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6 Turning Point The maturation of the computer sector and the escalation of foreign competi- tion place the sector at a turning point. U.S. semiconductor manufacturers and their suppliers face the prospect of continuing losses of market share to foreign firms. In turn, manufacturers of computers and related equipment find their base of domestic support eroding as competitors strengthen theirs. For now, the nation's software, services, and systems-integration industries sit atop global markets, but given events in other parts of the sector and developments abroad, one feels compelled to ask, For how long? Building on strengths, overcoming existing problems, and averting new ones require "a massive change in thinking," noted AT&T's Lucky. "I am left with the sense that we have a consensus on what is wrong," he said, reflecting on conditions in the hardware industry, "but no collective will to do anything about it." The history of numerous other industries and the observations of all colloqui- um participants underscore how difficult significant change will be to achieve. As Harvard's Rosenbloom described it, "ET]here is something systematically vulnerable about the way American companies have built positions in industrial markets and have tried to sustain dominance in those markets." The computer sector is saddled with perceptions from its earlier years that may no longer be appropriate and that may motivate a complacency among pol- icymakers that is unwarranted, in view of current realities. For example, "We have become slaves to the image of the entrepreneur shaping technology the garage computer or spreadsheet software package," warned Belady of MCC. "Unfortunately, many software projects, especially those having considerable 64

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TURNING POINT 65 risk and which have lengthy development periods, cannot emerge from such an environment. Bits and pieces from the academic side have difficulty getting integrated. The massive efforts aiming at improved tools and techniques for complex system design and sustained by long-term stable funding at fJapanese] companies . . . have few counterparts in the United States." The U.S. computer sector is too large and too complex to link the fortunes of each its three major industry groups hardware, software, and services and sys- tems integration in a dominolike fashion. Yet as representatives from each industry group pointed out at the colloquium, there are strategic dependencies common to all. And these dependencies are likely to grow as technology, the terms of competition, and the structure of the sector change at a rapid rate, one of the hallmarks of the sector. Therefore troubles in one industry can have implications for all and, as computing bones more pervasive, for the entire economy. AN ASSET AT RISK The woes of the U.S. semiconductor and semiconductor-manufacturing- equipment industries focus concern on another major chunk of the hardware industry, computer manufacturers. If U.S. computer manufacturers were to sur- render their leading position in global markets, would the consequences be any worse than those wrought by market declines in steel or other mature indus- tries? If computer manufacturing is indeed becoming a mature industry, as Hambrecht and others maintained, might it not be more efficient to use comput- ers that are manufactured elsewhere, freeing up resources for production of higher-value-added goods and services? These questions are not uncommon. "There are a lot of people who are still not convinced that there is a prob- lem that manufacturing needs to be preserved~nd those people are in influ- ential positions, making decisions in the government," said John E. McPhee, director of the Office of Computers and Business Equipment at the Department of Commerce. Colloquium participants shared the view that a narrow economic analysis focusing on comparative production efficiencies across countries ignores the rationale for a more strategic perspective. Computer development and manu- facturing are not simply ends in themselves- although they are nontrivial ends in terms of their contribution to the GNP, the balance of trade, employment, and other conventional measures. Rather, they are intricately linked both to the development of other computer-related products, including software and ser- vices as well as other types of hardware, and to advances in the use of computer technology. The use of computers contributes increasingly to the competitive- ness of virtually all industries. In short, computers themselves are an engine of technological change, a prerequisite for national growth in a global economy. The special and increasingly intrinsic value of computer-related technologies was captured by Perlis of Yale.

