A High-Tech Achilles Heel : Recession: American firms appear more vulnerable than foreign counterparts to a downturn. But some would feel the effect more than others.
With the U.S. economy on the verge of slipping into its first downturn in eight years, there are growing fears that a recession could seriously damage the nation’s ability to compete with its overseas rivals in high technology.
A recession would work to the benefit of companies that have good positions in growing markets, plenty of cash and a willingness to play for the long term. Most Japanese companies--as well as some European and Korean firms--fit that description. Many American companies do not.
“The ability to maintain investment in new technologies is likely to be much more seriously injured here than in Japan,” said Stephen Cohen, co-director of the Berkeley Roundtable on the International Economy. “There’s a long record of the Japanese moving in during a recession.”
If an economic slump forces American companies to cut back, they could lose even more ground in key technologies such as computer chips, where major portions are now Japanese-controlled, in part because of gains the country made in earlier recessions. The United States’ tenuous grip on world leadership in computer systems and telecommunications equipment could be further weakened, and small American technology firms that are often in the forefront of innovation might find it hard to stay afloat.
“Traditionally, recessions have been very damaging to American technological competitiveness as U.S. firms have eliminated or drastically cut research and development programs,” said Robert M. White, undersecretary of Commerce for technology. “Our international competitors have a much longer-range outlook and have accordingly maintained their level of investment in times of business downturns.”
Signs of a slump in the electronics business are appearing. Growth in many segments of the business has almost ground to a halt, and there’s no product on the horizon that’s poised to ride to the rescue, as the personal computer did in the early 1980s.
And for a number of reasons, Japanese electronics companies in general are well positioned to forge ahead even in bad times. They are larger than all but a few of their U.S. counterparts, face less pressure from shareholders for short-term profits and are not burdened by the debt that hobbles many American companies. Their critics say they also benefit from a protected home market and government-led strategies for selling abroad that often involve illegal “dumping” of products at below-market prices.
“The Japanese will have some problems of their own, but they have more staying power and more resilience than we do,” says Charles Ferguson, a research associate with the Center for Technology Policy and Industrial Development at the Massachusetts Institute of Technology.
Ominously, it was during and after the 1981-82 recession that Japanese companies became the leaders in worldwide production of semiconductor chips, the tiny but highly complex units that control computers. The ability to compete in semiconductors--which Americans invented--is considered a bellwether of technological competitiveness, and it requires huge investments in research and development and production equipment.
In 1981, U.S. firms had 57% of the world semiconductor market, versus 33% for the Japanese. Michael Borrus, deputy director of the Berkeley Roundtable, calculates that although spending by U.S. semiconductor companies on chip-making gear did not grow between 1981 and 1983, Japanese firms nearly doubled their investments, to $1.45 billion by 1983.
By 1983, Japan surpassed the United States in total absolute investment in semiconductor technology. Japanese firms continued to spend more through a 1985 slump in semiconductor demand, during which they were formally accused by the U.S. government of dumping chips in the American market. By 1986, the Japanese had taken over the lead in worldwide semiconductor sales. Today, Japanese companies dominate many portions of the business, including the critical memory-chip sector.
“In a lot of industries, failure to invest through a recession has been a turning point,” Borrus says. A recession now, he warns, “could turn out to be a very significant episode.”
Michael Murphy, editor of the California Technology Stock Letter, says a recession will also hit U.S. industry in an area where it has traditionally been very strong: the nurturing of small companies that are developing innovative technologies.
“Recessions are risky times, and capital stops flowing to the riskier companies,” Murphy said. He added that some successful small companies are already short of money because current market conditions make it difficult to sell stock.
Cohen said depressed stock prices and a general lack of investment funds in the United States would lead to “a continuation of Japanese acquisitions of small technology companies. Over 100 have already been bought.”
Analysts caution that the ultimate impact of a recession on the balance of power in technology will depend on many factors, not the least of which is whether the recession is worldwide. If the Japanese economy--heavily dependent on Middle East oil--were to weaken dramatically, Japanese firms would be less able to exploit opportunities in the United States.
Moreover, many U.S. computer firms now gain more than half their sales overseas and more than one-third in Europe. If Europe avoids a recession, that could help the U.S. electronics industry.
Exchange rates are also a critical factor in regulating the electronics trade, and the dollar has been falling fast in recent months. Claude Barfield, trade policy specialist at the American Enterprise Institute, a Washington think tank, noted that a weak dollar works to the advantage of U.S. manufacturers by making their exports cheap and discouraging imports.
“I don’t think a recession gives the Japanese any more opportunities,” Barfield said. “The Japanese economy is going into a difficult period, and if the U.S. is in a recession, that hurts the Japanese companies as well.”
John Mitchell, vice chairman of Motorola, also said there was no correlation between recession and competitiveness. “There is no fundamental reason (the Japanese) should be better off,” he said. Motorola has played a key role in maintaining U.S. competence in semiconductors and telecommunications equipment.
And some industry executives are not at all persuaded that a recession is imminent. They suggest that the eagerness of corporate customers to move from huge centralized computer systems to networks of desktop computers will keep demand strong.
“What recession?” asks Scott McNealy, president of Sun Microsystems, a vendor of high-powered desktop computers known as workstations. “To me, a recession is when bookings are down. We look at the Sun economy, not the national economy.”
But industry sales trends are not encouraging. The Gartner Group, a Stamford, Conn.-based research firm, recently reported that total information-industry sales grew by just 6.6% in 1989, an all-time low and less than half the 1988 growth rate of 16.5%. For the second quarter ended June 30, 1990, growth slipped to 6%, down from 7.7% in the first quarter, according to Gartner Group.
“This recession is going to hurt,” says Murphy. “Personal computer sales are slowing, without anything to replace them, and the defense business is going away. The only parts of the business that will do well are those that are in their own new-product cycle.”
Surprisingly, few U.S. industry executives seem concerned about the possible impact of a recession on American competitiveness. And that could make the ultimate result even worse.
“If they think a recession is going to leave them untouched, they’re living in a fantasy world,” said Kenneth Flamm, a senior fellow at the Brookings Institution, a Washington think tank. “If the market weeds out the smaller players, it’s mostly U.S. firms that will be weeded out.”
