chapter 3 steel, electronics, and automobiles: industrial

CHAPTER 3

Steel, Electronics,and Automobiles:

Industrial Structure

— ——. . . . . . . . .

Contents

Overview . . . . . . . ., . . 0 . . ., . ,0 .,0...., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Industry Definitions o * o . . e . * * * . * * * , . * o * . . * , . * . . * * * * . . . o . . o * . . * * . . . . o * . , , .

Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Geography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TheSteelIndustry ● ***.,., . . . . . . . . . .*,,.*,,* ● *.,***.. ● .*.*.,,* ● *.,..*.* . .

TheElectronicsIndustry. . . . . . . . . ● .*.... ....*.,. ● ...*..* . . . . . . . . .*...*,. ,.ConsumerElectronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Semiconductors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The AutomobileIndustry . . . . . . . . . . . . . . . 0 . . . . 0 , , . . . , . . . . 0 . . . . . , , . , , . . . . . . 6

SummaryandConclusions ● *..*** ..***.*. . . . . . . . . ● *,.**,. .....0.0 .**.*... ●

Table

3 1

3 23 23 3

34

37373841

42

46

TableNo. Pagel. WorldMarkets andU.S. Share, 1979. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

CHAPTER 3

Steel, Electronics, andAutomobiles: Industrial Structure

OverviewThe many differences exhibited by the

steel, electronics, and automobile industriesillustrate the difficulties of attempting togeneralize about the state of U.S. competitive-ness. Together, these three sectors includemuch of the Nation’s industrial base, provid-ing employment for a substantial fraction ofthe work force. They cover a span of techno-logical levels from low (some steel products,much of consumer electronics) to high (spe-cialty steels, large-scale integrated circuits,computers), There are differences in competi-tiveness among the industries, among firmswithin each industry, and even among prod-uct lines within individual firms. Further-more, all three industries are undergoingstructural change.

Integrated steel firms in the United Statesare burdened by capital plant that is, on theaverage, older than that of most of their for-eign competitors. While other countries, par-ticularly Japan and several West Europeannations, rapidly expanded and modernizedtheir steel capacities after the Second WorldWar, U.S. capacity increased only slowly, Upto 25 percent of U.S. steel capacity now ap-pears to be obsolete. ’ At the same time, the in-dustry as a whole remains a reasonably effi-cient producer of steel, probably second incosts only to Japan —which has more modern,larger scale plants, as well as lower laborcosts. The nonintegrated segment of the U.S.industry, in particular, is efficient and grow-ing,

There is now excess capacity in world steelmarkets. One result of overcapacity is to cre-ate incentives for producers in many coun-

tries to cut export prices and “dump” steelwhile attempting to maintain domestic pricelevels. Dumping and other unfair trade prac-tices have been important concerns of theAmerican steel industry,

The steel industry is not monolithic, but thetypical disaggregation into integrated pro-ducers, nonintegrated firms, and alloy/spe-cialty steelmaker is straightforward com-pared to the diversity exhibited in electron-ics. In many respects the three sectors of theelectronics industry covered in this report—consumer electronics, semiconductors, andcomputers —comprise three distinct indus-tries. They exhibit different levels of technol-ogy, different levels of competitiveness, anddifferent Government policy impacts.

Except for consumer electronics, most ofthe U.S. electronics industry remains strong;nonetheless, there is increasing concern be-cause of shrinking U.S. technological advan-tages and the support other countries areproviding their own industries, The Japanese,in particular, have targeted electronics as acornerstone of future industrial expansionand are pursuing policies directed at thatgoal. Some observers feel that if the UnitedStates does not respond, its remaining com-petitive advantage may disappear.

During 1980, the automobile industry hadthe most visible set of problems, with importstaking more than 25 percent of the marketand hundreds of thousands of workers un-employed. American automakers are goingthrough a period of rapidly changing productmix, which is s training their capital re-sources. The domestic automobile firms dif-fer markedly in their competitiveness, and inthe resources which they can bring to meet-

31

32 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

ing future needs— whether demanded by themarket or by Government regulations.

As in the case of steel, the U.S. automobilemarket is now a smaller proportion of thetotal world market than in the early postwarperiod. The share of world auto sales ac-counted for by firms based in the UnitedStates has dropped from three-quarters in1950 to less than one-third at present, despitetheir extensive foreign operations. ButAmerican firms have been and continue to bestrong in some foreign markets; now they findthemselves using knowledge (and sometimesprofits) gained overseas in the i r homemarket.

In the remaining sections of this chapter,these industry sectors are described in moredetail, together with aspects of their struc-ture that affect competitiveness (many ofthese are amplified in ch. 5). This chapter isdevoted primarily to understanding the diver-sity of the industries and its consequences.The approach is comparative, pointing outboth similarities and differences. No attemptis made at complete descriptions, but factorsthat influence competitiveness are empha-sized.

