estimates $1,200 10$1 ,800—N. Call, “It’s Later‘1’h:]n We Think” (interview with Abernathy), Forbes, Feb. 2,1981, p. 65. Both estimates are based on the same unpublishedreport of a ransul t ing firm.

to cheap labor (and often to unfair tradepractices). Later, factors such as productivi-ty, the Japanese work ethic, and the manage-ment systems of Japanese firms came to thefore. These are complex and poorly under-stood topics— several of which will be ex-plored in more depth in the OTA electronicsstudy. But questions of manufacturing effi-ciency and labor productivi ty—and theirsources—deserve further mention.

Japanese manufacturing industries have ina number of instances demonstrated produc-tivity levels equal and sometimes superior toU.S. industries. Japanese firms have alsoshown that they can make products of highquality. Relatively high productivity and rela-tively high quality characterize Japanesemanufacturers in industries as diverse ascameras, steel, electronics, and motor vehi-cles. While some observers stress culturalfactors among the attributes contributing tothe high performance of Japanese corpora-tions in such industries, it is easy to overem-phasize their importance. Many aspects of la-bor relations in Japan—the multitier labormarket, the so-called lifetime employmentsystem, seniori ty-based pay scales—arebased on rational organizational principles.)”Patterns of education and training for em-ployees of large corporations—whether fac-tory workers, technical professionals, ormanagers— have their sources in the histori-cal development of the Japanese economy,particularly the rapid industrialization whichbegan in the late 19th century.+’

Corporate management in Japan differs invarious ways from that in the United States,but here too cultural factors are only oneamong the many forces that have shaped themodern Japanese manufacturing organiza-tion. To say that Japanese firms achieve highproductivity because their employees workhard and long, or that they maintain high

‘“H. Shimacfa, The )up(lnese Empl(~yment System (Tokyo: TheJapan Institute of Labor, 1980); R. E. Cole, Work, Mohi]lty, (In[iPf]rticipa ti{)n; A Comparative Study of Americ~]n (Ind )(]p[lrreseindustry (Berkeley, Calif.: University uf (kliforni[i Press, 1979).

‘“S. B. Levine and 11. Kawaria, Human Iles[mrces in J(]p(]neselndustri[]l Devel~)]~mcnt (Princeton, N. J.: Princetun UniversityPress, 1980).

Ch. 5—industry-Spec/f\c Competitiveness ● 99

quality because factory personnel are pain-staking and diligent, does little to illuminatesources of competitiveness. After all, most ofthe techniques of quality control practiced inJapanese factories, along with manufacturingengineering methods of all types, are basedon principles developed in the West, importedto Japan, and adapted to Japanese organiza-tions, These methods continue to be taught inAmerican schools of engineering and man-agement, Like product technologies in thesteel and automobile industries, they are partof a common body of knowledge available tofirms all over the industrialized world.

To leave manufacturing costs and return tothe ingredients of successful automobile mar-keting in the United States, one of the criticalfactors is certainly the dealership system.When imports—both European and Japanese—lacked large, aggressive, and loyal dealernetworks, they were not perceived as seriousthreats, For many years sales of imports suf-fered because dealers were few and scat-tered, spare parts unavailable, service poor,and resale value low. The primary exceptionwas Volkswagen, which established a stronggroup of dealers during the 1960’s. The majorJapanese importers have now done the same,as table 23 shows. In many respects, theestablishment of a viable network of dealershas been at the center of the strategy of Jap-anese importers. No doubt they learned fromthe example of Volkswagen, and the failuresof other European firms to establish them-selves in the U.S. market. As the table in-dicates, over the last 5 years the numbers ofdealers for U.S. cars have declined slightly,but all the Japanese makes have increasedtheir representation (many dealers sell bothimports and domestics). While there are stillfar fewer dealers for imports, those handlingJapanese cars may be healthier. Dealers forHonda, Datsun, and Toyota sell more cars onthe average than American car dealers. ’(’Their current profit margins should also behigh because popular import models haveoften been in short supply and selling for pre-mium prices,

Table 23. —Numbers of Dealerships by Manufacturer

Dealerships PercentageFirm 1975 1980 change 1975-80

General Motors .11,860 - 11,425 – 3. 7%Ford, 6,773 6.514 - 2 4Chrysler 5,193 4,419 – 15.0American Motors 1,862 1,701 – 8 6Datsun. . . . 940 1,069 + 13.7Toyota. . 947 1,062 + 12.1V o l k s w a g e n 1 , 2 0 1 1.015 - 7 2M a z d a 375 759 + 102.4Honda . 409 740 + 80.9S u b a r u . 568 738 + 461Fiat . . . . . . . 691 640 – 7.2

SOURCES: 1975— Ward's 1976 Automotive Yearbook (38th ed. Detroit. Mich.1976) pp 34 119

1980—Automotive News 1980 Market Data Book issue pp. 48 54For both years the number of dealers IS that on January 1st

Small Car Strategies of U.S. Firms

In planning their corporate s trategies,domestic automakers did not anticipate thatconsumer preferences would shift so rapidlytoward small cars with good fuel economy,Nor did importers; Japanese firms had largeinventories in the United States prior to thedoubling of gasoline prices during 1979 and1980, Before this, big cars had been sellingwell.

