HOW DID Japan destroy the American television industry?
The secret history of that strategy reveals how Japanese manufacturers and the Japanese government first created an anti-competitive cartel and then reinforced it with diplomacy, fraud and the influence of Washington insiders. And it reveals how, in the end, Japan made a direct assault on the entire American electronics industry.
Today, only one American television manufacturer -- Zenith -- is left (and under intense pressure to give up its TV division). Zenith is alone because between 1968 and 1988, a roster of some of the most distinguished names in U.S. consumer electronics -- Philco, Sylvania, Emerson, Motorola, RCA, Westinghouse, Admiral, GE, Magnavox and many others -- either went out of the TV manufacturing business or were acquired by foreign competitors.
Japan's raid on the American market dates back to 1956, when the largest Japanese manufacturers formed the Home Electronic Appliance Market Stabilization Council, an illegal production cartel. The intent of the cartel was to monopolize the domestic market for television receivers, radios and other home electric products and to exclude foreign imports. Once their home market was secure, they would launch a drive against the far richer American market.
The Stabilization Council set minimum price levels for domestic sales of TV and radio receivers; established profit-margin levels; boycotted nonmembers and denied foreign companies critical access to Japanese distribution networks. At the same time, the council worked with the Japanese government to raise a wall of tariff and nontariff barriers to foreign imports.
Initially the council and its member companies met with opposition from the Japanese Fair Trade Commission (JFTC), created after World War II to enforce the antitrust laws imposed during the American occupation. But the companies were never ordered to make any structural changes in their operations; benign neglect of antitrust statutes was the deliberate policy of the Japanese government.
Still, the JFTC advocated a Western-style, pro-competition approach. The Ministry of International Trade and Industry (MITI), by contrast, advocated hardball industrial policies to advance the interests of domestic producers in global markets. MITI won and in the early 1960s targeted consumer electronics as a key element.
The first step in Japan's targeting initiative was to acquire America's television technology, which was then state-of-the-art. In the 1950s, U.S. TV manufacturers were international-minded, investing in European production facilities to get under Europe's tariff wall. But the only way they could generate earnings in Japan was to license their technology to members of the newly formed cartel. Foolishly, they did. RCA, GE and Westinghouse licensed and then transferred monochrome technology to members of the cartel. In 1962, RCA went one step further and licensed its color technology.
This put the Japanese in position to launch phase two of their plan: a full-scale assault on the very American companies that had licensed their technology.
In 1963, Japanese TV manufacturers created the Television Export Council to set cartel policy. The cartel members knew that their success depended on protecting their home market, using the profits generated by high domestic prices to cover losses incurred by selling the same products abroad at artifically low prices.
Government officials helped by ensuring that U.S. exporters were harassed by import safety inspectors; the Electronics Industries Association of Japan persuaded Japanese distributors not to handle certain American TV products. U.S. television exports to Japan soon fell precipitously. Japanese manufacturers were thus able to sell a set for more than twice as much in Japan as they could abroad.
Meanwhile, according to the U.S. Justice Department, Japanese manufacturers also had concocted a secret "double-pricing" scheme with the help of 80 American importers -- among them Sears and Alexander's. Through this scheme, the Japanese paid U.S. importers rebates of roughly $40 for each Japanese set. Japanese firms also provided offsetting discounts on other merchandise sold to TV importers, as well as payments disguised as "market research." To avoid detection by the U.S. government and lawsuits by American manufacturers, the participants in this scheme filed falsified documents with the Customs Service, citing what was known as the official "check price" as the amount they had received for each set. But there was no way for U.S. officials or American manufacturers to know how much importers were actually paying for Japanese goods.
It was a nearly perfect crime.
With the help of these secret rebates, already low "check prices" and high profits from domestic sales, the Japanese could easily underprice their American compeititors, often selling below production cost. Jobs in the U.S. television manufacturing industry fell 50 percent between 1966 and 1970. They dropped an additional 30 percent between 1971 and 1975, and 25 percent more between 1977 and 1981. When U.S. manufacturers realized what the Japanese were doing, they sought legal protection.