Industry DefinitionsProducts

An indication of market sizes, for theUnited States and the world, is given in tableI. The industry subdivisions in the table areexpanded on below.

The disaggregation for steel is that adoptedin the OTA steel study; this divides the indus-try into producers that are primarily inte-grated steelmaker, nonintegrated firms, andmanufacturers of alloy/specialty products.The basic distinctions are as follows. Inte-grated steelmaker begin with iron ore. Theymake iron, convert it to steel, and then to finalproducts such as sheet, plate, and structuralshapes. Nonintegrated firms typically beginwith steel scrap and produce only a limitedrange of final product types—e. g., reinforc-ing bar. Alloy/specialty products have par-ticular combinations of properties, such ashigh strength (aerospace alloy steels), highhardness and wear resistance (tool steels), orcorrosion resistance (stainless steels); theytypically sell for much higher prices thanplain carbon steels. Most alloy/specialtyfirms use scrap as the main input.

Table 1 .–World Markets and U.S. Share, 1979——

UnitedStates as

United percentIndustry States World of world—SteelTotal production of raw steel

(millions of tonnes) . . . . . . . 123 748 17%

Integrated producers. . . . . . 108 - na naNonintegrateda . . . . . . . . . . 12.2 na naAlloy/specialtya . . . . . . . . . . . 4.2 na na

ElectronicsTotal consumption ($ billions) $85.7 $168b 51

Consumer electronics ., . . 11.8 31.8 37Semiconductors . . . . . . . . . . 5.0 11,5 43Computers. . . . . . . . . . . . . 22.8 44.6 55O t h e r e l e c t r o n i c s . . . 46.1 83.3 55

Motor vehiclesTotal production (millions of

units). . . . . . . . 11.5 41.5 28

Passenger cars . . . . . . . . . . . 8.4 30.7 – 27

na = not availableaDisaggregated figures are for 1978bUnited States, Europe, and Japan only

SOURCES Steel—Annua/ .Statistical Report, 1979 (Washington. D C AmericanIron and Steel Institute, 1980), pp. 92-93, Technology and Steel In-dustry Competitiveness (Washington, D C Office of TechnologyAssessment, June 1980), p 248Electronics—” 1981 World Market Forecast, ’ Electronics, Jan 13,1981, pp. 121-144 (World production figures for electronics are notavailable )Motor vehicles —J. Evers, Motor Vehicle Manufacturers Associa.tion, personal communication, August 1980

Ch. 3—Steel, Electronics, and Automobiles. Industrial Structure ● 33

The three sectors of the electronics indus-try covered in this report—consumer elec-tronics, semiconductors, and computers—contain only a fraction of the 5,000 to 7,000firms in the U.S. electronics industry; how-ever, they are among the most important. z

Consumer electronics products includeradios, televisions, audio equipment such asstereo receivers, electronic watches, andelectronic toys and games. Home entertain-ment products such as TVs and video-cas-sette recorders receive the most attention inthe following chapters.

Semiconductor devices can be discrete cir-cuit elements such as transistors, or inte-grated circuits (ICS) containing several tensof thousands of circuit elements on a singlemonolithic “chip’ of silicon a few millimeterson a side. ICS, and particularly digital ICS,are the most dynamic portion of the semicon-ductor industry, both in terms of technolog-ical advance and in terms of sales growth, ICSare used in a wide range of products made bymany industries; an important current appli-cation is engine control electronics for auto-mobiles, While the biggest single market forICS is the computer industry, semiconductortechnology is important to virtually the entirebreadth of U.S. manufacturing and service in-dustries.

The computer sector spans firms rangingfrom those that make mainframe machinesselling for several million dollars to those thatbuild microcomputers using a single IC chipas the processor. The computer industry isimportant not only in itself, but because of therapidly expanding applications of dedicatedcomputers in other products to make them“smart.” Manufacturers of peripherals suchas memory and terminals are included withinthe computer sector.

(If)mn]llnic’:]ti[)tls 1s the lar~cst of the sectors omitted fr{]mthis report an[i from the full OTA clc(tr[)nics stucfl. It was cx-{lud~x~ prim:] ril~ to kc[?p [ho t w() s f u(lies more m:~n:i~e:~ hle,

Photo credit: IBM Corp.

This IC—a 64K RAM memory chip—can hold64,000 bits of information

The automobile industry as a whole em-braces large numbers of sales and servicefirms, as well as suppliers of componentparts. This report concentrates on manufac-turers of passenger cars and light trucks,many of the latter being used interchange-ably with passenger cars. Where the term“motor vehicles” is used, it refers to bothcars and trucks,

GeographyThe geographical boundaries of these in-

dustries must be defined before U.S. competi-tiveness can be assessed. Given the tendencytoward internationalized production, whatare the bounds of American industry and thelimits of Government interest?

