TEXAS INSTRUMENTS : Dual Identity Puts Chip Maker in Middle of U.S.-Japan Trade Fight
Texas Instruments has done a lot of things right in Japan. So many, in fact, that Japanese companies think of TI Japan almost as one of their own, and American firms view it as a model for doing business in Japan.
Yet Texas Instruments has failed in Japan--failed to capture more than a paltry share of the ravenous Japanese ket for semiconductors, those ubiquitous chips used in just about everything that gets plugged into a wall socket. Failed, despite nearly two decades of effort in Japan, to match the success it has had in other worldwide markets.
It’s a paradox that has left TI, a company that has often seemed ill at ease outside its rambling Dallas enclave, straddling both sides of the Pacific as a trade dispute threatens U.S.-Japan relations.
Poised to Profit the Most
As the largest surviving U.S. maker of the kinds of memory chips at the heart of the dispute, TI is poised to profit the most if the Japanese accede to U.S. demands. If dumping ends and prices rise, TI would again be able to make money on the commodity chips; if Japanese companies buy more U.S.-made chips, TI would be a chief supplier.
But as a company that sells products and licenses technology in Japan, Texas Instruments is also vulnerable to a backlash. Although supportive, and even active, in the behind-the-scenes negotiations, usually taciturn TI officials have been even more circumspect in what has become an international debate.
Its precarious position is perhaps most keenly felt by Akira Ishikawa, a native-born Japanese who is president of TI Japan, senior vice president of the parent company’s semiconductor
group and manager of its worldwide memory chip opera-
tions.
“I cannot talk from one side or the other,” he said. “In several cases, I’m in between the two.”
Ishikawa defines his company simply. “Most of our customers,” he said of TI Japan, “think we are like a Japanese company. . . . Always, TI Japan is a Japanese company. Legally, it’s Japanese; and at the same time, Texas Instruments is a United States-based company.”
But it’s more complicated than that. Texas Instruments, because of its manufacturing facilities in Japan, took on a dual identity during the shaping of last year’s U.S.-Japan agreement on semiconductor trade. That five-year pact calls for Japanese companies to stop dumping memory chips on worldwide markets--that is, selling below cost--and for Japan to open its own market to foreign producers, granting them a 20% share by 1991.
Engaged in Consultations
Japan’s apparent failure to comply with the agreement led to the U.S. decision earlier this month to impose tariffs on $300 million of Japanese products. Trade officials from both countries are engaging in consultations that each side hopes will bring about a swift resolution of the trade tensions.
Under the portion of the agreement that calls on Japan to monitor pricing of chips, TI Japan is considered a Japanese producer. Like other Japanese chip makers, including those found guilty of dumping chips on the U.S. market, it must submit production cost data, which is then used by the U.S. Commerce Department to establish “fair market values” for prices on chips it sells in the United States.
Conversely, under the part of the accord that calls on increased purchases by Japanese chip customers of non-Japanese-made chips, TI Japan’s products are considered American.
That dual role has caused
some friction for Texas Instruments in Japan. Earlier this year, in the face of U.S. warnings of impending sanctions, Japan’s Ministry of International Trade and Industry took two approaches to halting the dumping of chips in third-country markets (those other than the United States and Japan)--a situation it blamed largely on a thriving “gray market.”
The ministry began to more closely monitor exports of dynamic random access memory chips, or D-RAMs, to places such as Hong Kong, Singapore and Taiwan, and requested Japanese chip makers to cut back production of 256K D-RAMs, the current standard of the memory chip.
TI Japan did not reduce production. In late March, MITI asked for a second round of production cutbacks and accused TI Japan of actually increasing its output while others decreased theirs. In the second call for cutbacks, MITI specifically asked TI Japan to reduce D-RAM output at its Miho, Japan, plant by 13% during the second quarter of the year.
TI Japan has agreed to comply, if unhappily.
“Although we are responding to this Japanese directive, we do not believe that cutting production, with the attendant risk of creating an artificial shortage, is the correct approach,” said Jerry R. Junkins, Texas Instruments’ president and chief executive, at the company’s annual shareholders meeting in Dallas on April 16. “The right answer is simply to stop the dumping.”
New Plant Will Help
Other TI officials have privately expressed bewilderment at the request, saying that it reduces the number of “foreign-made” chips available for purchase by Japanese companies.
TI’s ace in the hole in this instance is its memory-chip plant in Dallas, a twin of the Miho facility. The Miho plant opened earlier last year than its Dallas counterpart and has already reached full production levels. But TI officials say the Dallas plant will be ready by the second half of this year to pick up slack created by the Miho cutbacks, if needed to meet demand.
At the annual meeting, Junkins said TI had already allocated the funds needed to expand production at Dallas. “I’m so happy,” he said, “that we have got the flexibility to do something about it.”
In the meantime, TI Japan will use production capacity at Miho to make the larger 1-megabit D-RAMs, as other Japanese makers have begun to do.
Analysts cite this flexibility as TI’s chief advantage in D-RAM production. It enables the company to allocate production at either plant based on a number of factors separate from MITI’s request for cutbacks, not the least of them the falling value of the dollar against the yen, which increases costs of Japanese exports to America.
Although TI intended its Dallas plant to serve U.S. customers and the Miho production to go to Asian buyers, particularly Japanese, it has still been shipping some of its Miho-built D-RAMs to the United States. By the end of the year, TI officials say, the company hopes to use its U.S. production to meet all of its U.S. demand.
