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APPENDIX A Industry Technology Profiles I. Aircraft Engine Industry II. III. IV. V. VI. VII. Electrical Equipment and Power Systems Industry VIII. Semiconductor Industry.................................... Automotive Industry. 93 .98 Biotechnology . ~103 Chemical Process Industry 110 Computer Fainter Industry. 114 119 ...... 123 134 Construction Industry 91

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I Aircraft Engine Industry BRIAN H. RowE The current worldwide aircraft engine industry is dominated by three companies: GE Aircraft Engines and Pratt & Whitney in the United States, and Rolls Royce in the United Kingdom. Each of these companies is capa- ble of producing a full line of state-of-the-art engines ranging from small (less than 1,000 horsepower) turboprops/turboshafts to high-performance afterburning military fighter engines to large (more than 20,000 pounds of thrust) high-bypass turbofans. It is in this last category, the high-bypass tur- bofan used on large commercial transport aircraft, that most of the activity related to the so-called globalization of technology has taken place. Between the three full-line suppliers and the vast network of subcontrac- tors and component vendors there exists a layer of second-tier players (Table Am. These consist of several U.S. and foreign companies who have limited whole-engine capability, that is, who are capable of designing, developing, manufacturing, selling, and supporting aircraft gas turbine engines, or major portions thereof, in some but not all segments of the mar- ket. The industry structure Is heavily Influenced by an extremely long prod- uct life cycle. The initial version of a new engine takes four to five years to develop from a well-established technology base, and an engine program, once development has begun, may span more than 30 years before the last engines produced are taken out of service. During this period, the manufac- turer usually introduces several major improvements to the engine model family, secures additional applications for derivative versions of the original design, and enjoys a revenue stream from replacement parts that may equal the sales volume of the original engines. . . .. . ~ 93

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94 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY TABLE A-1 Aircraft Gas Turbine Engine Industry Participants UNl lL;D STATES EUROPE JAPAN Rolls-Royce Prime Manufacturers Second-Tier Players GE Pratt & Whitney Garrett Allison Textron Williams Teledyne SNECMA MTU Volvo Fiat Turbomeca IHI Kit MHI As engine systems become more complex and expensive, the success of an engine program has become increasingly dependent on product support. Once an engine is put in operation, customers expect that the cause of ser- vice problems will be quickly identified and that redesigned parts will be readily available. Also, because growth versions of aircraft are usually heavier and have more demanding performance requirements, the engine manufacturer must be capable of improving the original design to produce more thrust without sacrificing interchangeability with earlier models. Together, these growth and reliability requirements dictate that a relatively high level of R&D spending continue well beyond initial certification and throughout virtually the entire production life of the engine. In the past decade, alliances have been established between the prime manufacturers and the second-tier companies, and among the second-tier companies themselves, to share technology, reduce fixed costs, and increase market access. Typically, one of the prime manufacturers establishes a long-term business relationship with one or more of the second-tier compa- nies to develop a new engine, which is then sold in regions or market seg- ments where the partners enjoy some type of competitive advantage. At a minimum, in return for providing some of the requisite development fund- ing or effort, these second-tier partners are entitled to manufacture some of the major components or subassemblies of the engine, both for new whole engines and for the spare parts, which are replaced throughout the service life of the engine. The industry's competitive intensity has been widely publicized; it has resulted in lower product cost to the customer, more frequent improvements in product performance and reliability, and shorter intervals between major advances in technology. The alliances formed between the prime manufac- turers and the second-tier companies help to reduce the growing financial