Many U.S. industries include firms thatconfront their foreign competitors not onlyth rough expor t s and impor t s , bu t a l sothrough manufacture and sales by overseassubsidiaries, This is common in electronicsand automobiles, though rare for steel, Thereare several patterns of investment. In auto-mobiles and computers, foreign subsidiaries

34 Ž U.S. industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

sell mostly in foreign markets, This is alsocommon in semiconductors; but in addition,many American semiconductor firms haveoverseas manufacturing facilities which re-export to the United States. Offshore assem-bly is also widespread in consumer elec-tronics.

In one sense, these overseas subsidiariesare foreign firms, not a part of U.S. industry.On the other hand, they are often inextrica-bly linked to the domestic operations of theparent company. Not only may these linkagesbe difficult to disentangle, but the subsidi-aries may be profitable while the U.S. parentlanguishes—giving the parent more freedomin developing strategies to extricate itselffrom competitive difficulty, In 1979, for ex-ample, Ford was able to offset losses in theU.S. market with profits overseas. Further,one can ask if Japanese-owned TV plants inthe United States—such as Quasar—shouldbe viewed as domestic producers,

Some decision is needed to define theboundaries of U.S. industry and hence U.S.competitiveness. In general, this study has at-tempted to stay with convention (and conve-nience) by defining U.S. industries to be those

operating within the geographic confines ofthe United States. Thus, in each of the threeindustries, U.S. firms are those employingU.S. workers; Quasar is an American firm, asis Volkswagen of America. Domestic manu-facturing by Ford or IBM receives more at-tention than their overseas production. Atmany points , however, such dist inctionsbreak down, and overseas operations must beconsidered.

Major competition in each of these indus-tries has recently come from Japan. This isnot to say that other rivals are insignificant.Certainly West Germany and France are im-portant factors in steel and automobiles, asare Korea and Taiwan in consumer electron-ics and steel, Nor is this meant to imply thatJapan is the primary competitor in all indus-tries. Japanese firms have not been success-ful in aircraft, and only about a third of U.S.imports of steel come from Japan, West Ger-many is a leader in machine tools (along withJapan), and other Far Eastern nations are ma-jor producers of apparel. Although attentionhas with reason focused on the Japanese,Japan does not constitute the rest of the in-dustrial world.

The Steel lndustry3

Steel has a unique combination of low costand desirable physical characteristics thatmake it virtually the only material suitablefor many applications. Among the most im-portant of these are: automobiles (around 20percent of domestic steel consumption), ma-chinery and equipment (10 percent), and con-tainers such as cans (7 percent). In addition,significant amounts of steel are used in con-struction, appliances, pipe, rail cars and loco-motives, wire products, and military equip-ment, Industrial societies as they are knowntoday could hardly exist without steel.

Almost all steel products are manufac-tured to standard specifications, There is lit-

‘Nfost of the information in this section is dr;~wn from theOTA steel study.

tle difference in the steel produced by variousfirms—a given type of sheet, plate, or struc-tural shape will be much the same whether itcomes from the United States or Korea. Whilethere are specialty products and proprietarygrades—e.g,, various tool-and-die steels—substantial product differentiation as occursin industries such as automobiles is seldompossible. Competition, therefore, is largelybased on relative prices and customer serv-ice, Important elements of the latter are time-ly and dependable delivery, and technical ad-vice, Such service is important and should notbe minimized; it is not necessarily true thatonly prices determine sales. In fact, manycustomers maintain famil iar and rel iablesources of supply even when lower prices areavailable elsewhere.

Ch. 3—Steel, Electronics, and Automobiles: Industrlal Structure ● 35

Photo credit: American Iron and Steel Institute

Slab casting of steel

From the standpoint of industry structure,steel has experienced a declining level of con-centration over the years. U.S. Steel, still thelargest producer, today accounts for barelymore than one-fifth of the domestic industry’ssales. Market share losses by the traditionalleaders have been taken partly by imports butpartly also by other domestic firms, includingnonintegrated producers and specialty steel-maker. These companies occupy marketniches for which the benefits of large-scaleoperation are less important.

Nonintegrated companies now account forsome 15 percent of industry shipments. TheOTA steel study estimates that such compa-nies may account for as much as 25 percentof domestic production by the end of the dec-

ade, provided adequate supplies of scrap andelectricity are available at reasonable costs.

Price is a critical determinant of compet-itive ability in steel, particularly for sales tofirms which themselves sell in highly compet-itive markets. Therefore, costs of productionare also crucial. American steelmaker faceboth problems and opportunities in their ef-forts to achieve low costs. On the positive sideis the close proximity of a large and diver-sified market. On the other hand, this coun-try’s technological advantages in steel havelargely eroded. Technology for making ironand steel is now well-diffused internationallyand available to all who can pay for it.

As might be expected for a commodity-likemarket, the industry engages in comparative-


ly little R&D. American firms tend to be moreactive in introducing product innovationssuch as dual-phase or microalloyed steelsthan in process innovations. In recent years,many of the latter have come from foreignfirms. U.S. Steel, for instance, recently con-cluded an agreement with Sumitomo MetalIndustries, a Japanese steelmaker, to pur-chase technology for computer-controlledproduction equipment.’ The industry alsorelies on suppliers of machinery and equip-ment for many process developments.

