Recovery Begins Taking Shape in Semiconductors : Japan Sanctions May Help, but Other Industry Trends Play an Even Greater Role
Joseph Parkinson is a stubborn man. Whether his stubbornness pays off is, you might say, the $300-million question.
Parkinson’s Boise, Idaho company is among the few remaining American makers of the computer chip that is at the heart of the current U.S. trade dispute with Japan. As prices for these so-called D-RAM semiconductors sunk, profits from making them vanished and many U.S. manufacturers fled the D-RAM business, a strategic segment of an industry deemed vital to the U.S. economy.
But Micron Technology, where Parkinson is chairman and chief executive, has stayed put. Nine months ago, he counted on a trade agreement designed to stop Japan’s chip makers from “dumping” its semiconductors at below-cost prices and to open the Japanese market to U.S. manufacturers. Now, he’s counting on the U.S. government’s 100% tariffs on $300 million worth of Japanese-made televisions, computers and power tools to persuade Japan to enforce the agreement.
If the trade sanctions work, Parkinson’s obstinacy will look like a virtue. Micron, which has lost more than $50 million in the past 18 months, could return to profitability in six months. And, said Parkinson, other American companies that stopped making Micron’s kind of chips in the past two years will return to the market.
That could translate into thousands of American jobs. The worldwide industry recession that began in late 1985 cut between 30,000 and 40,000 jobs from payrolls at all U.S. semiconductor companies. In anticipation of the trade agreement’s positive effects, Micron has doubled its employment in the last year to 1,400. Although that number is nearly level with Micron’s pre-recession employment peak, many of the workers there have had to take pay cuts, and all have lost their profit-sharing benefits.
While the sanctions carry risks of touching off an acrimonious and mutually destructive round of retaliation, there already are some signs that the tough U.S. line might work. In recent weeks, last-minute attempts by the Japanese to avert the tariffs have helped raise prices of some chips and, say some American companies, to increase their sales in Japan--two major goals of the semiconductor accord.
Even so, skeptics contend that after a period of apparent compliance the Japanese will relax their enforcement of the semiconductor agreement as they have done in past trade disputes.
Turnaround Already Begun
For that reason, they say, U.S. semiconductor makers such as Micron Technology may draw most of their strength from something far more fundamental and far less publicized than the tariffs announced Friday: a turnaround that already has begun to take shape in the computer and semiconductor industries.
New personal computer products are driving up demand for chips; the glut of chips on the market is drying up; and manufacturers’ efforts to tighten belts and improve efficiencies are beginning to show up in bottom-line results.
The industry’s trade group, the Semiconductor Industry Assn., recently reported that the dollar-volume of new orders for chips rose again last month, for the sixth consecutive time. That is partly attributable to the moderate rise in chip prices caused by the trade agreement; in the United States, prices for Japanese-made chips have been determined by fair-market values set by the Commerce Department and dumping here has been halted, officials say. But industry experts say the rise in orders is more a reflection of low inventories and renewed demand from computer makers.
The demand is coming from computer makers such as Apple Computer, International Business Machines and Compaq that have all introduced new, more powerful versions of personal computers that are bringing computer buyers back into what has been a sluggish market. These new machines themselves use more memory chips, and companies that make accessory products for the new machines also are contributing to the demand for chips.
Early in the year, Motorola, the Schaumberg, Ill.-based electronics company, said its chip-making division was back in the black and that the company was re-entering the market for memory chips, through an agreement with Toshiba of Japan.
Returned to Profitability
Just last week, another of the biggest American chip makers, Texas Instruments, reported that its semiconductor division also had returned to profitability in the first three months of this year, after losses all last year.
Intel Corp., a Silicon Valley company, on April 10 said it had also made money in the same time period. Intel’s neighbors, Advanced Micro Devices and National Semiconductor are still in the red, but Advanced Micro said it will be profitable by the end of this current quarter. Without predicting a return to profits, National Semiconductor’s chief executive Charles Sporck noted the pickup in orders for semiconductors and said he expected business conditions to continue improving.
Some industry observers say the rebound has more to do with the cyclical nature of the semiconductor business than with the trade agreement. Since its birth two decades ago, the semiconductor industry’s fortunes have risen and waned in rhythm with the needs of its customers, such as makers of computers and consumer electronics, for its products.
But industry executives lay much of the blame for the last downturn, which lasted longer and cut deeper than previous low cycles, on unfair competition from the Japanese, citing predatory pricing practices and artificial barriers to the robust Japanese market for chips.
Parkinson says these factors “decimated the American industry.” Along with Motorola, Intel and Advanced Micro dropped out of the D-RAM business. Intel, Advanced Micro Devices and National Semiconductor together lost $450 million during the long recession. Mostek, once a premier memory-chip maker, was acquired about eight years ago by United Technologies and by last year had been virtually dismantled.
The industry pushed for the trade pact and, more recently, for the sanctions as ways of restoring prices to profit-making levels.
They also sought to prevent dumping in future generations of memory chips and, further out, of the more sophisticated kinds of semiconductors they turned to when prices for D-RAMs dropped. In the meantime, the companies were scrambling to match the Japanese in manufacturing efficiencies and to improve the quality of their products. Most say they have done this and could now compete on a par, provided market prices reflect production costs.
Japan’s Trade Policies Cited
But semiconductor makers say they have been unable to reap the full benefits of their efforts because of Japanese trade policies. Reagan Administration trade officials say that while Japanese “dumping” of chips has ended in the United States, it is continuing in third-country markets such as Hong Kong and Singapore where chip purchases are booming.
And, said one trade official, rather than increasing sales in Japan, as called for in the trade pact, American companies’ share of the market there “at best has remained flat, and in all likelihood has declined.”
Industry analyst George Haloulakos of Seattle’s Dain Bosworth brokerage firm said the trade agreement has had only a “moderate” impact so far. But other factors, such as new product demand, “will spur the industry forward and have greater impact than the trade agreement,” he said.
It may be just as well for the U.S. semiconductor makers not to count on the trade agreement. Some critics have labeled it fundamentally flawed, and say it may never be enforceable, in part because it relies on the Japanese government to exert influence over a disparate and often independent collection of large and powerful Japanese chip makers who see the pact as working against their best interest.
U.S. trade officials privately admit that there is no back-up plan if the tariffs do, in fact, fail to engender compliance with the 8-month-old agreement. But opponents of the tariffs contend that the sanctions could set in motion a spiraling chain of trade actions by the United States and countermeasures by the Japanese.
The Japanese government has said it will appeal the sanctions to the world trade monitoring organization--General Agreement on Tariffs and Trade, or GATT--and have asked the United States to renegotiate the wording of the accord, especially as it applies to calculations of third-country dumping.
Want Agreement Terminated
Some Japanese chip makers--chafing under “fair market values,” prices set by the Commerce Department for sales of chips in the United States--are agitating for their government to terminate the agreement altogether. Companies such as NEC and Hitachi believe their production costs are unfairly calculated by Commerce, and believe they would fare better under a situation where the agreement was ended and “dumping” duties were imposed.
Trade officials say if Japan complies with the semiconductor agreement, the tariffs could be lifted in two or three months.
Parkinson of Micron Technology is hanging tough. “We have not retreated. We told them from Day One that we would be fighting them,” he said of his Japanese competitors, “and we’re staying in this market.”