While American automakers have been in-troducing new-generation subcompacts—GM’s Chevette in 1976, Chrysler’s Omni/Hori-zon in 1978—their product lines in small carsremain thin. Even with the introductions ofthe Chrysler K-car and Ford’s Escort/Lynx forthe 1981 model year, the Japanese manufac-turers still offer many more small cars and abroader selection of subcompacts.

Historically, manufacturers outside theUnited States have stressed small, inexpen-sive, and economical vehicles. In both Europeand Japan, high gasoline prices and a varietyof public policies—e.g. , s teep taxes onweight, eng ine d i sp lacement , o r hor se -power—have encouraged small size and goodfue l economy. Inc reas ing ly , U .S . au to -makers—who have, after all, been quite suc-cessful in many foreign countries—are beingforced away from their traditional productstrategies in their home market, These strat-egies emphasized comfort and ride, size, du-



Final assembly area for Ford Escort/Lynx

rability, and at times performance. Optionalequipment, whether functional or cosmetic,has also been important. Now American man-ufacturers have to compete in terms of fueleconomy and space utilization here as well asoverseas, The changes, helped along by Gov-ernment fuel economy standards [ch. 6), havebeen sharp. By 1979 the production-weightedaverage fuel economy of a new domestic carhad reached 19.2 miles per gallon, comparedto 12.9 miles per gallon in 1974.”

— ——4“’Innovation and Fuel Economy Among Domestic and Im-

ported Cars, ‘“ World Auto Trwde: Current Trends and Structur-U1 Problems, op. cit., p. 24.

Initial efforts to improve fuel economy fo-cused on weight reduction. The average do-mestic car weighed 4,35o lb in 1975, 3,7oo lbin 1979. These reductions were accomplishedby “downsizing” and shifting to lighter mate-rials—replacing iron and plain carbon steelwith plastics, aluminum, and high-strengthsteel. More front-wheel drive cars are nowappearing. These save weight primarily byallowing overall vehicle size to be decreasedfor given interior dimensions.

During the 1970’s, American firms alsobegan more actively marketing captive im-ports— small cars produced by wholly or par-


tially owned foreign firms. As American man-ufacturers are currently unable to countvehicles in their corporate average fueleconomy figures unless the value-added in theUnited States is greater than 75 percent(scheduled to be reduced to 50 percent for thefirst 150,000 cars by the Automotive Fuel Ef-ficiency Act of 1980), the incentives to sellcaptives have not been great.

A side-by-side comparison of U.S. and im-ported cars by weight class, table 24, revealsthat American automakers are competitive infuel economy. However, the table also showshow slim American product lines are (or werein 1979) in the lower weight classes andsmaller sizes. While the domestic manufac-turers had no models in the lowest weightclass—2,000 lb—there were 10 imports. As ithappens, two-thirds of import sales in 1979were in the 2,500-lb weight class and below,against only 7 percent of domestic sales. Incontrast, almost 80 percent of domestic saleswere in the 3,500- to 4,500-lb classes. Theaverage fuel economy of domestic cars doesexceed that for imports in each categorywhere comparisons are possible except the2,50()-lb weight class, where the difference issmall.

It appears that a significant part of thecurrent difficulties of American firms stemsfrom the thinness of their product lines in thesmall car classes which are becoming moreand more popular (e.g., table 24, also tables21 and 221. Even for the 1981 model year, thetop 20 cars in EPA mileage rating are foreignin manufacture and/or design (the Volks-

Table 24.— Fuel Economies of Domestic andImported Automobiles, 1979

Domestic ImportedWeight Number of Average Number of Averageclass models mpg models mpg

2,000 lb 0 — 10 32:62,500 lb 11 281 34 28.33,000 lb 47 224 21.43,500 lb 65 197 20 18,54,000 lb 56 17.4 9 15.1

SOURCE: World Auto Trade Current Trends and Structural Problems hearings

(Washington D C Subcommittee on Trade Committee on Ways andMeans U S House of Representat ives Mar 7 and 18 1980) p 25