The OTA steel study concluded that a num-ber of significant innovations in making ironand steel might come into general use withinthe next 20 years. Moreover, many technolo-gies already available and proven have notbeen as widely adopted in the United Statesas in some other countries. Not only com-puterized process control , but also con-tinuous casting and a variety of improve-ments in basic oxygen steelmaking couldraise yields and productivity, as well as saveenergy, if they were more pervasive in theAmerican industry. Finding the capital re-quired to implement new technologies or tomodernize using existing technologies is amajor hurdle for most portions of the Ameri-can industry; the OTA steel study estimatescapital needs for modernization and expan-sion at $3 billion per year (in 1978 dollars)over the next 10 years, $5.3 billion per yearfor total capital requirements,

There are factors beyond technology andinvestment capital which are important forthe international production and sale of steel.Some work to the benefit of the U.S. industry,others to its detriment, An obvious benefit isthe low value-to-weight ratio of steel, makingit costly to ship, particularly overland; rel-atively little steel moves more than 300 milesfrom a domestic mill or port-of-entry. Importsmust bear significant transportation costs.

On the other hand, the industry’s largefixed capital requirements encourage “un-

“4J~panese Steel Maker to Computerize Production Lines ofU.S Steel Mill, ” Jupun Heport No. 97, Joint Publications Re-search Service 75611, May 11.1980, p, 48.

Photo credit American Iron and Steel Institute

Pouring hot metal

fair” pricing practices. Operating a millbelow capacity results in high unit costs.Often the problem is worse abroad than inthe United States because labor costs may bemore nearly fixed in the short term. This canarise because of lifetime employment (Ja-pan —although there is flexibility in Japaneselabor costs because of the widespread use ofcontract workers and also the large fractionof wages paid as bonuses) or a social andpolitical climate— often coupled with strongunions—that makes layoffs difficult (Europe).In any case, efforts of foreign firms to operateclose to capacity without cutting prices athome may lead to dumping of excess produc-tion overseas.’ This practice, together withthe industry’s cyclical demand pattern, hascreated difficult conditions for Americansteel firms, even though their average costs of

‘) Dumping refers to export sales at prices below thosecharged in the home market, or in some cases to sales at pricesbelow cost.

Ch. 3—Steel, Electronics, and Automobiles: Industrial Structure ● 37

production may be fully competitive, Therehave been more dumping cases brought in theUnited States in steel than in any other in-dustry. (The industry points out that othercountries shield their steel industries fromforeign competition and need not resort toantidumping measures. )

Despite intense price competition, the U.S.steel industry remains more profitable thanother major national steel industries. Butprofits have suffered compared to other sec-tors of the American economy, Returns onequity for the steel industry in the UnitedStates have been significantly below theaverage for all manufacturing in every yearbut one since 1958.

Finally, it is noteworthy that the steel in-dustry, in the United States and in other coun-

tries, has faced increased costs because ofgovernment regulation, In the United States,environmental controls and workplace healthand safety standards have raised costs ofproduction. Ironmaking and steelmaking havebeen inherently polluting of both air andwater; when Federal policy began to reflectenvironmental concerns, t h e b u r d e n o fchange fell heavily on this industry. The OTAsteel study found that meeting environmentaland workplace standards took about 17 per-cent of new investment in the industry duringthe 1970’s. To the extent that such regula-tions do not apply abroad, the domestic in-dustry is placed in a less competitive positionby virtue of public policy alone.

The Electronics IndustryAs pointed out previously, this study ad-

dresses only three sectors of the electronicsindustry: consumer electronics, semicon-ductors, and computers.

Consumer Electronics

Most of the products of this sector—e.g.,radios, TVs—are sold through wholesale/re-tail distribution channels, mainly to house-holds. A relatively high proportion of the con-sumer electronics products marketed in thiscountry now originate in the Far East, Video-cassette recorders (VCRs), for example, in-cluding those marketed under Americanbrand names, are produced almost exclusive-ly in Japan. Color TVs are assembled in theUnited States by both American and foreignfirms; regardless of the home of the parentfirm, many of the manufacturing operationsare carried out in regions with low laborcosts, primarily Mexico and the Far East. Inthe newest product categories, such as videodisks and home computers, American firmsare mounting strong efforts to maintain lead-ership. However, it is likely that in the longrun, even if they are successful, the more

labor-intensive production processes willmove overseas,

Continuing competitive strength in con-sumer electronics depends, much as for steel,on maintaining low prices in mature productsand staying abreast of technological develop-ments that might have major impacts on theindustry’s future direction. The latter includethe video disks and home computers men-tioned above: in the future, such potentialnew products as flat screen TVs and inte-grated home entertainment centers maybecome large markets.