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INDUSTRY PROFILES 95 burden associated with increasing worldwide competition without jeopar- dizing their technology leadership. For GE and Pratt & Whitney, the direction and pace at which critical technologies advance is heavily influenced by U.S. government require- ments for both applied research and specific military engine development programs. Both companies have engineering functions that spend approxi- mately $1 billion on research and development annually, roughly divided between military (government-funded) and commercial (company-funded) applications. In addition to being the principal source of technology funds, the U.S. government imposes tight export controls on what are deemed to be the most advanced technologies, not necessarily limited to those contained in the latest military systems. Restrictions imposed by security clearance requirements for personnel working on classified military programs practi- cally exclude using engineers who are foreign nationals. A government pol- icy requiring that dependence on foreign sources for raw materials or fin- ished parts be kept to a minimum is somewhat more flexible. To remain competitive, each of the U.S. prime manufacturers maintains its own full set of materials and the design and manufacturing process tech- nologies that are needed for developing and producing new engines across the full product spectrum. Except as required by the U.S. government in case of dual production sourcing, there is no sharing or exchange of tech- nology between the two companies, and yet both companies are viewed as being essentially at technical parity, as is Rolls-Royce. Consequently, the strongest competitive advantage accrues from either having the earliest availability or being able to maintain a sole-source position in a successful aircraft program. Even though finished parts supplied by vendors constitute roughly 40 percent of the typical engine's manufacturing cost, the prime manufacturers perform the total design function on these parts and require their suppliers to adhere to the same stringent manufacturing standards as exist in the prime manufacturers' own factories. However, the industry's sourcing structure for purchased parts does little to isolate one prime manufacturer's process technology from the other's: 24 of GE's 25 largest suppliers also sell simi- lar components to Pratt & Whitney, and several of the second-tier compa- nies have alliances with more than one of the prime manufacturers. In a major engine program, the role of the second-tier companies lies somewhere between the prime manufacturers and the vendor network of fin- ished parts suppliers. In return for incurring a portion of the development expense, the second-tier partners usually receive the technology needed to use the latest machines, production tooling, and process technology, which enable them to produce complex parts from what are generally unique and difh~cult-to-work materials. In those cooperative agreements in which the

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96 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY second-tier partners are also responsible for the design of the parts they will produce, there is some transfer of limited aerothermodynamic and structural design technology from the prime manufacturer. However, the prime manu- facturer is able to prevent any erosion of his technology leadership by retaining control over the design of those engine components that represent the greatest technical risk, and the integration of all component designs into the total engine system. In addition to market access, the second-tier partner gains current, component-specific technology (mainly in manufacturing processes but increasingly in design), as well as the scale benefits of greater production loading. As these smaller partners gain experience across sever- al different engine programs, limited but valuable technology begins to flow back to the prime manufacturers (see Table Am. The key to maintaining technology leadership in the U.S. aircraft engine industry is a stable, synchronous relationship with the U.S. government. A national policy that would seek to preserve leadership by compelling U.S. high-tech companies to deny others access to their technology may be self- defeating. In aircraft engines, U.S. leadership has been built upon a healthy balance of sustained public and private investment in a vigorous research and development function staffed by competent, imaginative people. An environment that supports the activity of an entrepreneurial technologist and rewards risk taking will nurture the continued development of leading-edge technology. The accumulation of a series of interrelated new or advanced technolo gies, coupled with the perception of a market opportunity, can trigger the initiation of a new engine development. As the product-specific develop- ment team takes on its task of integrating the new concepts into a total propulsion system, a strong, well-funded applied research function moves on Anew challenges and concepts, seeking major improvements or even another new system for initiation several years away. The span and com- plexity of this process create a time buffer that separates the leading-edge technology from that which is being incorporated into engines in near-term development or production. This inherent natural protection is superior to any restrictive public policy, provided the impetus for advances in tech- nology is maintained. There is a strategic-defensive reason why GE and Pratt & Whitney should continue to share their technology with the Europeans and Japanese. If they become dissatisfied with the existing relationships, they might be driven to form a true non-U.S. alliance possibly led by Rolls-Royce- which would have both the resources and the market access to pose a seri- ous challenge to U.S. industry leadership, as Airbus Industrie has done in large commercial aircraft. There is a vague, judgmental distinction between giving away too much technology and yielding too little; either extreme can weaken U.S. industry.