In March 1968, the Import Committee of the U.S. Electronics Industries Association filed a petition with the Treasury Department alleging that TV sets from Japan were being illegally "dumped" on the U.S. market. The Treasury Department began an investigation, sending questionnaires to five major Japanese TV makers -- Sony, Sharp, Matsushita, Toshiba and Hitachi -- seeking information about their U.S. sales.
The Japanese simply stonewalled the requests. The cartel members and their American partners knew that if their kickback arrangements were revealed, they would face fines and penalties totaling hundreds of millions of dollars. A year went by and nothing happened. When Treasury pressed its demand, the Japanese Embassy requested more time. So did Japan's American importers.
One way to frustrate the Treasury inquiry and avoid these fines was to shred the evidence. In October 1970, an executive of one U.S. importer wrote to his superior suggesting that the firm's files and back purchase orders be "purged." Another -- perhaps more predictable -- solution was a legal counteroffensive. Still, in 1970, Treasury could only conclude that, on the basis of the "check prices" reported by U.S. importers to Customs, there was clear evidence that the Japanese were dumping TVs. Finally, in March 1971, almost three years after U.S. manufacturers filed their complaint, the U.S. government issued an official finding that the Japanese were doing just that. By then, however, much damage was done. What America's television firms now needed -- and needed quickly -- was for the Treasury Department to calculate and collect the anti-dumping levies the law required to offset the cartel's advantage. Calculating the levy involved a complex formula dependent on timely, accurate information from the Japanese about manufacturing and shipping costs, domestic price formulas and other factors.
Years would go by before the Treasury Department came up with a number.
While the dumping investigation dragged on, U.S. companies sought other legal remedies. In late 1970, the National Union Electric Corporation (NUE), whose products sold under the brand names of Emerson and Dumont, filed a private antitrust suit, charging certain Japanese companies were engaged in a conspiracy to restrain competition and drive firms like NUE out of business, In 1974, Zenith filed a similar suit, challenging Matsushita's purchase of the entire Consumer Products Division of Motorola. (Matsushita is the Osaka firm currently discussing the acquisition of MCA Inc., a deal similar to Sony's purchase of Columbia Pictures.) To level the competitive playing field, Zenith asked Treasury to impose a countervailing duty on Japanese exports equal to the Japanese government's tax rebates which were, in effect, subsidies.
The Zenith petition posed a dilemma. If Treasury ruled in Zenith's favor, similar countervailing duties could be imposed on most U.S. imports. To avoid a trade conflict with other countries, the United States would then be forced either to alter its tax system to conform to global trade treaties or to renegotiate the essential elements of those treaties.
Treasury chose a third option: It did nothing. Of its tens of thousands of employees in the early 1970s, only one overburdened official was assigned to administer America's countervailing duty laws. This gave Treasury officials the opportunity to bury Zenith's papers amidst huge stacks of unexamined petitions.
One former U.S. trade negotiator recounts a fundamental government tenet of the late 1960s and early 1970s: "Our trade policy was to keep U.S. markets open and the Congress pacified." In large measure, this policy reflected the attitudes of Richard Nixon and his national security adviser, Henry Kissinger. Neither had much interest in trade matters, except when they impinged on foreign or defense policies.
But the repeated, deliberate delays in enforcing U.S. trade laws hopelessly undermined the strength of U.S. television companies. It also made them easy acquisition targets. In addition to the Motorola-Matsushita deal, Magnavox was purchased by N.V. Philips, a well-known Dutch firm. Warwick Electronics, until then one of America's largest private TV manufacturers, was purchased by Sanyo. In less than a year, three other U.S. television companies were either acquired or forced out of business.
In 1968, there were 28 American-owned TV manufacturers in business. By the end of 1976, only six remained. When Jimmy Carter became president, the Japanese cartel faced a minefield of proceedings and investigations, and in 1977, five cartel members -- Hitachi, Mitsubishi Electric, Sanyo, Sharp, and Toshiba -- hired former deputy special trade representative Harald Malmgren to solve their problems.
Malmgren, who had served under Nixon and Ford and had helped Nixon prepare for a trade summit with Japan, was well equipped to earn his $300,000 fee -- and he quickly delivered. As the Japan Economic Journal reported: "In three short months, Mr. Malmgren was able to talk to all sides involved in the dispute, and work out a compromise . . . ."
