Chatting with the press and buttonholing congressmen, Japan's government and leading high technology companies performed an urgent political Kabuki last week to demonstrate their willingness to soothe growing trade tensions.
Spicing the symbolism with substance, Japan's powerful Ministry of International Trade and Industry said it had reached a preliminary agreement with International Business Machines Corp. that would give the computer giant access to Japanese patents. Hitachi Ltd. said it would boost its U.S. high-tech purchases by $260 million to $380 million in the next 18 months and help fund basic research here. And Sanyo Electric Co. announced it would begin manufacturing videocassette recorders in the United States.
When it comes to the trade war in semiconductors, however, there is no mistaking the tone of U.S. bitterness -- and Japanese defensiveness -- in what has been a disastrous year both in economic and trade terms. Business has been terrible for the industry in general and for American semiconductor manufacturers in particular. Whether the U.S. industry can return to spectacular growth after this recession is even in doubt.
Former free traders such as Hewlett-Packard Co. Chairman David Packard, Intel Corp. Vice Chairman Robert Noyce and Advanced Micro Devices Chairman Jerry Sanders all have recently called for trade sanctions against Japanese semiconductor manufacturers, arguing that Japan has consistently and deliberately thwarted efforts at fair and open trade.
Those calls culminated in a Section 301 filing by the Semiconductor Industry Association on June 14, charging that the Japanese have sold microchips for uncompetitively low prices in the United States while shutting U.S. producers out of a fair market share in Japan.
"They are growing in this market and we are losing ground here and losing ground there. This is very dangerous for the American manufacturer," said Alan Wolff, attorney for the SIA.
The Japanese and Americans have agreed to disagree about virtually every facet of the semiconductor imbalance of trade. The two countries even disagree about statistics. The SIA claims that the U.S. market share in Japan stagnated at about 11 percent of the $8 billion market last year, while MITI claims the U.S. share has grown to 19.1 percent of the total Japanese market. Japan held about 14 percent of the $11.6 billion U.S. market in semiconductors last year. Meanwhile, the U.S. Commerce Department announced a record $4.57 billion trade deficit with Japan for June.
Japanese semiconductor manufacturers insist that their home market is "more open than you think," in the words of Hitachi official Yasushi Sayama, and that there has been no evidence that Japanese companies are dumping their chips in America -- selling them below manufacturing cost. The International Trade Commission reported a preliminary finding Friday that Micron Technologies Inc., a Boise, Idaho semiconductor firm, had been economically injured by lower-priced imports. The Commerce Department will continue the investigation. If both agencies decide that Japan's firms dumped microchips on the market, they will impose a compensatory tariff.
In a virtually unprecedented effort, Hitachi Ltd. -- one of the world's leading semiconductor companies -- had some of its top executives talk to American journalists in a bid to dispel notions that it had behaved in predatory and anticompetitive ways.
Long a "bad boy" of the Japanese high-tech industry, according to its U.S. competitors, Hitachi suffered considerable embarrassment when it was forced to pay a reported $300 million financial settlement after it was caught illegally purchasing technical data from IBM during an FBI industrial espionage sting operation in 1981.
Hitachi's reputation was further tarnished with the widely publicized disclosure of an internal memo that urged sales personnel to undercut competing U.S. products by 10 percent now matter how low they had to go, and also guaranteed a 25 percent distributional profit margin. Although Hitachi officials have repudiated the memo as a product of over-enthusiastic American employes, some U.S. semiconductor companies are still fuming and say they are considering antitrust action.
In an interview, Toshi Kitamura, who heads Hitachi's international organization, dismissed the memo as a sales promotion "hype" initiated by a former Intel employe who had come to work for Hitachi.
"We are not familiar with these things in Japan," he said.
The American semiconductor industry's problems are its own fault and were not created by Japan or any of her electronics companies, the Hitachi executives insist.
"Let us compete together," said Hitachi executive Hiroshi Miyamoto, who sports a microchip tie clip. His company sold $50 million worth of semiconductors each month in the United States during the fiscal year that ended March 31.
However, the question that hangs over America's Silicon Valley is whether it can compete at all in a capital-intensive market in which product life cycles are shrinking dramatically.
America's semiconductor industry has yet to plug an unrelenting flow of red ink that is a direct result of far lower-than-expected sales and a fundamental plant overcapacity. The situation is the most desperate in the industry's 20-year history. Layoffs are rife and even Japanese semiconductor operations are slashing capital expenditures.
"The other recessions all had reasons," said Ken MacKenzie, a semiconductor industry analyst at Dataquest in San Jose, Calif. "They were tunnels that had light at the end of them. Right now, you can't even see a tunnel."
MacKenzie predicts it may take up to 18 months for America's semiconductor manaufacturers to pull out of the slump.
The problem is particularly painful for America's independent semiconductor manufacturers such as Intel and AMD, whose basic structure differs fundamentally from their main Japanese rivals. Hitachi and Nippon Electric Co., for instance, not only manufacture silicon chips -- they are diversified multi-billion dollar electronics conglomerates that also assemble the products that the chips go into. The U.S. independents lack this kind of captive market to sell to. And because their product lines aren't diversified, they have a more difficult time raising capital on their own in bad times. (Digital Equipment Corp., Texas Instruments, Hewlett-Packard and IBM -- all vertically integrated like the Japanese -- chose not to sign the 301 complaint).
The Japanese enjoy a significant advantage over U.S. competitors in raising capital, thanks to their country's very supportive financial markets, which offer convertible debentures for as little as 2.2 percent and loans at a prime lending rate of 7.7 percent. The cost of capital for leading U.S. semiconductor firms was more than 9 percent last year.
Despite these advantages, Hitachi's Miyamoto said he believes Silicon Valley's recovery is not an impossibility.
MacKenzie and other Silicon Valley observers, though, all agree that the Japanese have won an important victory in the race to produce the new generation of 256K random access memory chips. Though fundamentally a commodity item, these memory chips are a high-volume indicator of the state-of-the-art in manufacturing technology.
In barely two years, the price of the 256K chip has fallen from over $20 to about $3, with the Japanese capturing the overwhelming share of the market.
While American companies such as Intel and National Semiconductor still are leaders in the design and manufacture of microprocessors -- the computers on a chip -- it's clear that, for all intents and purposes, the war in the memory market is over.
Other observers point out that the boom in video games, followed by the explosion of the personal computer market, ignited the growth in semiconductor demand. As yet, there is nothing on the horizon that might spur more volume sales of semiconductors. Perhaps a new surge in computer sales, or the emergence of digital television would increase demand. The harsh fact remains that the semiconductor industry is groping for a new technology application to generate high-volume sales.
The problem, though, is who would capture the lion's share of that new volume should it materialize?
If they hope to recover, American semiconductor companies will have to focus as much on marketing as technology, insists Dataquest's MacKenzie.
"In the very recent past, the real focus as a company was as a high-technology manufacturer," said MacKenzie, "Now they're finally treating marketing applications and market planning as a technology."
Ultimately, he predicts, American companies are counting on a strong market for customized semiconductors to rekindle profitability.
Of course, these questions of new technology and marketing don't directly address the problems surrounding U.S.-Japanese trade. It's clear that there is a strong U.S. belief that the Japanese unfairly discriminate against American chips and that they are playing hardball in the U.S. market. Whether that is true or not, it's evident that the problem with Japan is only one part of the crisis of overcapacity and sluggish demand that now confronts the global semiconductor industry.