The Orderly Marketing Agreements forcolor TVs negotiated by the U.S. Governmentand beginning in 1977 function as importquotas. They have protected U.S. labor tosome extent, and have also encouraged Jap-anese producers to locate plants here. In ef-fect, the weaker U.S. firms that were drivenfrom the market by import competition havebeen replaced by foreign firms manufactur-ing in the United States. The Japanese arebeing followed to the United States by com-panies based in Taiwan and South Korea.


Photo credit RCA

Final assembly of color TVs

While the largest U.S. firms have retainedmarket share, the real questions deal withfuture products. Will these be developed andmanufactured by American firms, or will for-eign manufacturers capture the market asthey did for VCRs? Will the United Statesbecome simply a site for assembly plants,with management control and R&D remainingoverseas? Given the low profit margins in thissector, the high risks, and the past history ofstrong import competition in products basedon U.S. technology, the domestic consumerelectronics industry may, like the steel in-dustry, have trouble f inding the capitalnecessary to compete.

Retail distribution systems, and productquali ty and rel iabi l i ty, also affect com-petitiveness. Consumer electronics productsare sold through a wide variety of retailoutlets. Historically, this meant that manu-

facturers attempting to establish and main-tain recognized brand names paid close at-tention to distribution. Retailers not onlywere responsible for product sales, but also,and perhaps more importantly, for aftersalesservicing.

This pattern has changed in recent years,partly as a result of imports, and partly be-cause of improved product quality and relia-bility. Importers did not have extensive retaildistribution networks. They countered by de-veloping new marketing channels (e. g., dis-count stores) and— to avoid the need for fre-quent servicing— by emphasizing reliable,trouble-free products. As one result, productquality and reliability have also improved fordomestic products. Higher reliability hasdiminished the role once played by retailservicing, and greatly expanded the numberof possible retail outlets.

Semiconductors

Solid-state TVs are only one of the manynear-revolutionary effects of semiconductortechnology on the rest of the electronics in-dustry. Many electronics products and sys-tems now in widespread use would be quiteimpossible without semiconductors. More-over, semiconductors are also having pro-found impacts on the products of many in-dustries outside of electronics.

The semiconductor industry includesscores of firms, many specializing in narrowmarket segments; there are thousands of dif-ferent types of semiconductors capable ofperforming many different circuit functions.Perhaps the most important feature for inter-national competitiveness—impinging on allother aspects— is the technology itself, andits rate of change. Future applications ofsemiconductors in industries ranging fromcommunications systems to home applianceswill dwarf present accomplishments, if onlybecause applications always lag the availa-bility of technology; advances in semiconduc-tor devices could stop now and the stream ofnew applications would continue basicallyunhindered for several years, Of course newapplications also suggest new needs. The


Photo credit Westinghouse

Machine dictation/word processing center

microprocessor is a classic case—a productrapidly adapted to uses unforeseen by its de-velopers, these new uses in turn spawningnew microprocessor designs. (Microproces-sors are ICS containing a complete computerprocessing unit on a single chip. )

Another important aspect of the semicon-ductor industry is the continuing decreaseover time in manufacturing costs for equiva-lent circuit functions. These cost reductionshave two basic causes. First, the ability topack more and more circuit elements onto asingle chip has dramatically reduced the costper function— e.g., per logic gate or per bit ofcomputer memory. As a result, the total costof the circuitry for performing a given taskhas fallen rapidly. This has been a majorcause of the decreases in the cost of comput-ing power over the past 20 years—by a factorof more than a hundred since the mid-1950’s. 6

It has also made possible many applicationsthat previously would have been impossible,impractical, or simply too expensive.

‘ f I 1,. ( lilS\\ (’II , (’t f} 1,, “‘[1[1S11 I’f>(’tllloli)~\’,“‘ ~;orll~~[l f(’1’, vol. 11,

S(q)l(m)tx’r 197[1, p. 10.

A second reason for cost decreases is theso-called learning curve phenomenon. Thecosts of the chips themselves drop as more ofa given type are made, both from the experi-ence gained in making them and becausehigher volumes justify more efficient process-ing equipment. As a firm’s cumulative pro-duction of a given device goes up, the yield—the percentage of chips that meet specifica-tions—also tends to go up, and costs declinerapidly.

The promise of cost savings through ex-perience is so well embedded in the indus-try’s history that prices of new semiconduc-tor devices have frequently been establishedwith future savings in mind. That is, produc-ers of a new device may set prices belowtheir current manufacturing costs, confidentthat costs will fall as higher volumes arereached. One of the purposes of such a for-ward pricing strategy is to increase sales andachieve high production volumes as quickly

Photo credit National,

A silicon wafer for making ICS being handledwith a vacuum penciI

40 ● U .S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

as possible. The advantages accruing to inno-vators first on the market with new productsexplain much of the emphasis the semicon-ductor industry places on R&D.