In believing that it deserves a greater portion of chip sales in Japan, TI stands solid with the rest of the U.S. semiconductor industry. Overall, U.S. chip makers hold more than 40% of the worldwide market for semiconductors, but less than 10% of Japan’s market.
By itself, Texas Instruments captures 8% of all worldwide sales of chips and 10% of the U.S. market, estimates Daniel L. Klesken, an analyst with Montgomery Securities in San Francisco.
Frustrating Experience
But in Japan, Klesken says, TI’s market share is only 2%.
“Every one of the U.S. (chip) companies has been frustrated by trying to do business in Japan,” Klesken said. But that is especially the case with TI--the first to attempt to tap that country’s potential as a market.
After years of negotiating with the Japanese government, TI opened its first plant there in 1968, and Ishikawa joined the company the same year. TI was forced to enter into a joint-venture arrangement to build a plant in Japan but eventually was allowed to buy out its partner, Sony, and make TI Japan a wholly owned subsidiary. It now operates three chip plants in Japan: at Miho, Hiji and Hatogaya.
Although TI’s efforts initially netted it a major portion of Japan’s chip sales, once the Japanese electronics giants learned to make chips--with the aid of U.S. technology--they soon surpassed their mentors in quality and pricing.
TI was left in the dust. Although TI Japan still controls 40% of the Japanese market for a kind of semiconductor known as bipolar logic chips, it has lagged in the more significant, high-volume business of memory chips.
(A D-RAM is a basic kind of semiconductor. It generally only stores information; other, more sophisticated kinds of chips such as microprocessors and logic chips manipulate information as well. Companies such as TI believe that high-volume production of memory chips fosters advances in the manufacture of other kinds of semiconductors.)
What had been a U.S.-owned worldwide market for all kinds of chips began shifting to the Japanese. In 1985, TI slipped from the world’s leading chip producer to No. 3, behind Japan’s NEC and U.S.-based Motorola. In 1986, while the worldwide industry recession lingered, the rise of the yen helped place Japanese makers ahead of their U.S. rivals in dollar-measured sales. Motorola dropped to fourth place, and TI into fifth. Hitachi and Toshiba, both Japanese companies, took over the second and third spots, behind NEC.
Forced to Cut Back
In 1984, Klesken estimated, Texas Instruments made between $100 million and $175 million on D-RAMs. “It lost many times that amount in 1985 and 1986,” he said.
As the recession erased U.S. companies’ profits from memory chips, many of them abandoned the market. TI did not but was forced to lay off thousands of its U.S. workers and close one of its chip-making plants in a jarring restructuring that closely followed its dismal failures in such consumer products as small computers and watches.
Only after years of effort has TI been able to claim that it matches its Japanese competitors in quality and yield. But that claim has yet to bear fruit in the marketplace.
Klesken said that Texas Instruments’ operations in Japan “are better focused than other U.S. companies. What they are doing in Japan are the right kinds of things. They haven’t been as successful (in terms of sales) as they would like to have been, but then, no one has been.”
U.S. trade officials say that since the trade agreement was reached July 31, U.S. companies as a whole have not gained market share in Japan. In fact, they believe it is likely that U.S. producers’ share has actually declined.
But Texas Instruments officials insist that in the weeks preceding the U.S. decision to impose tariffs, they saw an increase in orders. “There’s a strong effort in Japan to increase purchases from U.S. companies,” said William N. Sick, TI’s executive vice president in charge of its Pacific Rim business.
“We’ve seen that effort in the last couple of weeks, and we’re in a position to provide D-RAMS to the Japanese market.”
Move Could Backfire
Sick acknowledged the possibility that the sanctions, aimed at the biggest Japanese chip makers--who are also Japan’s biggest chip consumers--could backfire on TI if hostilities are not soon eased.
“There could be some of that, yes,” he said, “but when the increased volume (of purchases) comes, it will go to those who can best satisfy their needs.”
That, believe TI officials, means Texas Instruments.
Scrappy but small Micron Technology, the only other American company that still makes D-RAMs for sale on the open market, is unlikely to be a major benefactor if U.S. sales to Japan increase. It has been a thorn in the side of the Japanese companies since it filed the first anti-dumping suit against the Japanese in June, 1985. And it has yet to achieve the same high-quality standards as TI, industry experts say.
In 1985, TI Japan’s Hiji plant won the Deming prize, Japan’s most coveted and prestigious award for industrial quality control. That award solidified TI Japan’s image as a Japanese company.
“On the key points of quality, service, price and (production) capabilities, we have established ourselves as good suppliers in the last 19 years,” said TI’s Ishikawa. “Our customers, regardless of what kind of trade agreements are in effect, need TI.”
Ishikawa admits that Japan has embarked on a more serious effort to implement the trade agreement in the weeks since the U.S. announced plans to impose sanctions. But, he said, echoing sentiments of Japanese trade officials, “It just needs a little more time to work.”
For Texas Instruments, which derived nearly 40% of its $5 billion in 1986 sales from electronics components, the time cannot pass too quickly. Although the company said its semiconductor operations returned to profitability in the first quarter of this year, analysts believe the margins are fragile.
“If Japan obeys the trade agreement,” said Klesken, “TI can once again make money on D-RAMs. . . . It can make tens of millions of dollars again on them, and that’s the bottom line to all this.”