Averages are not sales weighted

wagen Rabbit diesel is made here but was de-veloped in Germany). Furthermore, manyconsumers, faced with a choice among two orthree variations on a domestic subcompact,or half-a-dozen Toyota models, might wellfind a particular Toyota that was more ap-pealing to them, The product strategies of theJapanese firms— emphasizing variety, as wellas quality and fuel economy—thus seem to beworking well (many buyers now rate importsdistinctly superior in quality”),

To keep up with the changing market—andwith Government regulations for fuel econ-omy, emissions control, and safety —U.S.automakers continue to face large capital ex-penditures. These have been estimated at $70billion for the period 1979-85 43 —more thanhalf to be spent in the United States. It seemslikely that even GM will need to borrow—per-haps $5 billion to $10 billion—to accomplishthe redesign and retooling required. Ford hasalready borrowed, and has also announcedcutbacks on planned expenditures because ofdisappointing cash flow. Chrysler’s precari-ous financial situation is well known. Foreignfirms do not have to invest at comparable lev-els because they already produce mostlysmall cars.

Assuming investment funds were avail-able, would U.S. firms be able to compete ef-fectively with imports in the compact andsubcompact classes? Past experience indi-cates that this may not be as easy as somehave assumed. To begin with, the import mar-ket share is now 25 percent nationally—andconsiderably higher for subcompacts. Importsales have been at 50 percent in California, abellwether automobile market. ” History sug-gests that market share losses are not easilyreversed in the short run. Furthermore, theJapanese have clearly established their cred-ibility with the American consumer, Theyhave reputations for building high-quality

“R, Irvin, “Japan: Quality Cars. ” Autoweek, July 21, 1980,p. 10.

4’7’he LI. S, Autf)m[jb]le lndustr}, 1980: Report to the Presi~ientFrom the Secret[]r\r of Tr(]nsport(]ti(]n, op. cit,, pp. 55-66,

“P. E. Ho]lie, “~’oreign Car Surge in Californi~, ”’ New YorkT]mes, Nlar. 26, 1980, p, 111,



Robots welding automobile subframes

cars at reasonable prices—cars that do notrequire frequent repairs and that have goodresale value. Their dealer organizations arestrong. Lower manufacturing costs give themfreedom to cut prices to maintain sales.American automakers have proved that they

can compete in Europe and elsewhere withsmall cars; the extent to which overseas ex-perience can be transferred back to theUnited States will be an important element intheir long-run competitive prospects.

Summary and ConclusionsThe competitive positions of firms in each

of these industries result from complex setsof factors—some quantifiable, others intangi-ble. Each sector is increasingly challenged bycompetitive pressures on a worldwide basis—a common theme for U.S. industry.

A distinguishing feature of the steel indus-try is its wage pattern. That pattern shows atendency, accelerating in recent years, for

wages to increase faster than the nationalaverage in manufacturing. Wages in foreignsteel industries have also been going up. Butwhi le the Amer ican s t ee l indus t ry hasachieved productivity gains similar to thoseof European steelmaker, productivi ty in-creases have been greater in Japan. MostU.S. firms have been unable to effectivelycompete for export sales with the lowerpriced (but sometimes higher cost) products

Ch. 5—lndusfry-Specific Competitiveness Ž 103

offered by foreign steelmaker. They havealso been in a poor position to combat importsand dumping at home,

Although steelmaking costs in Europe aregenerally higher than for American firms, themarginal cost export pricing strategies fol-lowed by many European steelmaker lead toimport sales in the United States at dumpingprices. In contrast to the Europeans, Japan’ssteelmaker have a production cost advan-tage—stemming from factors such as moremodern plant and equipment, lower wages,exchange rate effects, and a well-developedraw material supply network, The hard factis that the Japanese have become very effi-cient and aggressive competitors.

Employment in the American steel industryhas declined by more than 20 percent since1965. However, the major cause of falling em-ployment has not been rising imports, but ris-ing productivity. Moreover, to increase thecompetitiveness of the steel industry its pro-ductivity will need to be further increased—for example, by modernizing its plant andequipment, Employment will thus continue todecrease unless production expands. Be-cause of slow domestic market growth, theonly way to expand production sufficientlywould be through exports —which is unlikely,given excess world steel capacity (there maybe promise in exports of alloy/specialtysteels). At current production levels, then,goals of improved international competitive-ness and stable or rising employment in thisindustry are fundamentally opposed.