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66 KEEPING THE U.S. COMPUTER INDUSTRY COhIPETITIVE The computer is a tool of thought and function. It helps us model and it itself is modeled. As an agent of control it permits us to interact with nature at all levels of granularity from the stars to the quarks. The computer is crucial in our effort to escape from the biological polyhedron that evolution has consigned us to: It is crucial in the operations that extend the temperature range, the atmospheric pres- sures, the years of life, the atmosphere, and the health that are required for us to continue to exist. We must never forget that we are at the beginning of the Computer Age, so that exploration of its role must continue into the foreseeable future. Thus the physical form of the computer may change, but our recognition of and dependence on the abstract concept "computation" will continue to deepen. It is inconceivable that we could function without the computer. Of course we must not worship the machine as an idol but we must domesticate it so that it serves bow as a good and as a performer. The computer must be expected to play a role in almost every human activity. It is because of the growing pervasiveness of computing, argued Perlis and oth- ers, that we cannot yield a leadership role complacently. "For the computer industry," commented Perlis, "yielding control to foreign concerns will have an impact in the intellectual sense that yielding agriculture would have in the bio- logical sense." Echoed Teece from the University of California at Berkeley, "The computer industry generates significant positive technological and market demand spillovers to other industries. Moreover, for a nation to capture these spillovers, it is necessary to have a domestic computer industry." Despite the great progress that has been made in making computers easier to use and finding new ways to use them, colloquium participants acknowledged that businesses and individuals are still learning to use computers. The growth of the systems-integration business and other services reflects some of the diffi- culties users have experienced. Taking advantage of distributed computing requires "thinking outside the box and beyond the obvious solutions," Price Waterhouse's Turner observed. New, more productive ways of doing busi- ness-perhaps revolutionary, when compared with the mechanized approaches to computing so common today-are likely to result. Indeed, computers and their convergence with telecommunications equipment and other technologies present the opportunity to create new businesses and even new industries. In education, the arts, and virtually every other field of endeavor, computers and software are extensions not only of human abilities, but also of the human imagination. This is a "world of restless technology," said Yale's Perlis, and the computer is likely to insinuate itself into most societal and economic affairs. No one, he added, can "predict with any accuracy whatsoever what the role of the computer will be in our lives or our children's lives.... One thing we can very well be sure of is [that] it will be far different from what it is loony." Although the United States does not have a monopoly on new ideas, it is a prodigious source, demonstrated best perhaps by the pioneering innovations that launched the Computer Revolution and the Information Age. A healthy computer

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TURNING POINT 67 sector-one that does not rely on imported hardware and software-will be crit- ical to generating and applying the new ideas that set the stage for future tech- nological and economic advances. A computer sector that is healthier than the one that now exists will be essential for U.S. firms and the nation as a whole. SEWING A COURSE FOR IMPROVEMENT Colloquium participants expressed general agreement on where remedial actions are needed, differing principally on how to resolve issues in the area of standardization. They were unanimous about the need for action; as Ferguson put it, "The time is fast approaching, I think, when we really have to mobilize." The agenda emerging from the colloquium includes the following key areas . . . requiring action. Cooperation Signs that the computer sector has begun to mobilize are appearing. Most striking, perhaps, is the effort to establish U.S. Memories, Inc., a joint DRAM- manufactunng facility funded by hardware industry firms that was announced in June of 1989. The production facility, if successfully launched, would work closely with SEMATECH, the privately supported and government-funded con- sortium that is developing methods and equipment for manufacturing advanced integrated circuits. Such novel cooperative arrangements represent a fundamen- tal break from past ways of doing business, but more are likely to be needed, many colloquium participants believed: "We are learning about cooperation," Ferguson noted, "but Japanese firms understand it already." Teece, of the University of California, also noted the importance of coopera- tion and in his writings has stressed the need to form alliances in accordance with shifting corporate and market boundaries. As the digital technologies once used almost exclusively in computers continue to spread to telecommunications, consumer electronics, and other areas, new interfirm relationships will be required to harness the manufacturing, marketing, and other capabilities required to compete in global markets. The Role of Government "We need government support," said Helter of EDS, "but let me also point out that we need to support the government." The nature of this now-essential relationship, which also includes universities, has been slow to materialize. A major obstacle is the fragmented structure of the federal government and indus- try. Given the environment in which computer-related industries operate, what does the computer sector need from government? According to several comput

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68 KEEPING THE U.S. COMPUTER INDUSTRY COMPETITIVE er sector representatives, the answer is likely to involve creating conditions that help businesses and government to adjust to competition in a global economy. "Whether we succeed or fail," said John Doyle of Hewlett Packard, "depends on how we manage our businesses and how the government manages the busi- ness environment." Most colloquium participants saw the government as playing an enabling role, as setting up a policy and regulatory framework that accommodates the flexibility needed to compete in global markets and fosters a long-term strategic view of competitive issues. Taking this argument further, Paul Turner, director of research at Price Waterhouse Technology Center, cautioned against an active, protectionist pos- ture. "Like it or not," he pointed out, "we are now part of a global economy with complex interdependencies that are ill understood. In such circumstances it is surely wise to recall the obligation of physician to patient expressed by Hippocrates: 'First do no harm."' In areas such as education and tax and trade policy, all of which are vitally important to the computer sector, the government must play a lead role. According to many participants, that leadership responsibility should also extend to initiatives designed to create an infrastructure for the Information Age, including a national computer network. With the aid of industry, govern- ment should be addressing what infrastructural elements are needed and deter- mining which elements are likely to emerge through the marketplace and which will require federal or state incentives, Teece advised. Responsibility for other initiatives deemed critical to the performance of the computer sector, Teece also recommended, should rest with private industry, assisted at times by government. "If there should be an industrial policy," he said, "it should be what I call a private industrial policy, led by industry, with industry dollars, perhaps supplemented by a small amount of government dol- lars." Manufacturing Speaker after speaker emphasized the importance of competence in manufac- turing, reinforcing the conclusions reached in many examinations of the nation's competitiveness. It is an acknowledged fact that foreign competitors that have eclipsed U.S. firms in many domestic and international markets have achieved their market-leading positions on the strength of their manufacturing capabili- ties. The ability of the hardware firms to recover market share and to fend off challenges in product areas they still dominate will be determined largely by their ability to make high-quality products efficiently and to insert innovations quickly into their product designs and manufacturing processes. "The primary ingredient for success in the next decade," said IBM's Toole, "is speed speed in development and speed in delivering derivative products of