In many firms, however, this R&D is con-fined almost exclusively to process engineer-ing and circuit design. Basic research is lim-ited to a few of the larger manufacturers,some of which—such as Western Electric(Bell Laboratories) and IBM–do not sellsemiconductors on the open market, makingthem only for internal use.

Possibly because of its history of aggres-sive pricing combined with heavy R&D costs,the semiconductor industry has not been no-tably profitable, particularly in terms ofreturn on sales. Nor does the dollar volume ofsales keep pace with the level of physical out-put. As a result, internally generated cashflows have often been inadequate to financethe rapid plant expansions needed to servegrowing markets. This problem has latelybeen exacerbated because the newest gener-ations of ICS demand a considerably higherlevel of capital expenditure for design andmanufacture. Capital requirements per dol-lar of sales are said to have risen 50 percentbetween 1970 and 1980, ’ An upward shift incapital needs is common as industries ma-ture, but in semiconductors the capital re-quirements are only partly for new produc-tion equipment. Additional funds are neededbecause of the higher level of technology it-self—particularly the rapidly escalat ingcosts of circuit design as ICS approach andexceed 100,000 elements per chip.

There is another feature of the industryworth exploring briefly, one common to indus-tries early in their evolutionary histories.Semiconductor firms, especially the largerones, are attempting to integrate forward intofinal products. Much of the incentive resultsfrom a natural desire to internalize more ofthe end-product value-added. Thus, semicon-ductor firms have, at various times, tried to

J. B. Brinton. . . Chip Makers to Shrug off Recession,’”E]ectronics, Apr. 10, 1980, p. 42.

integrate forward into consumer productssuch as electronic watches and calculators,and also into computers.

There are strategic reasons for integrationas well. End-product manufacture offers di-versification and a measure of protectionagainst the possibility of customers integrat-ing backwards, In fact, backward integra-tion—i, e., end-product manufacturers mak-ing their own semiconductors—has also beentaking place quite rapidly, again primarily forstrategic reasons. Firms whose productsrange from electronic toys and games tomainframe computers, as well as diversifiedindustrial concerns, have been adding semi-conductor capability, both to gain some meas-ure of stability in supply, and to have theability to design and produce unique deviceswhich might be required for their own prod-ucts but not in large enough quantities to at-tract merchant firms.

As a result, the structure of the sector ischanging rapidly. Much of the spectacularsuccess of the semiconductor industry in theUnited States has been built on innovativeproducts and processes coming from inde-pendent firms —often small and entrepre-neurial—serving the merchant market, Thisis just the type of firm that has seemed to bedisappearing. It remains to be seen whetherthe structural changes taking place in theU.S. industry will result in a slackening of thepace of innovation and in competitiveness.

The major determinants of competitiveability in semiconductors are the capacity toinnovate, and, as products mature, to manu-facture at low cost. Neither of these demandswill change in the foreseeable future, Main-taining competitiveness—interna tionally ordomestical ly—will continue to require amuch higher proportion of technically skilledpersonnel such as engineers than is true formost other industries, In addition to high-costtechnical professionals, semiconductor firmsneed low-cost assembly labor to be competi-tive. As a result, virtually all the larger firmshave transferred labor-intensive operationsoverseas.

Ch. 3—Steel, Electronics, and Automobiles: Industrial Structure ● 4 1

Beyond these two requirements—innova-tive capability and low-cost manufacture—isanother factor important to competitiveness:product quality and reliability. In this, semi-conductors are more like consumer electron-ics products than steel. While it is not quitetrue that all steel made to the same specifica-tion is the same, there are certainly largervariations in quality and reliability for semi-conductors than for many other commodity-like products. Relative levels of quality andreliability y of Japanese and American ICS havebeen hotly debated. This issue, which de-pends on both process and product tech-nologies—the latter because some ICS canbe designed to tolerate flaws and partialfailures—is discussed in more detail in chap-ter 5,

Quality and reliability are important be-cause they affect costs to purchasers, Othercost factors which are important in some in-dustries are only minor concerns for semicon-ductors. For example, the value-to-weight ra-tio of semiconductors is among the highest ofall manufactured products, Consequently,transportation costs are insignificant. More-over, the industry is environmentally clean sothat, unlike the steel industry, costs of com-plying with environmental and workplacestandards have not been burdensome.

Computers

While the mainframe and minicomputersegments of the computer industry seem atthe moment structurally stable, other por-tions are changing rapidly. Microcomputerfirms—those building machines based on mi-croprocessors-have experienced a shakeoutover the last few years associated with atransition from a hobbyist market to onedominated by small business applications. Anumber of pioneering microcomputer firmshave disappeared through bankruptcy or ac-quisition. The peripherals sector—companiesmaking auxiliary storage, terminals, andrelated equipment— is also volatile. Further-more, software has become an important en-trepreneurial area. Even in mainframes, theincius try structure has not been static, as

plug-compatible manufacturers have enteredthe market—and in some cases, left it again.(Plug-compatible machines are interchang-eable with equipment manufactured by IBM.but typically offer lower prices and/or higherperformance. )

IBM is the largest manufacturer of main-frame computers—with manufacturing andsales operations around the world, It has asubstantial market share in virtually everycountry in which it sells. Along with otherAmerican firms, IBM has dominated largecomputers worldwide since the inception ofthe industry in the 1950’s, In fact, the com-puter industries of almost every country(Japan and Great Britain are the major excep-tions) have had at their cores the overseassubsidiaries of American computer firms.over the years, the U.S. computer industryhas become the archetype of the high-technol-ogy industry for which this country has beenenvied.

