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Why Technology Needs a Federal Hand

Like clouds on the horizon, events in the global computer industry are sending warnings to the United States--which means a warning to you in an age when computers influence all industry and walks of life.

Fujitsu Ltd. of Japan last week bought control of ICL, Britain’s only computer manufacturer. The deal made Fujitsu, at $16 billion in sales, the world’s second-largest computer company--after International Business Machines--and threw Europe into despair.

For more than a decade, European countries have been trying to create a computer industry that could compete with the Americans and the Japanese. Governments supported the efforts of France’s Groupe Bull, Germany’s Siemens, Holland’s Philips and Italy’s Olivetti--as well as ICL--because they recognized that an independent computer industry was necessary for “Europe to control its economic future,” as one European commissioner in Brussels put it.

But last week many conceded that such efforts look fruitless. European companies, even with government backing, can’t bear the cost of developing new technologies at a time of narrowing profits in the fiercely competitive computer electronics field. After falling behind technically, Britain’s ICL, for example, had been buying key computer chips from Fujitsu to save development expenses.

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Now ICL will provide Fujitsu--which less than 20 years ago was just a telephone equipment company with only $6 million in sales--a beachhead to Europe’s market.

The Japanese company moved immediately to expand that beachhead by proposing an investment in Siemens, but the German company wasn’t interested--having entered into a $600-million research joint venture with IBM early this year.

The game is getting expensive and rough because the stakes are so incredibly high. “The $750-billion computer electronics industry itself is a major source of skilled jobs and national wealth,” says Michael Borrus of the Berkeley Roundtable on International Economics. “And then there are all the applications,” he notes, referring to everything from your supermarket checkout to the fuel injection in your car. “If you fall behind, all your industries are second-rate.”

Yet that could be the bleak prospect facing the United States. “No matter that U.S. companies still lead in developing the most innovative technologies,” writes computer expert Charles Ferguson in the latest Harvard Business Review. If current trends continue, “they will fail outright or become, in effect, local design and marketing subsidiaries of Japanese companies.”

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Investment exhaustion is the terrible trend. The great U.S. venture capital system that funded U.S. entrepreneurial breakthroughs in the 1970s and ‘80s is behaving like a winded runner. The big pension funds and others are reluctant to invest in complex electronics projects, where a typical factory costs $400 million. “If the payoff is five years or more, capital isn’t coming forward,” says Alan Patricof of New York’s Patricof Associates.

As a result, U.S. computer makers are turning to Japan for parts and financing--and a computer trade surplus with Japan 10 years ago has become a $6-billion deficit. Apple and Compaq, Hewlett-Packard and Digital Equipment all buy key semiconductors and computer screens from Japanese companies that are either actual or potential competitors.

And those are not ordinary computer screens, but liquid crystal displays--advanced versions of your digital watch. In the future, such screens--the development of a product invented, alas, more than 20 years ago at Westinghouse and the old RCA company--may be implanted with electronics and become the whole computer.

Yet today, 20 Japanese companies--but no U.S. companies--are working on such screens, says George Gilder, author of “Microcosm” and a frequent commentator on technology. “U.S. companies consistently have refused to back liquid crystal manufacture,” he says. They prefer to buy from Japan, which could be very shortsighted.

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“It’s unwise to depend on a competitor for such a critical technology,” Gilder says.

But the question cries out: If European and U.S. companies seem hobbled by the high risk and narrow profits of today’s computer game, how can Japan’s companies keep at it?

The short answer is that they take a longer-term view of profit--if you capture a market, the profit over years and decades is immense. But the real, underlying reason is an effort of national will. As a new book, “Computers Inc.; Japan’s Challenge to IBM,” by Professor Marie Anchordoguy of the University of Washington explains clearly, the Japanese government created a computer industry over three decades by investing heavily in basic research and protecting companies in the home market--but also forcing them to compete. Avoiding Europe’s mistake, Japan didn’t pick one company but weeded out the subs from the varsity the way football coaches do in spring training. Oki Electric didn’t make the cut; Fujitsu did.

Still, Japan’s protectionist ways are not America’s, and the U.S. industry is already hotly competitive. So what can be done? The U.S. government should have a policy to support basic research, experts say--the way it has in the past. In agriculture, for example, the government chartered the land grant universities in 1862 to do basic research, and the crop and livestock research findings of those universities have made U.S. farming the most efficient in the world.

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More recently, the Defense Department after World War II, and the later space effort, supported research in electronics and computers that made the U.S. industry the world leader.

But things have changed, and the Bush Administration opposes help for specific U.S. industry on grounds that the market will decide which businesses are most deserving. The White House even forced a key government employee--Craig Fields, head of the Defense research agency--out of his post for trying to foster a U.S. effort in liquid crystal displays. In the Administration’s view, he was interfering with market forces.

The problem is, market forces favor the government-backed, long-term investment patterns of Japanese industry. So trusting to the market looks like a decision to cede U.S. leadership in the computer industry. If so, the Administration may not live to regret it. But many Americans facing a long-term decline in their standard of living certainly will. The stakes are high; the warnings are clear.


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