Pact With Japan: How Chip Makers Stand to Benefit : Firms Welcome Opportunities but They See No Guarantees
At a Friday morning meeting at Texas Instruments, eight lawyers were on hand to help executives figure out the semiconductor trade pact signed the day before by the United States and Japan. “And I still don’t know what it means,” said one company official who attended.
U.S. semiconductor makers are loathe to start counting their chickens. They have proclaimed satisfaction with the five-year agreement. In it, the Japanese promised to prevent dumping of the tiny electronic circuits in the United States and to promote more sales of American chips in Japan.
“There are no guarantees here, just opportunities,” said George Scalise, who headed the Semiconductor Industry Assn. committee heavily involved in the negotiations, which stretched over nearly a year and consumed countless hours and energies.
The agreement “must be considered a point of departure rather than a destination, but it places us on the right path to achieve a fair, balanced and truly competitive trading environment,” Scalise said in an SIA statement.
For an industry in dire need of a lift, it was a restrained response indeed.
Investors, too, reacted with dispassion bordering on indifference. In the two trading days following the announcement of the agreement, semiconductor stocks as a group were little changed.
‘Effect Is Neutral’
“For the near term, the effect is neutral,” said Adam Cuhney, who follows semiconductor issues for Kidder, Peabody & Co. in San Francisco.
The field of U.S. companies could be affected differently by each of the two major issues, dumping and market access, addressed in the pact.
Most U.S. companies will be helped, analysts agree, if the lucrative and growing Japanese segment of the worldwide market for chips is opened up. In the first six months of this year, U.S.-based chip makers held only 8.1% of that market, which is expected to account for $9 billion of $25 billion in sales worldwide, according to the SIA.
As part of the negotiations, the two sides reached an “understanding” that sales of chips in Japan by foreign producers should account for a 20% share of the market by the end of the five years. Although not included in the formal agreement, that target will be included in a private document to be circulated among the chip makers on both sides of the Pacific, sources have confirmed.
If sales of chips continue to grow as anticipated, that could raise the U.S. companies’ share to as high as $4 billion from about $640 million last year.
Companies that already have a strong presence in Japan could be best poised to take advantage of that part of the agreement. Of the five major U.S. companies, only Motorola and Texas Instruments have chip-making plants in Japan. The other three, Intel, Advanced Micro Devices and National Semiconductor, each have sales and design facilities in Japan and have considered building plants as well.
Advantage of Japanese Plants
Texas Instruments has about 4,000 Japanese employees and makes about 75% of all of its dynamic RAMs (a type of memory chip) there. Its early lead in Japan--its manufacturing plant north of Tokyo was built in 1968--has meant that it suffered less from market-access problems than other makers slower to break into the Japanese market. But, because its product line is heavily dependent on D-RAMs, it has suffered from the D-RAM price wars in the U.S. market.
Schaumberg, Ill.-based Motorola already has moved back into profitability and may be among the first to achieve gains from the pact, said George Haloulakos, semiconductor analyst at Cable, Howse & Regan in Seattle. Although U.S. companies are still the acknowledged technology leaders, the Japanese companies brought new production efficiency to the industry.
In the past year, however, Motorola has improved its on-time delivery by 36% and its outgoing quality levels by 32%, noted Haloulakos.
Other, smaller companies may see some early benefits from increased access to the Japanese market, said Tim Richards of Dewey, Ballantine, the law firm that represented the SIA in the unfair trade practices complaint that was the basis for the negotiations.
Among them could be SEEQ Technology, a San Jose firm that makes a specialized kind of memory chips called EEPROMs (electrical eraseable programmable read-only memory), and International Rectifier, an El Segundo firm that specializes in chips called power MOSFETs.
“Any small company with a proprietary product ought to be in a good position, because those might be some of the first kind of chips that the Japanese would want to buy,” Richards said. International Rectifier has been selling its chips in Japan, “but they don’t have the market share you would expect” for such a product, he said.
Companies hurt most by predatory pricing policies can be expected to benefit most from the Japanese promises to end dumping practices, analysts said.
Among them are Texas Instruments, Intel and Advanced Micro Devices. EPROMs are an important part of the product lineup for the latter two firms.
Without having to match the below-production-cost pricing of the Japanese, the U.S. companies will again be able to begin making profits on memory chips and regain market share, analyst Haloulakos said. The pricing war, combined with sharp declines in orders from the industry’s biggest customers, the computer makers, cost the U.S. semiconductor companies more than $1 billion in profits and 55,000 jobs in 1985, he noted.
Losses have continued into this year. Without the anti-dumping provisions in the pact, analyst Cuhney said, the U.S. industry would be hard-pressed to return to profitability by the third quarter of 1987. With it, he said, the black ink should be back by next year’s first quarter.
National Semi, which joined Advanced Micro and Intel in filing the dumping complaint on EPROMs, still makes those commodity memory chips, but a bigger part of its business is in logic devices and microprocessors. Logic devices compose about two-thirds of U.S. chip sales and have been targeted by the Japanese as the next major push, analysts believe.
National Semi believes that the no-dumping agreement, which applies to all forms of chips and not just EPROMs and D-RAMs, will in the long run benefit it as well. “We saw the Japanese coming (in logic devices), and we’re glad they’ll be doing it on the basis of fair-market pricing,” a National spokesman said.
Intel, which went through the most dramatic reshaping exercise in response to the U.S. industry slump by closing several plants and eliminating more than 2,500 jobs, is one of the companies that believes it can compete head-to-head with the Japanese on manufacturing cost efficiency. Many analysts agree and said the leaner, meaner Intel will find its way back to profitability with the help of the agreement.
“Intel is in much better shape” than when the slump began, analyst Cuhney said. The company’s executives “have done a good job in shifting the company from a design orientation into a manufacturing powerhouse. They believe their costs are lower than those of the Japanese in EPROMs.”
“The whole industry’s price structures should improve,” said Mona Eraiba, chip analyst at Salomon Bros. in New York. “But they won’t get the full benefit of that unless demand improves as well.”
Therein lies the rub, believes Cuhney of Kidder, Peabody. Citing slackening demand in the three major segments of the U.S. market--automotive, military and computers--he believes that the benefits of stabilized pricing could be offset by renewed sales efforts by the Japanese here.
Japanese exports to the United States slackened off at the beginning of this year, partially because of trade tensions and partly because exchange rates were less favorable. Sales were down 41% to $517 million in the first six months of 1986, according to Japan’s Finance Ministry.
But with the agreement, Cuhney believes, there will be more vigorous sales efforts by Japanese companies--more manufacturers trying to carve out slices of a pie that doesn’t appear to be growing.
“In the near term, there will be those two offsetting results (of the pact),” he said. “Prices will go up, but there will be a host of other suppliers entering the United States.”