This tradeoff between employment andproductivity is a subset of a larger group ofdomestic and international economic prob-lems. Economic growth is the single most im-portant determinant of demand for steel; in aclimate of domestic and international eco-nomic slowdown, it is especially difficult forthe U.S. industry to increase its share of asluggish world market. With excess capacitythe current norm in industrialized nations,and increased capacity the trend in newly in-dustrializing countries such as South Koreaand Mexico, the American steel industry is

likely to continue to diminish in importancerelative to the rest of the world.

Among the positive signs is the scope in theUnited States for modernization, and forprocess R&D aimed at lower costs and higherproductivity (which would however decreaseemployment opportunities). Changing demandpatterns—toward higher strength, more ex-pensive steels —also provide opportunity forthe domestic s teelmaker. Increasing thetechnological content of the industry’s offer-ings is one way for it to compete against inter-national rivals who can sell standard prod-ucts more cheaply.

Imports and foreign production have hadgreater impacts on consumer electronicsthan on any other sector OTA has examined.Over the last 15 years the size of the workforce has been cut in half and the overallposition of U.S. companies in the domesticmarket has declined markedly, The successof Japanese TV manufacturers in penetratingparticular market niches, and then expand-ing through emphasis on low-priced, high-quality products has been remarkable. Wereit not for OMAs set up to regulate the flow ofimports, the position of American color TVmanufacturers would have eroded even fur-ther.

A renewed commitment to R&D in high-technology consumer products could be onepath to enhanced competitiveness for U.S.manufacturers, New products that rely onsemiconductor devices may provide oppor-tunities for the stronger U.S. firms in the old-line home entertainment sector, as well as fornew entrants from other parts of the elec-tronics industry. While there are potentialdisadvantages as well as advantages to ver-tical integration, forward integrat ion bysemiconductor firms may be increasingly at-tractive as the value-added in consumer elec-tronics becomes more heavily concentrated inintegrated circuits.

It is probably not an exaggeration to saythat the semiconductor industry—and partic-ularly, the applications of semiconductor


technology—are now the ingredients mostvital for the future of an advanced industrialeconomy. From the U.S. perspective, thesemiconductor industry is also notable inthat, while American firms are currently ex-tremely competitive worldwide, there is con-cern about the future because foreign firmsand governments have set out to systemati-cally advance their technological capabil-ities, as well as their market positions,

In semiconductors, more than steel andautos, technology is a primary focus of con-cern. American companies were responsiblefor the initial development of most types ofsemiconductor devices, but recently the tech-nology gap between the United States andJapan has narrowed. Japanese firms are nowat or near parity with the United States inmany areas, helped by R&D support from theJapanese Government. Although Japanesecompanies are unlikely to overtake their U.S.rivals in ICs such as microprocessors that de-pend on clever design, the Japanese havealready demonstrated their capabilities inmore straightforward circuits.

While Japan’s cooperative VLSI programhas been important, the major impact of thisgovernment-sponsored effort was perhapsless a matter of technology than psychology,By providing a unifying focus for R&D, suchcooperative projects contribute to the tech-nical capability of Japanese firms both direct-ly and indirectly.

A deserved reputation for high quality hasalso contributed to the competitiveness of theJapanese electronics industry. This is an areawhere U.S. firms have renewed their efforts;but the Japanese will undoubtedly also con-tinue to progress.

U.S. semiconductor firms face rapidly es-calating capital requirements for R&D and tomeet the growing demand for their products.Vert ical integrat ion wil l continue in theUnited States; it is in the strategic interests ofthe managements of firms now in the mer-chant market, as well as those that make endproducts. Mergers and backward or forwardintegration can give complementary product

lines, captive markets, synergistic environ-ments for R&D and product development, andsometimes capital,

In computers, American firms have alwaysbeen extremely competitive. Here, as forsemiconductors, the real question is whetherU.S. firms will be able to maintain their posi-tions. Past efforts by foreign firms to competedirectly with IBM and other U.S. computermanufacturers have seldom had much suc-cess. Even in Japan, where measures weretaken to promote domestic firms and discour-age imports, U.S. producers still account for45 percent of the market.

The advantages of U.S. computer manufac-turers have come from extensive service andsupport capabilities and broad product lines,as well as their technology, American firmshave dominated hardware as well as soft-ware developments, and have also becomeskilled at marketing on a world scale, Thesedeterminants of competitive success are un-likely to change, even amidst the marketshifts associated with the increasing relativeimportance of minicomputers and microcom-puters, and the blurring of boundaries be-tween the computer and the communicationsindustries. Software will continue to grow insignificance— an area in which the Japaneseindustry has been weak, but one which it hastargeted for development.

