MICHAEL LIIKALA : High-Tech Exports’ Watchdog : O.C. Electronics Firms Keep Licensing Bureau Busy
In 1988, when the U.S. Commerce Department picked Newport Beach as the site of its first regional Bureau of Export Administration office, high-technology companies in Silicon Valley were understandably miffed. After all, Orange County’s high-tech industry has nowhere near the number of companies that have settled in the technology hotbed in and around San Jose.
But the export numbers coming out of the county the following year proved the Commerce Department right. The growth of the county’s export license applications in 1989 outstripped the rest of the nation. The value of these applications, which are an indicator of future trends in high-tech trade activity, rose from $3.7 billion in 1988 to $6.2 billion last year.
As director of the 10-state western regional bureau, Michael Liikala makes sure that companies are in compliance with federal export regulations. For the former senior trade adviser with the Commerce Department in Washington, this is an interesting time to be at the bureau’s helm. Major political changes in Eastern Europe have spurred regulatory changes in the 17-nation Coordinating Committee on Multilateral Export Controls, or Cocom, which has administered Western export controls for 40 years.
To stay abreast of the fastest growing and most innovative industries, Liikala has installed a lot of high-tech equipment to run the bureau’s Newport Beach office. He said he tries to run the bureau like a business to keep it lean, efficient and “relevant” to the high-tech industry.
In a recent interview with Times staff writer Cristina Lee, Liikala talked about the latest changes in the nation’s export control policies.
Q. What were the major changes in export regulations?
A. The first phase resulted in the latest changes in the commodity control list agreed upon by Cocom in Paris. This will have a tremendous impact on the licensing activity in Orange County. Last year, nearly 96% of the county’s exports were for precision instruments and electronics products, including computers, where the greatest liberalization occurred. Licensing requirements have been lifted for machine tools, telecommunications and some technical data and software.
Changes agreed to by Cocom that became effective July 2 touch on many county industries. Some personal computers previously requiring a validated license, such as those based on Intel Corp.’s 80386 microprocessor and the Motorola-based 68020 microprocessor, can now go to the Free World and East Bloc destinations, even to the Soviet Union, using a general license. They will not require paperwork or review by the Department of Commerce.
With the decontrol of Intel 80386-based computers, which I think are now the largest-selling computers abroad, we have gone to the heart of the export market.
Additional items that have been decontrolled include minicomputers used for small engineering facilities and laboratories, and medical equipment incorporating high-level computer systems. Other examples of decontrolled machines are the IBM Personal System/2 series, the (Apple Computer) Macintosh series and Compaq (Computer’s) Deskpro 386. Additional machines affected include certain models made by Digital Equipment and IBM.
The semiconductor industry has also benefited. Almost all integrated circuits can now be shipped under a general license to nearly all of the Free World countries. Previously, these commodities required validated licenses issued by the Office of Export Licensing.
The second phase will come later this year, which will dramatically reduce the list of controlled export commodities to a core list. This basically changes the philosophy of export controls.
Right now, the process specifically identifies the products that are and are not controlled and, therefore, can and cannot be exported. The core list approach will specifically say that products listed cannot be exported because they pose a threat to national security.
Q. What major regulatory controls are still in place for computer exports?
A. In the areas where export controls remain, three categories have just been established based on the speed of a computer. For computers with a 275 processing data rate (PDR) and below, all that’s needed is a general license, which does not need Commerce approval.
A second category is what we call ‘national discretion,’ which covers exporters who plan to ship computers having 275 PDRs to 550 PDRs. These are mid-level mainframe computers and are generally used in banks and large businesses. Most computers (using Intel’s 80486 microchip) come under the second category, and Commerce will need to issue individual validated licenses for this category. In this category, each Cocom member country can use its own judgment and decide whether to allow export of these computers.
The third category, which includes computers with 550 PDRs to 1,000 PDRs, is the “favorable consideration” category. Commerce needs to issue an individual validated license that needs to be approved by Cocom. In this category are large mainframes used for scientific and other applications. Cocom will likely approve license applications in this category.
Computers with a processing data rate of between 1,000 PDRs and 2,000 PDRs will need validated individual licenses, and their destination will be limited to Hungary, Czechoslovakia and Poland. But these three East European countries won’t get that “favorable consideration” status until they put together a safeguard, such as an export control system similar to what the United States has.
Q. How have changes among many former Soviet satellites in Eastern Europe changed the nature of export licensing?
A. Just a year ago, the world market was divided into three groups, the East Bloc countries, Cocom countries and countries in between. The lines were clearer and controls were so rigid that it was pretty easy for U.S. companies to know whether to go ahead with a deal or not.
Now you’ve got three different types of export licenses for countries in Eastern Europe. A company can export almost anything under a general license to what used to be East Germany. Poland, Hungary and Czechoslovakia get a very liberal licensing approach, where applications will likely be approved. The Soviet Union, Albania and certain other countries will get a less liberal licensing category and, except for a handful of low-grade computers, will have to go through the Cocom approval process.
Q. What would the changes mean to exporters?
A. The changes are fairly complex and they present a lot of opportunities, but companies have to take the initiative, work with government agencies and put some resources and emphasis in developing new markets.
This opens high-tech companies’ products to almost all countries, with the exception of the embargoed countries Cuba, Vietnam, North Korea, Libya and Cambodia. Since all the Cocom countries have agreed to this liberalization, companies should be aware also that they’re competing with 16 other member countries of Cocom.
