The Chip Pact Helped Pull Plug on Japan

What’s the story on the electronics industry a year after the U.S. government forced a semiconductor trade agreement on Japan? That a bit of forceful government intervention can do a world of good.

Even at first glance the U.S. industry looks healthier. Semiconductor companies have returned to making a profit, and stock prices have climbed back to respectable, if not record, levels.

Mergers are occurring as stronger companies grow by acquiring product lines from weaker ones--as National Semiconductor did in acquiring Fairchild. And, says analyst James Barlage of Smith Barney, Harris Upham, the industry can look forward to sales growth of 13% to 14% a year as a cyclical upturn in business proceeds.

Behind such routine reports, however, lies a more instructive story, one of a national policy that says this industry is too important to leave to chance.

“I think there’s a stalemate going on,” says Intel Corp. President Andrew Grove, of the global competition today. “The industry with the aid of the government has forced a stalemate as in World War I, when the armies went into the trenches.” The Japanese industry, Grove says, has solidified its lead in one kind of chip; the U.S. industry has kept its lead in another. The Japanese dominate consumer electronics, and U.S. industry leads in computers and the sophisticated microprocessors that go with them.

The statistics confirm a dead heat. The Japanese and U.S. electronics industries each control about 43% of a $31-billion worldwide market--with the other 14% split among European developed countries and Asian developing ones, such as South Korea and Taiwan.

The Currency Factor

“Don’t underestimate what it takes to bring a juggernaut to a standstill,” says Grove. “For 10 years, the tide was running in favor of the Japanese industry; for the last two years that hasn’t been the case. For the first time, Japanese penetration in a targeted industry has been stopped.”

What did it? Currency shifts were important. The shift of the yen has brought “the cost of an engineer in Tokyo into parity with the cost of an engineer in Silicon Valley,” says analyst Michael Stark of Robertson, Colman & Stephens, a San Francisco brokerage.

Engineers in Tokyo aren’t paid in dollars, of course, but the international value of the yen they are paid becomes part of the cost of the Japanese memory chip. A salary of 6 million yen used to be the equivalent of $25,000, a fair starting salary for an engineer. Now that 6 million yen is worth $40,000. That’s a fair leap in any language, when you consider that pay and bonuses of knowledge workers like engineers can add up to half the costs of producing microchips.

But more than currency, it was the government’s enforcement of the semiconductor agreement that mainly turned the tide. It hit directly at the practice of Hitachi, NEC and Fujitsu exporting their excess production at low prices to gain a market. It wasn’t as if the Japanese companies were making money on such semiconductor sales. The memory chips were loss leaders, subsidized by profits from other company divisions. The agreement put a stop to that by raising market prices.

The agreement was attacked on classical economic grounds. There were arguments that if the Japanese wanted to lose money supplying us electronic chips, we should accept it as a gift. If we lost an industry in the process, it was argued, the workings of global economics would benefit us in other ways.

Those arguments ignored what had happened in the 1970s, as U.S. industry and government stood by while the consumer electronics industry went under.

Now the pace of technology in consumer electronics is set in Japan, which went on from TV sets and radios to VCRs and digital tape players.

Not only that, but consumer electronics helped Japanese companies develop their semiconductor products, just as the personal computer has helped U.S. electronics companies develop microprocessors.

But the edge in microprocessors, the key to leadership in personal computers, was in danger in recent years as the U.S. electronics industry suffered staggering losses because of predatory pricing on Japanese chips. The prospect was that the U.S. semiconductor industry would go the way of the TV set makers.

But the lesson had been learned that if you let go an industry in which technology is developing, you let go the future. And the government stepped in.

Now there is determination to go ahead.

For the past two years, the U.S. electronics industry has been investing more in plant and equipment than the Japanese industry. And the leading companies, led by computer giant International Business Machines, are investing $125 million to advance chip-making technology.

“IBM is a global company,” says Executive Vice President Jack D. Kuehler, “but we depend on the health of the U.S. semiconductor industry.” So does a lot of U.S. business.