For automobiles, as for steel, import pene-tration is nothing new. While the recentdownturn in sales of domestic cars has prece-dents, given the cyclical behavior charac-teristic of the industry, the important fact isthat more than 25 percent of the U.S. marketis now taken by imports (and import penetra-tion is even higher in the most popular sub-compact class). The Japanese have led thiswave of imports; since 1973 the Japaneseshare of all imported cars sold in the UnitedStates has gone from 40 to 80 percent.

While some have argued that imports arethe primary cause of the apparently decliningcompetitiveness of U.S. automobile firms, it isdifficult to make this case. Although Japan’sautomakers have real advantages in lower

-. ———. .

Ch. 5—industry-Specit\c Competitiveness ● 105

manufacturing costs, some Japanese cars—like some Japanese TV sets—have the provenability to command premium prices in theAmerican market. Among the reasons forlower production costs in Japan are the ex-tensive use of affiliated and subsidiary firmsand subcontractors —which may depressaverage wages.

A considerable portion of the difficulty ex-perienced in 1980 by U.S. automakers wasthe result of economic recession and nonpricefactors, including the sudden shift in con-sumer demand to small cars— caused by re-cent jumps in gasoline prices. Still, much ofthe sales decline since 1978 can be attributedto a shrinking market, with perhaps one-quarter representing domestic productiondisplaced by imports. A major part of theproblem has been a mismatch between prod-uct design and market demand. The productlines of the American firms are thin in smallcars, part icularly subcompacts-which aretaking a much larger share of the marketthan as recently as 1978. Imports offer widerselections of subcompact models. Moreover,consumers regard them as high quality, welldesigned, and good values. U.S. companies re-mained in a reactive position in this portion ofthe market through 1980, While new 1981U.S. models may reverse some of the losses ofthe last 2 years, Japanese imports are nowwell established in the United States; Amer-ican firms can expect difficulty in regainingmarket share.

The costs of the current decline fall heavilyon unemployed American automobile work-ers. The magnitude cf employment losses, andthe regional concentration of the problem,suggest a need for public policy measures tomore effectively deal with such dislocations(ch. 8). Because of the tradeoff between pro-ductivity and employment, jobs in the domes-tic automobile industry will not regain theirformer levels even in good sales years.

Despite the differences among these indus-tries, there are common themes. All three,like their counterparts abroad, are now moreexposed to the rigors of international com-

petition. The U.S. market in these sectors isalso a much smaller fraction of the totalworld market than in the 1950’s. Americanfirms which do not export or manufactureoverseas are bound to shrink in relative im-portance.

Profits have declined—in some years dis-appeared— in steel, consumer electronics,and automobiles. This cuts into the cash flowavailable for modernizing and rebuildingcompetitiveness. Statements focusing on theneed for capital to foster competitivenesshave come from leaders of all three indus-tries, and from other sectors of the Americaneconomy. If universally true, they would be asevere indictment of domestic capital mar-kets—usually thought to be the best devel-oped in the world. However, each industryhas different reasons to advance for thecauses of its capital shortfall. In semicon-ductors, it is primarily rapid growth and therising capital-intensity of VLSI. In steel, ex-penditures are needed to meet environmentaland workplace standards, as well as to re-place outmoded plant and equipment. The au-tomobile industry must spend large amountson redesign and retooling to produce small,high-mileage cars, In each instance theredoes in fact appear to be a good possibilitythat the market will not supply all the fundstha t i ndus t ry des i r e s . Th i s i s t yp ica l lybecause expected returns are lower than foralternative investments.

The problems that have been describedtypify the dilemmas which other U.S. manu-facturing industries face, or will face in thenot-too-distant future. Perhaps the most im-portant conclusion, illustrated by all three in-dustries, is that the technological advantagespossessed by American firms in the earlierpostwar period have now been significantlyeroded, Even in electronics, where Americancompanies have been world competitors parexcellence, the U.S. technological lead is inmany cases now marginal.

A second and related theme is the cost ofdeclining competitiveness. The benefits of in-ternational trade and competition are signifi-

106 . U.S. Industrial Competitiveness —A Comparison of Steelj Electronics, and Automobiles fornobi/es

cant—e.g., in bringing new products to con- employment opportunities has its most seri-sumers, often at lower prices. Increased com- ous impacts on particular regions and groups.petitiveness and productivity can raise living The inescapable fact is that the structuralstandards and slow inflation, But there are changes underway in the United States andalso serious losses. Declining employment op- the world economy entail long-term employ-portunities in steel and automobiles stem ment declines in traditionally important sec-mostly from productivity growth, Nonethe- tors of the economy,less, imports always cost U.S. jobs, The loss in

CHAPTER 5 Industry-Specific Competitiveness

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