U.S. Chip Users Forced to Join Lobbying Game : With Shortages and Rising Prices, Industry Moves to Counter Producers’ Clout
The high-technology electronics business, a bastion of free enterprise where hard-driving engineers start tiny back yard companies and become millionaires, has outgrown its disdain for big government and moved deeply into the Washington power game of lawyers and lobbyists.
Companies making semiconductors, the tiny silicon chips at the heart of today’s computers and a host of other products, enjoy reduced competition under a U.S.-Japan trade agreement they fought for. It sets floor prices for Japanese chip exports.
And chip companies have plunged even more deeply into the legislative arena by pushing the Defense Department and Congress to contribute $100 million a year to Sematech, a new industry research and development venture.
Now the consumers of memory chips--Apple Computer and Atari, among others--are ready to play the same political game, launching a lobbying effort that is likely to widen a rift in the high-tech community. Upset with rising prices and shortages they blame on the chip accord, the companies that make computers and other electronic products dependent on chips are on the verge of forming their own lobbying organization. They will tell Congress and the Reagan Administration: You helped the semiconductor people, but you forgot about us.
It’s a long way from the early 1980s, when the high-tech executives came to Washington only to lobby for a favorable tax climate to promote innovation. They wanted research and development tax credits, and lower capital gains rates, but didn’t ask for specific favors for their industry.
“These are the entrepreneurs of Silicon Valley, the guys who started in garages--they don’t want to see government intervention,” said Alan Wolff, the Washington lawyer who charted the semiconductor industry’s activist course. But unfortunately, he said, there was no alternative to enlisting the U.S. government as an ally to fight the trade depredations of Japanese companies.
“Japan pulled its companies together in a national effort to achieve domination in microelectronics,” Wolff said. “The U.S. government,” he added ruefully, “is not designed to think about foreign industrial challenges.”
Suffered Huge Losses
During 1985 and 1986, Japanese firms lost a staggering $4 billion on semiconductor sales while the U.S. companies suffered a $2-billion bath of red ink. But the Japanese, with the long-range goal of leadership in the U.S. market, were willing to absorb losses indefinitely, Wolff said. The American industry was threatened with extinction, he said, and could be saved only by government intervention.
The Semiconductor Industry Assn.’s appeal for government help resulted in the semiconductor agreement of 1986, under which Commerce Department experts monitor the prices of Japanese producers in a “fair market value” system. The Japanese companies can charge the cost of production and an 8% profit. And the Japanese made an informal promise expand their use of American semiconductors, which have a scant 10% of the market now.
The normal free market must be temporarily set aside to keep alive the U.S. semiconductor industry, government and industry agreed.
Suddenly, one sector of the high-tech business had been given a specific protected status, the kind of favor previously granted to much less glamorous industries such as steel and textiles.
The SIA “filled the vacuum of ideas,” said one admiring Washington high-tech consultant. With lawyers, consultants, economists and skilled lobbyists, the semiconductor industry made a persuasive case for help among American trade negotiators and members of Congress.
“As far as anybody knew, SIA was speaking for the entire high-tech industry,” said the consultant, who has now been hired by a computer manufacturer to plead the other side of the issue.
There’s no doubt that the 1986 agreement was a special interest measure, “driven” by the semiconductor producers, said former Silicon Valley Rep. Ed Zschau. “There wasn’t a careful consideration of the impact on (semiconductor) users.”
For the hundreds of companies using chips to make computers and other electronic products with memory, the time since the pact was signed has brought devastating shortages and higher prices.
Costs rose more than $400 million in a single year, according to a confidential study prepared for the American Electronics Assn. “Respondents are unable to pass these cost increases along to their customers without risking significant loss of business,” the study said.
It’s unclear how much of the shortage may have been prompted by the semiconductor pact, under which some Japanese firms curtailed production to drive prices to the “fair market” level mandated by the agreement.
Angry at the price hikes and shortages, companies using chips are fighting back with the same weapons used so skillfully by the semiconductor producers.
