By Scott Palmer
(Published in The Wall Street Journal, February 19, 1986)
The U.S. semiconductor industry has a message for American consumers: it would like them, please, to stop buying all those inexpensive computer chips from the Japanese and, instead, buy more expensive U.S.-made chips.
In 1985, three separate complaints were filed with the federal government’s International Trade Commission, charging that Japanese semiconductor makers were "dumping" computer chips in the American market at "less than fair value" – i.e., at lower prices than those offered by U.S. firms. In all three cases, the ITC found that U.S. semiconductor firms were "injured" by competing Japanese products. Most recently, on January 22, the ITC ruled that Japanese makers of 256k computer memory chips were guilty of dumping.
In another complaint, the Semiconductor Industry Association here charged that the Japanese market remains "closed" to U.S. semiconductor firms, and demanded that Japan institute an "affirmative action" program to force Japanese consumers to buy more U.S. chips.
Long, Hard Fight is Seen
Such complaints are made every two years or so, in sync with the biennial boom-and-bust cycle of the semiconductor industry. In 1984, an "up" year, the industry grew by 43% and everyone was happy and profitable. In 1985, however, orders plummeted to 50% of their 1984 levels, while the price of 64k RAM chips dropped from $3.50 each in September 1984 to 50 cents in July 1985. At the same time, continued overbuilding of semiconductor plants aggravated an already serious excess of capacity over demand.
Although the market is now on the "up" part of the cycle again, current estimates put world semiconductor demand at a mere 40% of existing capacity. And Japanese manufacturers are sitting on 93 million RAM chips that they couldn’t sell in 1985 – enough to supply the entire U.S. market for three months.
Unless Japanese firms can be kept out of the American market, U.S. semiconductor makers are in for a long, hard fight.
The International Trade Commission is charged by Congress to decide, on a case-by-case-basis, if U.S. firms are "injured" by foreign competition. In practice, this means that any U.S. company facing competition from abroad can file a complaint with the ITC, because all that "injury" means is lost sales or depressed profit margins. It helps if the U.S. firm can accuse its competitors of "dumping" products at "less than fair value," but it’s not strictly necessary.
Of course, what the ITC is not charged to do is examine the benefits to U.S. consumers of low-priced goods, whether produced here or abroad. In the case of computer chips, falling prices have been tough on semiconductor firms but good for almost everyone else – from the manufacturers of computers, automobiles, and home appliances, who can sell more at lower prices because their costs are reduced; to those U.S. workers who find jobs because of expanded production; to the U.S. consumers who get bargain prices on any goods that contain low-priced chips.
To determine if a Japanese firm is selling computer chips at "less than fair value," the Commerce Department compares the company’s prices in the U.S. with those in Japan. If the U.S. price (with adjustments for transportation costs) is less than the Japanese market price, or if it is less than the "fully-allocated cost of production" plus an 8% profit margin, then the Japanese firm is found guilty of "dumping." Import duties are imposed to deprive U.S. consumers of the offending bargains.
In the case of 64k RAM chips, Commerce found that Japanese firms were indeed guilty of selling for less than "fair value." Anti-dumping penalties ranging from 8% to 94% of the chips’ price were imposed. The effects are already being felt. One New York-based vendor of expansion boards for the IBM PC expects his costs to increase about $200 a board as a direct result of the Commerce Department’s action. Other chip-using firms expect similar cost increases.
The whole idea of "fair value," of course, makes about as much economic sense as reading pig entrails to predict the business cycle. Prices are determined by market forces, not by costs of production. Under the "fair value" rule – i.e., the price in a foreign market must not be lower than in a firm’s home market – therefore, a Los Angeles swimsuit maker whose products brought a lower price in Alaska than in California would be guilty of "dumping."
Interestingly enough, U.S. semiconductor firms were not the only ones "injured" by the bruising price wars of 1985. Japanese firms such as Fujitsu, Hitachi, and Toshiba also sustained tremendous losses, and have now begun to raise their prices in an attempt to recover. In the darkest days of 1985, Hitachi told its distributors to underbid competitors by 10% for as many times as it took to win an order. Such an approach might help to build market share and move excess inventories, even in a depressed market, but it’s hell on profits.
Is aggressive price cutting indicative of a Japanese conspiracy to ruin U.S. competitors at all costs? "I’ve never heard anyone say that the Japanese semiconductor industry is out to destroy the American semiconductor industry," says Clyde Prestowitz, counselor to the secretary of commerce and chairman of the U.S.-Japan High Technology Working Group. "And I don’t know anyone who is at all knowledgeable who believes that."
While some chips makers bemoan Japanese inroads in the U.S. market, the Semiconductor Industry Association focuses on the failure of U.S. firms to penetrate the Japanese market. the SIA argues that Japanese producers remain protected, but because legal barriers to semiconductor imports were removed by Tokyo in 1975, the trade group must rely on a strange post hoc argument that vitiates U.S. manufacturers’ complaints about how much they are injured by Japanese import competition.
"In all markets except Japan," the SIA says, "the U.S. semiconductor industry outperforms its Japanese counterparts by a wide margin: in Europe by nearly five to one; in the U.S. and Canada by six to one; and in the rest of the world, by three to two in 1984."
In Japan, however, U.S. firms have achieved a market share of only 11% or 19%, depending on whose numbers you believe. The SIA concludes that this demonstrates a market structure still protective of domestic producers despite the end of legal restraints.
Most interesting of all is what the SIA considers protection against imports. If Japanese firms that use semiconductors produce their own chips in-house or prefer to buy from other Japanese firms instead of from U.S. vendors, these are "import barriers" that must be abolished. Japanese firms must be forced to buy American-made chips – also, presumably, at American-made prices, since the SIA notes that "the price of semiconductors in the Japanese market is generally very low" – a characteristic not of protected markets, but of highly-competitive ones.
Despite the weakness of their arguments, both U.S. semiconductor makers and the SIA have a legitimate complaint – not against the Japanese, but against U.S. government policies that cripple American firms’ ability to compete.
Quick Fixes, Not Cures
Capital costs for U.S. firms are three times those faced by their Japanese competitors. In Japan, both short- and long-term capital gains are exempt from taxation, while rates in the U.S. are 50% and 20%, respectively. In Japan, with no Social Security-type Ponzi scheme, workers must save their money for retirement (in tax-exempt savings accounts), thus making more capital available to Japanese firms at lower interest rates. In Japan, unhampered by antitrust laws based on discredited economic theories, firms can join together in business groups to reduce their risks, thereby reducing their capital costs even further.
Joint research and development efforts are commonplace in Japan, allowing several firms to share the cost of basic R&D. In the U.S., restrictions on joint R&D have been relaxed, but such ventures are still discouraged by the uncertainties of antitrust law.
The conclusion? Quick fixes, political rhetoric, and protection against imports will not cure what ails the U.S. semiconductor industry. Only a fundamental re-assessment of America’s policies toward business will ultimately succeed.