Technology Competition: Time to Fight ‘Em or Join ‘Em?

WASHINGTON — Should the U.S. electronics industry try to beat its Japanese competitors or join them? Or can it do both?

A battle is raging within the nation’s largest and most important manufacturing industry over just how to cope with the international competition that is reshaping such formerly divergent sectors as computers, consumer electronics and telecommunications into one gigantic global industry.

The most promising strategy for the 1990s and beyond, a number of analysts believe, is to pursue both competition and cooperation with Japanese and European firms simultaneously. American electronics firms are trying, although they are having a hard time striking the right balance.

Recent events reflect that. At the same time that seven major American electronics firms are pursuing efforts to put together a consortium aimed at counterbalancing Japanese dominance of the computer memory chip market, other companies are turning their backs on such U.S. alliances and forging closer and closer ties with Japanese manufacturers.

Only a few firms, such as International Business Machines, Motorola and Texas Instruments, are trying--with varying degrees of success--to pursue these different approaches at the same time.

A parallel battle is proceeding in Washington. And in the view of many high-tech firms and analysts, federal policy-makers are only making life more difficult for the industry.

As the still-powerful U.S. electronics industry gropes for a new strategy, Washington remains locked into its old way of looking at things--to subsidize or not to subsidize. Like a fun-house mirror, Washington’s debate reflects the industry’s internal struggle in a grossly distorted way.

“Companies like IBM, DEC (Digital Equipment Corp.) and others are pursuing a very sophisticated strategy involving both international and domestic partnerships,” said Jeffrey Hart, an Indiana University professor who is a high-tech expert for the University of California’s Berkeley Roundtable for International Economics. “But it may be too sophisticated for Washington to understand.”

In Congress, a host of powerful lawmakers insist that the U.S. electronics industry will collapse without large doses of government assistance. Most Bush Administration officials, by contrast, argue just as heatedly that providing substantial aid would only undermine market forces and foster a new forum for pork-barrel politics.

Rep. Mel Levine (D-Santa Monica) warns that the Administration’s approach would doom the U.S. electronics industry’s effort to develop an all-American high-definition television industry. “What we are seeing is the economic equivalent of Neville Chamberlain’s failure of nerve at Munich,” he said.

But Michael J. Boskin, President Bush’s top economic adviser, says it makes little sense to support certain firms just because they are headquartered in the United States. U.S. electronics companies stand to gain a good share of business--making components and assembling them into final products--if they merely participate in international cooperatives.

“Whether it’s American-owned, Japanese-owned, German-owned or who-owned,” Boskin said recently, “manufacturing in America in the ‘90s is going to be strong.”

The battle lines are less clear cut within the industry than within the government. Even as one lobbying group, the American Electronics Assn., besieges Washington with demands for help in catching up with Japan in high-definition television, U.S. semiconductor manufacturers based in Silicon Valley are scrambling on their own to make deals with the AEA’s Japanese rivals.

“It is a gesture of good faith on Japan’s part,” said Wilfred J. Corrigan, the chairman of the Semiconductor Industry Assn., after concluding an agreement in Tokyo earlier this month that called for U.S. companies to design and produce critical HDTV components for Japanese manufacturers.

The Cupertino, Calif.-based SIA itself wears two hats. It gathers under one umbrella the $200-million-a-year semiconductor consortium of U.S. industry and government known as Sematech. Simultaneously, it seeks to boost semiconductor sales to Japan through its HDTV deal.

Kenneth Flam, an industry specialist at the Brookings Institution, says international deals such as that have made the old ways of looking at the electronics industry obsolete. “It is impossible to draw lines that divide the U.S. from the rest of the world,” he said.

But in trying to pursue both globalism and nationalism simultaneously, the electronics industry is being caught in the middle of Washington’s age-old ideological debate over whether the government should intervene to support certain industrial sectors.

“This controversy represents a clash of two ideas,” said Jeff Faux of the Economic Policy Institute here. “Unless the government gets more involved, we face unilateral economic disarmament.”

The tension surfaced earlier this month on Capitol Hill when several members of Congress accused the Administration of trying to cut back on the relatively small amounts of federal funds now provided for certain high-tech projects by the Defense Advanced Research Projects Agency (DARPA), a part of the Defense Department.

Lawmakers charged that top Bush aides such as Boskin and Budget Director Richard G. Darman were trying to crush DARPA’s high-tech projects. “The Bush Administration is waving the white flag,” said Sen. Albert Gore Jr. (D-Tenn.).

Darman vigorously denies the accusations, however, and top Pentagon officials support his statements.

Some members of Congress wonder if U.S. firms are betraying American interests as they forge new ties with Japan.

“We can’t let another country control our future,” said Rep. Helen Delich Bentley (R-Md.), “and that’s what is happening when Americans sell out to the Japanese.”

Opponents of aiding U.S. industry argue in response that the government is in no position to single out which industrial sectors are worthy of its support.

“We shouldn’t be helping particular firms or particular products,” said a high-level Administration official who asked not to be named. “The type of technology should be a type that applies across a host of sectors. But HDTV, for instance, didn’t fit my version of the appropriate criteria.”

Apart from the question of government funding, a 1984 law allowed U.S. companies to emulate the presumed Japanese virtue of cooperation. As a consequence, electronics companies have banded together in more than 100 consortia to share the risks of costly research.

The results so far, however, are thin. And a far more ambitious effort to carry such joint efforts into cooperative manufacturing appears to be running out of steam.

The much-ballyhooed U.S. Memories consortium, formed earlier this year by seven leading computer and semiconductor makers, has so far failed to attract any additional sponsors despite a year-end deadline for signing up enough participants to get the project off the ground.

Headed by an ex-IBM executive, Sanford Kane, U.S. Memories is supposed to build from scratch a factory to make the next generation of computer memory chips. The goal was to lessen the dependence of American firms on the Japanese suppliers that dominate the market and undercut any advantage such control provides in spreading to new products where Americans still reign.

But a number of leading U.S. computer firms--including Apple Computer, Sun Microsystems and Compaq--have decided not to join the consortium.

One reason is that many firms are now confident of the reliability of their Japanese chip suppliers and are seeking closer ties in Asia. Sun, for instance, has forged a strong relationship with Fujitsu Ltd. of Japan and has offered to license the operating system of its computer workstations to Asian computer firms to encourage its use abroad.

There are also fears, though, that more than strictly business considerations are involved. Some analysts argue that certain firms have bowed to Japanese demands to steer away from all-American groups. “There has been quiet pressure from the Japanese to stay out of U.S. Memories,” says Berkeley’s Hart.

Some industry mavericks have questioned the need for U.S. Memories at all.

T. J. Rodgers, president of Silicon Valley’s hottest new company, Cypress Semiconductor, insists that his firm could manufacture advanced memory chips on its own if IBM would make available the technology it has promised to provide to U.S. Memories. Covering its bets, IBM has entered into talks with Cypress and Micron Technology, based in Boise, Ida., to do just that.

Back in Washington, it is unclear just what the federal government could do to help the electronics industry even if policy-makers wanted to plunge ahead. With little extra money in the till, “the government’s role must be limited and carefully designed to help and not hinder,” said Earnest Ambler, the Commerce Department’s undersecretary for technology.

Most in-depth studies, such as the report prepared earlier this year by the Electronics Industries Assn. on HDTV, contend that the first priority of the federal government to boost industrial competitiveness should be to reduce the federal budget deficit, boost aid for education and press other nations to open their markets more widely.

That should be more than enough to keep Washington busy.