While some new entrants into the com-puter industry— namely the manufacturers ofplug-compatible mainframes—have chosen tocompete head-on with IBM, the manufactur-ers of micros and minis have, in effect, pio-neered market niches left vacant by the main-frame companies, Increasingly, minicomput-ers are providing all the performance neededfor particular applications. With markets forboth plug-compatible and small machinesbeing aggressively pursued by a varie!y offirms—including a number of successfulsemiconductor manufacturers—the struc-ture of the computer industry will continue tochange.

The market structure for computers re-mains simple compared with products suchas consumer electronics or automobiles. Mostcomputer manufacturers sell directly to finalusers, generally employing their own salesforces, Nonetheless, change is taking placehere as well. Smaller computers intended foruse in homes or businesses are now sold atthe retail level. (Home computers can also beconsidered part of the consumer electronicssector. ) Regardless of the type of computer—

42 ● U.S. InduStrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

O * . * -8

Photo cred(l IBM Corp

IBM 4341 Computer System

micro, mini, or mainframe— ancillary serv- the costs of such services are included in theices such as software development, and main- price of the computer system, making directtenance of both hardware and software, are price comparisons between competing prod-important for market acceptance. Sometimes ucts difficult.

The Automobile IndustryBecause of its size alone, the motor vehicle more are employed in sales and service ac-

industry occupies a unique position in the tivities.*economy of the United States, and for that Despite its size, the industry is one of thematter the world. The industry is responsible Nation’s (and the world’s) more concen-for the employment of more than 2 million —.people in this country in manufacturing ‘{’r~~ U.S. Autfmlof]ilc ln{ius(ry, 1980: Report [{) the Presi(ient

fr(m] the Swret(]ry of ‘1’r(lns~~f)rtf](i~~n (Washington, D.c.: I)e-alone, including supplier firms making com- partment of ‘1’r:lll~port[]tion,” I)OT-P-1O-8I-O2, Jiinuar} 1981),ponent parts and accessories. Several million P. 84.


trated. One company, General Motors, manu-factures over half of the cars and trucks pro-duced in the United States; virtually all of theremainder are made by two other firms, Fordand Chrysler. Although a foreign competitor,Volkswagen, has recently begun assemblyhere, about 30 percent of its value-added istied to imports of components from abroad;when its U.S. assembly plant is operating,Honda will probably also import major sub-assemblies such as engines.

Concentration in the automobile industryon a global basis is nonetheless decreasing,largely because of the rapid growth ofJapanese automakers. These firms were in-significant in the early postwar period buthave been gaining market share in many

parts of the world. Imports have had the ef-fect of reconcentrating the U.S. market.

Both Japanese and European automakerstend to have a greater share of their sales inmarkets outside their home countries than doU.S. firms. Whether through subsidiaries orexports, one-half or more of the sales of mostforeign firms occur outside their domesticmarkets. For American automakers, the pro-portion is generally one-third or less. There-fore U.S. firms have a greater dependence onhome market sales than do foreign manufac-turers.

In the United States, most automobiles arepurchased as replacements for vehicles al-ready in the fleet, which now numbers well


over 100 million. For the typical purchaser,buying a car is a substantial outlay of funds;two-thirds buy on credit, Thus, the availabili-ty and cost of financing is an important factorin sales. Furthermore, most buyers can deferpurchase of an automobile, new or used, sim-ply by keeping the old one longer. Therefore,when economic conditions appear uncertain,and when interest rates are high, the marketfor automobiles is drastically affected, Muchof the precipitous decline in sales of Ameri-can-made cars during 1980 can be attributedto such factors. Returns on equity of U.S.automakers have generally been comparableto other U.S. manufacturing industries, buttend to drop more in recession years such as1974-75 or 1980,

The producers of finished vehicles by nomeans constitute the entire industry. Autosare assembled from components—some madeinternally and some purchased from otherfirms, While all manufacturers make theirown bodies, and most build the engines anddrivetrains, American Motors buys its trans-missions from Borg-Warner and Chrysleruses Volkswagen engines in some models. Onrare occasions, manufacturers have inte-grated even further upstream: Ford operatesa steel mill; Chrysler makes glass. For manyother components, U.S. automobile com-panies rely on some 50,000 supplier firms.Often the automaker will produce only a cer-tain fraction of its needs for a particularpart, purchasing the rest outside. This “tap-ered vertical integration” allows the com-pany to achieve scale economies while shift-ing the risk of variable demand to others. Val-ue-added by the automakers is highest for GM—around 50 percent —lowest for Chryslerand AMC—3O percent or less.q

‘R. A, Leone, W. ]. Abernathy, S. P. Bradley, and ]. A.Hunker, *’Regulation and Techno]ogi(:al Innovation in the Auto-mobile Industry, ” final rep(lrt to 0’I_A, (x)ntract No. 933-3800,0,hfay 1980, p. 2-55.

