Malcolm Baldrige, the chain-smoking secretary of Commerce, thinks the time has come to play hardball with Japan on trade issues. Drawing on his own experience as a businessman in Japan, Baldrige tells a listener in his office that having "targeted" steel and automobiles to "be their export strengths in the '60s and '70s," the Japanese are targeting telecommunications, computers and other high-technology items in the 1980s and 1990s.
Baldrige has been lecturing Japanese officials on the need to open up their markets further to Western exporters. "Sure," he says he's told them, "you gotta export more, but you can't continually export more without importing more, because you're no longer the small island country coming back from the ravages of World War II."
It's not going down well in Japan, as Baldrige knows. Government and business officials can barely conceal their anger at what they regard as an American effort to shift the blame for poor economic management from Washington to Tokyo.
"Some of my Japanese friends, including some in the government, take me aside and say, 'Mac, you're getting a very bad press in Japan--you ought to be more delicate or circumspect,' " Baldrige said. "Bull. I'm not gonna take it easy, if I believe in this, and I'm right in it."
The most dramatic symbol of what Baldrige sees as a new Japanese assault on the American economy is a tiny silicon "chip" called a 64K RAM--the acronym for a random access memory that can store or change 64,000 bits of digital computer data. It is the main memory bank used in today's computers.
The 64K RAM, capable of holding four times the amount of data that could be squeezed into its predcessor, the 16K RAM, is a hot item. From $100 million worth last year, the market has exploded to $600 million this year--and the potential for next year is at least double that.
And the reason that Baldrige is exploding is that Japan, in a bitter competitive battle featured by plunging prices, has grabbed 70 percent of the 64K RAM market from the Americans--the guys who invented semiconductors in the first place, and who taught the Japanese how to make them.
But wait, there's more to a grim story: The next couple of years will bring the 256K RAM, with four times the capacity of the 64K RAM. That is destined to be even a bigger money maker, but some key people in the American industry are already conceding the 256K RAM market to the Japanese.
To take one disaster at a time, how did the U.S. industry lose out on the 64K RAM? Two years ago, on a reporting assignment in Silicon Valley, Calif.--then headquarters for most of the U.S. chip makers--I found American companies stunned by the Japanese ability to go from zero to 40 percent of the 16K RAM market within a few years, largely because the Japanese were putting out what was without doubt a higher quality product.
So the U.S. companies redoubled their efforts to boost quality and head the Japanese off from the 64K RAMs. But as Andrew Pollack recently reported in The New York Times, the U.S. manufacturers "managed to trip themselves up." The Japanese came to the market with their 64K RAMs, while many American companies, trying to make their chips smaller and more complex, couldn't get them off the drawing board.
Baldrige admits that the American companies goofed. But he doesn't think the U.S. industry should quit trying--and indeed, American companies using chips are anxious to have some American suppliers, provided they match the Japanese product in price and quality.
"We developed that industry, and Japan wouldn't have been anywhere near close enough to take advantage of one slip in misjudgment in the U.S. if, for example, they had not had direct government funding for research and development," Baldrige asserts. Then, "there's Nippon Telephone and Telegraph (NTT), virtually a private preserve for Japanese semiconductor manufacturers. They were enabled to get the volume that put them in the position to take advantage of this one American capacity slip. And they're good. You can't take that away from them. But they wouldn't have been close enough to do that if they hadn't had these other factors going for them.
"And incidentally, I think you'll see quality of American RAMs will be as good or better than the Japanese . That's a temporary phenomenon."
There were other mistakes: one big chip maker, Intel, stopped producing 16K RAMs, and started to buy the Japanese memories when the competition got rough. Now, Intel's plans to get into the 64K RAM market are viewed with a jaundiced eye.
"I think that's true," Baldrige commented. "But Intel is not the only manufacturer. I think other factors are more important. I mean American companies, a bunch of them, they're not all going to be good at the same time, but the fact is they were substantially ahead of the Japanese and really did develop these memory bits .
"The Japanese really haven't developed this industry . They've developed very little, they're not good innovators. Even in robots, they've taken our robots and developed their industry by simply putting enough money in and by specific government measures to support their robotics industry. There's a 13 percent bonus for robot users on normal depreciation during the first year. That's on top of regular depreciation. And a $450 million loan program to encourage introduction of robots in places where it's possible to increase productivity.
"And then they started the Japanese robot-leasing corporation . . . it gets to the point that it's hard for Japanese companies to turn down the use of a robot because of this extra subsidy, and that's the way they build up the home market, and then when they get that volume there, they attack abroad."
He argues that the Japanese success comes not from technological breakthroughs, but from "very good manufacturing techniques." Baldrige's explanation for Japan's great exporting success that has built up a $20 billion trade surplus with the United States: the Japanese take technological breakthroughs from the United States and Europe, feed them to their own companies that are assured no competition in the Japanese home market while the process is perfected. Once all the bugs are worked out, according to the Cabinet officer, the Japanese turn private companies loose to "target" export markets.
If there were equal access, Baldrige says, "you could turn some of our high-technology companies loose with not just today's stuff, but what will be coming up. And all of a sudden, the Hitachis, the Fujitsus, and these other companies would have real competition in their backyard. . . across the board. And I'll guarantee you that's going to make those Japanese worry . . . if others get into their captive home market."
What are the answers to this complex of problems? Baldridge has directed a Cabinet Council on Commerce and Trade to study the domestic problems of the high-technology industry in the United States, "because that's one of our biggest leadership areas." But beyond that, Baldrige is pressing the case that Japan must open its market not just to agricultural products, but to American high-technology equipment. The threat being held out is "reciprocity" legislation--a barrier to imports here unless there is equal access to Japanese markets.
He complains, for example, that the Japanese are protecting a whole series of burgeoning high-technology industries. Thus, the secretary charges that in the case of high-technology medical instruments, where "the U.S. is No. 1 worldwide," Japan will take up to two years to test a new product even though it's been approved in the United States and in some cases in Europe as well.
"Now, it's no coincidence at the end of two years when it's approved that the Japanese industry competing with us has had those 24 months to develop their own equivalent piece of machinery, whatever it is," Baldrige said. "And you know? The Japanese company comes in and the American company never does."
Are they stealing it outright? "Absolutely," Baldrige says without hesitation. "Oh, there's no question about that. No question about it."
He cites also the refusal of a Japanese pharmaceutical company called Green Cross to use any of the sophisticated blood-fractionating techniques developed in the United States, although Japan has unrestricted access to the "raw material," in this case blood plasma imported from the United States.
"They Green Cross were written up in The Wall Street Journal as an example of a very fine Japanese company whose stock had gone way up, and so forth," Baldrige said.
"Well, it's gone up because they've got this monopoly, and with the profits from the monopoly, they are now buying our genetic engineering companies, a very fast-growing high-tech business in the United States.
"They keep telling us that really, Americans just have to work harder, and learn to speak Japanese to break into their markets . But I'll tell you, I could go to a Japanese Kraft paperboard buyer, and hold up a piece of U.S. board, and without speaking Japanese draw a figure on it--$390 a ton--and then take his paperboard, and draw the domestic price--$590--and complete a sale right there.
"We can land soda ash in Japan at $180 a ton and make $30 a ton profit. They can't sell soda ash for less than $280 a ton. Know how much of the soda ash market we have? One percent . . . With one percent of the market and $100 a ton less, there's got to be a force at work there, and I know it's a cartel.
"So from the high-technology end to the low-technology end, we can beat 'em for whatever reason--quality, price, or engineering. . . . But there's no way, if we can't get in, if we don't have access."