These firms, including Atari, Tektronix and Apple, have raised money, hired a Washington lawyer and are on the verge of creating a new lobbying association. Next will come the economists and public relations consultants employed to win friends and influence public opinion.
“We’re a relatively new industry,” said Richard Bernhardt, coordinator of government affairs for Atari Corp. “We haven’t been in Washington politics long enough to have people on the (Capitol) Hill and to have organized lobbying efforts.
The chip users’ informal group will send a solicitation letter within two weeks to 150 companies, inviting them to join the new association, which promises to be a determined and aggressive advocate.
It will try to do for the chip consumers what the SIA has done for the chip manufacturers. The semiconductor agreement was developed because the SIA “knows which buttons to push,” Bernhardt said. “The people I have spoken to at (the Department of) Commerce and the (U.S.) special trade representative’s office and in Congress all say they depend on information from the SIA.”
The semiconductor industry’s power to mobilize opinion was demonstrated again Friday when a bipartisan group of House members appealed to President Reagan in a letter to take a tough line on market access with Japan at the at the economic summit in Toronto.
Early this month, SIA members held a summit meeting of their own in Tokyo with the Japanese electronic industry but failed to get any commitment for a bigger market share for U.S. goods.
After the Tokyo talks broke down, the SIA opened a campaign at the highest levels of government, trying to enlist Reagan’s help.
The congressional letter was the opening gun in a barrage of persuasion.
“We urge you to ask Prime Minister (Noboru) Takeshita why Japan has not complied with the semiconductor agreement and what foreign companies actually achieve access to the Japanese market,” said the group of 25 House members, which cover a broad political spectrum, ranging from liberal Democrats to conservative Republicans.
The United States should not lift sanctions against Japan because it has failed to open its market to American semiconductors, the letter said. Despite the promises for a “gradual and steady” expansion of sales into Japan, the U.S. share of the Japanese market actually declined, falling below 10% in the first quarter of this year.
The members of Congress said “it is vitally important for the United States economy as a whole and United States security, that U.S. companies obtain full access to the Japanese semiconductor market.”
This kind of wholehearted political enthusiasm for one relatively small segment of U.S. industry has surprised the users of computer chips, a much bigger assortment of companies.
“Is the semiconductor industry playing role the steel industry has in years past, asking for special protection?” wondered Paul Ely, chairman of Convergent Inc. of San Jose, which makes computers for sale under other firms’ brand names.
The semiconductor agreement’s pricing system, which sets a floor for each Japanese firm, is an awkward and inefficient way for prices to be established, Ely said. “If you believe in free trade, you have to believe in free trade all the way.”
Dumping, forbidden to the Japanese, is the traditional way for American producers to build their business, he argued. “This is a practice U.S. companies did for years. People always lose money at first to get a product design into high volume, to increase applications and lower costs,” Ely said.
For the SIA, the semiconductor agreement covers one front of a two-front battleground. The other campaign is what has become an annual drive for congressional appropriations of $100 million, the federal government’s contribution to Sematech, an industry effort to improve production quality and speed of the next generation of chips.
Persuaded to Join
Semiconductor lobbyists hold meetings on Capitol Hill for congressional staff members, complete with sample letters of support for their bosses to sign and send to the Administration. They promise advance notice of Sematech research grants, spread generously in key states, so congressmen can claim full credit.
Government participation is vital, said SIA attorney Wolff. If the industry tried to form its own research venture, some big companies might refuse to join, but would simply try to freeload on the information developed with the its competitors funds.
With the promise of federal funds, however, the major companies in the semiconductor business were easily persuaded to join the research venture. The Pentagon was the logical supplier of the government’s contribution because of its interest in semiconductors for weapons systems.
The industry hopes the government will supply funds for at least five years. After that, Sematech may be able to stand on its own financially.
Federal dollars are essential because “the benefits are broader than individual companies are willing to pay for,” Wolff said.
The money must be appropriated anew each year by Congress, and that means the semiconductor industry is deeply enmeshed in the political struggle.
This will tarnish the image of high-tech companies and their leaders as hard-charging independent entrepreneurs, said Zschau, who headed a House Republican task force on high technology.