Automobile manufacturers sell through ex-tensive networks of independent franchiseddealers. Financially sound and loyal dealersare of great importance to the automakers,who also depend on them to provide serviceand used car sales.

Market strategies of U.S. auto manufactur-ers have traditionally stressed upgrading ofmodels and optional equipment, which offeropportunities to increase profits. Differen-tiating basic models through design features,and standard equipment, along with periodicstyling changes, were cornerstones of indus-try marketing for decades, Recently, year-to-year styling changes have been deempha-sized. Cars now remain in production for 10years or more with little alteration. In the1970’s, the variety of products represented inthe marketplace nonetheless increased. Notonly did domest ic firms introduce newmodels, and imports proliferate, but lighttrucks and vans became more important aspassenger vehicles.

Government regulations—concerned withsafety, exhaust emissions, and fuel econ-omy—have increasingly constrained the de-signs of vehicles sold in the U.S. market. Thepace of technological change has acceleratedin the industry—partly as a result of regula-tions, partly as a result of the demands of themarketplace. Automobiles built in the UnitedStates are evolving toward designs more likethose in the rest of the world.

Regulatory uncertainty and demandingtimetables for new standards have createddifficult conditions for all automakers sellingin the United States, Domestic firms havebeen affected much more heavily than foreignproducers by regulatory and market demandsfor high fuel economy because most importshave been small cars with good gas mileage.Large investments are needed for U.S. auto-makers to redesign and retool their fleets tomeet the new conditions.

Ch. 3—Steel, Electronics, and Automobiles Industrial Structure ● 4 5

46 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Summary and ConclusionsSteel, electronics, and automobiles differ

in technological levels, markets, and industrystructures. The more advanced process tech-nologies in any of the industries can be quitedemanding, and might well be called “hightechnology, ” This is as true of computer-con-trolled rolling mills or integrated manufactur-ing systems for automatic transmissions as itis for the wafer fabrication lines used tomake large-scale integrated circuits,

There is more variation in levels of producttechnologies. While most steel products arecommodity items— and would be considered“low technology” compared to, for instance,ae rospace alloys— electronics virtuallydefines the high-technology industry. Never-theless, product technologies for TVs exhibita pattern of relatively routine developmentand refinement which is quite different fromthe rapid advances characteristic of semicon-ductors or computers. For many years, tech-nological change in automobiles was similarto that in TVs-a matter of continued refine-ment but few major innovations. In many re-spects, the turn to smaller cars making moreefficient use of both fuel and interior space isno more than an acceleration of this processof refinement. At the same time, there is nowmuch greater technological variety in themarketplace than in the recent past. Front-wheel drive, electronic engine controls, anddiesel engines are examples. While notalways new, these have certainly increasedthe diversity of technologies represented inthe U.S. automobile fleet.

In all three industries, manufacturing costsare important. But for many electronics prod-ucts, and for automobiles, product character-istics and consumer appeal—whether em-bracing real differences in performance (as

indicated by computing power or fuel econ-omy) or relatively superficial variations—aremajor determining factors of the competitive-ness of individual firms, Such characteristicsinclude product quality—both the reality andthe perception— as well as design. Thus, thecompetitiveness of U.S. firms in all three in-dustries depends on a complex of factorsranging from technological capability to mar-keting skills and management.

Structural change is taking place in allthree industries, In steel, integrated firms areshutting down less efficient mills as noninte-grated firms increase their market share. Inconsumer electronics, the changes are direct-ly associated with foreign competition. Thiscompetition came first from imports, thenfrom foreign firms assembling their productsin the United States, The semiconductor sec-tor is experiencing acquisitions and verticalintegration. Product mixes are changing inboth computers and automobiles.

Structural change has been only one of theforces creating large capital needs in theseindustries, In steel, capital investment is re-quired to meet environmental regulations, aswell as workplace health and safety stand-ards, and to replace outdated plant andequipment. In semiconductors, expansion ofdemand is outstripping the abilities of somefirms to raise funds for R&D and new capitalinvestment. Automobi le compan ies a respending large sums both to develop newmodels and to purchase the plant and equip-ment to make them. The patterns and out-comes of these changes will have importanteffects on the competitive futures of all threeU.S. industries, topics which are addressed inlater chapters.

chapter 3 steel, electronics, and automobiles: industrial

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