The other interesting part of it is export license applications nationwide will go down. I expect the county’s export licensing applications will drop between 30% to 40% this year as a result of decontrol.
Q. Under what category would new technologies with no previous controls fall?
A. That’s something Cocom is struggling with now--how to categorize new technologies.
The Commerce Department is working on an approach to that area by assembling a core list of technologies. This is something the U.S. government will be taking to Paris in the next Cocom meeting on Sept. 15. We’re also struggling with the fact that the global rules have changed. We will be stressing economic competitiveness more, with less emphasis on military superiority.
There are two sides to the core list approach. First, we want a tight list of products that are sensitive to U.S. security; and second, we want to index the list. We don’t want to say that a certain computer is controlled forever because, five years from now, it will be obsolete anyhow.
The current control list is about the size of the L.A. yellow pages. It contains between 130,000 to 140,000 commodity-controlled products. We expect to reduce that to a core list of 8,000 to 10,000 commodities and everything outside the list is decontrolled.
Cocom will discuss how to index the core list in the next six months and Commerce officials will be negotiating with Cocom members on what goes into the core list starting late this summer. President Bush has proposed that Commerce come up with a core list by the end of the year.
Q. How will Washington keep some of the high-tech equipment from falling into the wrong hands?
A. The Commerce Department is now putting together export control enforcement teams under the Bureau of Export Enforcement to make sure that technologies under control do not end up in the wrong hands. They will be responsible for ensuring that the safeguards that Poland, Czechoslovakia and Hungary have agreed to will be effective.
We don’t expect the safeguards to be in place until October because these countries have to put their export control programs in place and they have to get approved by their respective legislative authorities and by Cocom. The idea now is to have traveling squads of export enforcement personnel who will go to Eastern Europe and conduct pre-license checks and post-shipment checks on technologies that U.S. companies are asking to export to those countries.
Currently, the only U.S. Export Control Enforcement teams stationed in Europe are in our embassies in Bern, Switzerland; Vienna, and Stockholm. But we expect similar export enforcement control agents eventually to be stationed in our embassies in the three East European countries.
Q. What is the future role of your bureau now that your workload is somewhat lessened by these changes?
A. We’ll have to make sure that companies understand the extent to which global economic relations have changed and how it will affect their commercial activities.
We’re here to advise businesses of government policies. But now, our role has broadened to include the defense industry, which previously didn’t need our services to export because their main customers were at the Pentagon. Now they have to seek out the international market to balance the loss of defense contracts.
Orange County companies will have to find better ways to work with other governments to get their business and compete in their markets. Companies have to let us know how the regulations are affecting them, what their competitors are doing and how we can change the regulations to make them more competitive in the world market. We’ll have to make them understand this more layered approach to the new export control policy.
Our problem in the 1990s will be to prevent high-tech and nuclear products from falling into the hands of warring Third World countries, especially those that are not among the 126 signatories to the Non-Proliferation of Nuclear Weapons Treaty.
Q. What were some of the major mistakes that companies have made in their attempts to crack the Eastern European market?
A. A lot of times companies spend a lot of effort developing a deal, then come running to us to get their export licenses approved. Transactions, big or small, do not always get approved.
Even though the policies on exports have become more liberal, the controls on sales of certain high-technologies to the Eastern Bloc countries haven’t gone away. We still have real control of sales of certain technologies, and they have to be cognizant of that.
The second mistake is the typical prudent businessman approach, in which business people envision that they can sell a toothbrush to every Soviet citizen. The Eastern Bloc countries are potentially large markets. But unless these countries generate enough economic development to earn hard currency, significant trade cannot materialize.
Also, companies must be aware the Eastern Bloc countries will have to go through a lot of wrenching economic restructuring. You’re going to have problems with unions and political struggles within each of those governments, which could affect any business agreement a U.S. company might have.
Q. What services does your office provide to keep companies posted on regulatory changes?
A. We’ve developed a ‘fast fax system,’ which allows companies that are heavy users of our services to keep a tab on regulatory developments. They give us their facsimile numbers and we program this into our machines. When we get a regulatory change in their areas of concern, this machine will automatically fax that information to a master list of 400 companies, a majority of them in California. Although this service is free, we try to limit it to companies that really need it.
We’ve also developed seminars and briefings with chief executives, senators and other ranking government officials. We have a mailing list of 12,000 companies.
Q. What is Commerce doing to meet the growing need among companies to export?
A. We’ve opened an office in Santa Clara in May because Silicon Valley’s high-tech community was upset when we decided to locate the bureau here, but we’re staffing that office from here. We try to keep both business communities happy.
We’ll be opening another one in Portland, Ore., (today) )because there’s a growing high-tech community out there too. The reason why we’re in California is because it accounted for 40% of all export license application activity in the last year. I’m responsible for 10 western states in the country--Alaska, Hawaii, Oregon, Washington, California, Nevada, Utah, Idaho, New Mexico and Arizona--where 55% of all U.S. export licensing activity occurred in 1989.
Q. How have the deficit-cutting efforts in Congress affected your office?
A. Our workload has gone up something like 500% in the last two years. When we first came here, we were getting about 100 calls a day. By the end of our first year, we were getting 300 calls a day, and now we’re getting 450 daily.
Q. What kind of inquiries do you often get from companies?
A. We’re most often asked about the classification of a company’s product; that is, whether a license is needed for the export of their products. We’re also asked to interpret regulatory guidelines. Regulations are written by bureaucrats, lawyers and engineers, and we’re out here partly to explain and act as interpreters for federal laws.