That compromise, later known as the Orderly Marketing Agreement (OMA), limited Japanese TV exports to the United States to 1.5 million units a year for three years. But it allowed the Japanese to use their newly acquired U.S. manufacturing base to fill orders that exceeded the quota.
But much more than the television quota was agreed to in those telling first days of the Carter administration. Carter's point man on trade was Robert Strauss, the newly appointed special trade representative and the former chairman of the Democratic Party as well as a top fund-raiser for Democratic candidates. For Strauss and the U.S. trade negotiating office, bilateral issues like the TV case were little more than hindrances to America's larger General Agreement on Tariffs and Trade (GATT) agenda. The Japanese, on the other hand, saw the GATT negotiations as merely a sideshow. They wanted firm control of specific end-use industries -- especially the critical consumer electronics sector.
As part of a deal he ultimately negotiated, Strauss signed a secret side letter with the Japanese and agreed to provisions that would hamper American actions on television matters for years to come. Strauss committed the United States to: Limit the ITC investigation of predatory pricing by the Japanese cartel. (Strauss wrote that he would urge the ITC "to confine its investigation to allegations of practices that are clearly not within the scope of the Antidumping Act of 1921 . . . ." Appeal an earlier ruling by the Customs Court in favor of Zenith. Liquidate anti-dumping duties expeditiously. (The Japanese understood this to mean that U.S. officials would settle for little or nothing.) Ignore monopolization charges against Japanese companies when they were acting domestically in accordance with the directives of the Japanese government. (To do otherwise, Strauss wrote, "would raise serious problems of sovereign immunity, act of state and comity." This gave the cartel an inviolable sanctuary from which they could pursue their anti-competitive schemes.) Inform the Japanese government quickly of any significant findings arising from U.S. investigations of the TV matter, and be open to informal Japanese communications (that is, create a back channel).
A year and a half after Strauss made his secret commitments, Rep. Dan Rostenkowski (D-Ill.) learned of them. At a Ways and Means committee hearing, he asked Strauss for a copy of the agreement, which he was given for the record. Still, the U.S. government remained committed to its deal.
Strauss was, to say the least, badly outnegotiated. Indeed, thanks to Strauss, the cartel achieved a political solution to most of its legal problems in a single bold stroke -- and at virtually no cost. It now had everything it needed to complete its assault on what remained of the American television industry. By the late 1980s, as Japan dominated America's consumer electronics markets, the logical next step was to squeeze extra profits from this dominant position. When New York Attorney General Robert Abrams revealed in 1989 that Panasonic and Technics (both subsidiaries of Japan's Matsushita) had mounted a vertical price-fixing scheme in America, the firms immediately agreed to an $18 million settlement -- though without actually acknowledging wrongdoing.
By then, though, the pattern had become all too clear.
As of 1989, more than 20 former government officials with some responsibility for television issues had been hired by Japanese manufacturers or by the law firms and lobbying organizations that represent them. Many other ex-officials involved had gone to work for related Japanese interests. Under existing ethics laws, this is entirely legal.
What, though, is the cost of the decline and fall of the U.S.-owned television industry? Why does it matter that most consumer electronics are foreign-made?
For the United States, it has been an economic loss of historic proportions. During the 1980s, the U.S. market for VCRs alone generated more than $71 billion in sales for Japanese manufacturers, and added significantly to the U.S. trade deficit with Japan. The loss of the American television industry also undermined the TV parts industry -- a producer of such integral components as semiconductors, which are also used in hundreds of other industries. The Commerce Department's own analysts have concluded that a key factor in the decline of the American semiconductor industry was the loss of U.S. TV manufacturers, who were among its largest customers. Much like falling dominoes, the decline of the semiconductor industry now threatens dozens of other related U.S. industries, such as super-computers and advanced machine tools.
Japan today has a position of global dominance in the electronics industry. It has, not to put too fine a point on it, reached a point where it can easily launch similar strikes against all the high-technology markets of the world.
Pat Choate is a political economist. This article is adapted from "Agents of Influence: How Japan's Lobbyists in the United States Manipulate America's Political and Economic System," published by Knopf.