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TURNING POINT 69 very high quality to the marketplace. To win, one needs to be competitive in all areas competitive designs; well-trained employees; a strong infrastructure of tools, materials, and components; and much-improved manufacturing prowess." Unfortunately, the means to upgrade manufacturing capabilities in the com- puter sector are diminishing. "The first problem that we face collectively," Ferguson maintained, "tis the declining capabilities in a] number of base tech- nologies, component technologies, and component markets [that] are quite criti- cal to the ability of a downstream systems firm to succeed in the computer industry." Standards Perhaps the most contentious issue discussed at the colloquium, standardiza- tion is gaining international momentum, and the U.S. computer sector must reckon with it. One way to view standards was characterized by Teece. 'The whole role of standards is one that cannot be underestimated," he said, "because control of standards confers protections akin to patents." The discussion about standards should not revolve around whether there should be standards or not, according to Teece. '`The point to recognize is that if one controls standards, one can turn that into a competitive advantage." Morris and others noted that the standards game is international and that "uni- versal international" standards can place U.S. vendors at a disadvantage. Consequently, harmonizing the actions of all U.S. parties individual firms, the computer sector, and the government is necessary. The challenge may be even greater than the colloquium's discussion of tech- nical aspects suggests. The United States is in some sense outnumbered in international standards arenas, because each country effectively has an equal vote. Consequently, innovations, leadership, and early deployment in this coun- try can be vitiated by politics. The current one-county/one-vote system could be used by regions to protect local businesses by promoting a series of mutually incompatible standards adopted in individual regions, although this would ulti- mately be to the disadvantage of all involved, given the benefits of standardiza- tion discussed elsewhere in this report. Education Concerns about education ranged from the sector's needs for people with sci- entific and engineering talent to the broader need for education to support more and better uses of computer-related technologies. The government has tradi- tionally been crucial in providing support for the education of the country's computer scientists and engineers. The results have been extremely positive, according to Stardent's Bell, who maintained, "I think we [the United States] have the most creative engineers. I think we have the finest scientists in com

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70 KEEPING THE U.S. COMPUTER INDUSTRY COMPETITIVE purer science going." However, in comparison to the level of effort other coun- tries are now expending, he said, "we do have a training problem." The nation cannot afford to carry the burden of 25 percent of its high-school- age youth dropping out, according to Helter, who argued that there is a mis- match between education and other institutions that compose our economic infrastructure and the evolving economy: "Most of the institutions of the U.S. infrastructure were created to administer the Industrial Age society" and may now be in some respects obsolete. Obviously, the interests of the computer sector are affected by this national problem. "For marketing to succeed," Perlis said, "there has to be a market.... Not only do we need an educated work force to be able to perform jobs, but we need an educated force that wants to know fend is] interested in essentially expanding [its] own knowledge." In the not-so-distant-future, in Perlis' view, computers and their applications will be integral to virtually every effort intend- ed to extend one's personal knowledge. Widespread and imaginative use of computers in education can help to better equip tomorrow's adults for contributing to U.S. society, several participants suggested. In turn, new, more effective uses of computers may evolve from the familiarity with the technology that is cultivated through education and training. The future industrial competitiveness of the entire nation, one speaker noted, may largely be determined by how effectively the general population uses com- puters. CLOSING OBSERVATIONS The agenda that emerges from the colloquium implies the need for sustained follow-up measures by industry, government, and universities, acting together and independently. The nature of the necessary interaction, as well as the mech- anisms and the extent of cooperation, must be defined through a continuing dia- logue that has only just begun. From this dialogue, perhaps, will come the nec- essary leadership to ensure that the United States responds effectively to the strategic challenges mounted by foreign competitors. Fragmented, piecemeal responses will not be sufficient. One clear lesson of the 1980s is that simply invoking the need for leadership is not enough. For government and industry, incremental tinkering at the margin will not be enough, either. The Computer Science and Technology Board will examine several of the issues raised in this colloquium in more detail, and it urges decisionmakers in industry, government, and academia to do so as well.