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INDUSTRY PROFILES 97 Today's reality is that alliances are vital to being a world-class competitor, and prudent, controlled technology transfer is essential to strong, mutually- beneficial alliances. Neither of these is as threatening to U.S. leadership as would be our failure to support- with funding and people and public poli- cy and insist on broad, bold initiatives that advance critical aircraft engine technology. TABLE A-2 Aircraft Engine Technology Profile Current Technologies Future New Aircraft Critical Technologies Aerothermodynamics design High-performance Very high temperature U.S. leads in critical hot fighters turbines, combustors section design Vectoring, ventral nozzles Low observables Structures design U.S. leads but Europe High-speed transport Short supersonic, mixed gaining compression inlets Low-emission combusters Controls Low-noise exhausts U.S. leads in applications, Advanced integrated controls but Japan taking the lead in hardware Subsonic transport High pressure, temperature core components Systems integration Low drag/weight nacelles U.S. has slight lead on Europe, High-efficiency fans more on Japan High-temperature composites Materials All Advanced manufacturing U.S. leads but Europe & Japan processes passing U.S. in nonmetallics Testing facilities, methods Manufacturing processes U.S. leads in technology, but Europe and Japan implementing faster

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II Automotive Industry W. DALE COMPrON The automotive industry has been transformed in the past decade. Whereas its design and manufacturing facilities were once located near the markets that it serves, the industry now offers products that are designed and manufactured in a dozen or more countries and are marketed in hundreds of countries. The conversion to a world marketplace has created a competitive environment that rewards product quality, product reliability, low cost of ownership, and reliable service, irrespective of where the product is manu- factured. From an international perspective, the automotive industry is technologi- cally more homogeneous than might be surmised from a casual examination of the performance of various manufacturers in the marketplace. Recent comparative studies of the industry in the United States and Japan strongly suggest that the competitive advantage enjoyed by the Japanese does not arise from a technical advantage. Similarly, the technology used by the European manufacturers does not differ substantially from that used by U.S. manufacturers. Neither would a significant difference be found between the level of the technology used by the automotive industry in Brazil, Korea, Taiwan, Italy, Australia, or Canada and that used in the United States, an observation that is not surprising since U.S. companies are strong partici- pants in many of these markets. This homogeneity does not mean, however, that the industry of a particular country may not be technologically superior in a specific area, for example, Brazil's use of alcohol fuels. Although this superiority tends to be the exception rather than the norm, it is important to recognize that regional differences in the marketplace can also strongly affect the technological level of the products offered in those regions. This 98

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INDUSTRY PROFILES 99 can be seen in the emphasis on characteristics such as high-speed perfor- mance and fuel economy which are strongly influenced by local customs or government regulations. One must conclude, therefore, that the current competitive advantage enjoyed by some manufacturers, for example, the Japanese, results not from better technology but from a better management of their overall system. This includes, of course, the way that they use technology, their continuing emphasis on quality, and the continuous improvement of all operations, and in some instances, lower costs. For this committee, the following three key questions seem relevant to the discussion of "engineering as an international enterprise" as it relates to the automotive industry. Why did the homogene- ity develop? Is this technological homogeneity likely to change with an accompanying increase in domination of the world industry by companies located in one geographic area? What impact will these trends have on the engineering capability of the United States? The answer to the first question is a direct consequence of an industry structure that can be roughly described as a combination of (1) large multi- national companies with design, manufacturing, and marketing activities in many countries; (2) national companies that design and manufacture prod- ucts in one country but market these products worldwide; and (3) a variety of business arrangements that involve joint ventures, minority ownerships, and purchase agreements for components and vehicles. In this regard, each of the major U.S. companies owns equity in one or more Japanese compa- nies. With regard to national companies, there are local companies such as Citroen and BMW as well as subsidiaries of multinationals that have existed for decades and are often treated and considered by the host populace as local national companies. As examples of the latter, both Ford and General Motors have subsidiaries in Europe, Asia, Central America, and South America that have design, engineering, and manufacturing capability. One should conclude, therefore, that the globalization of the automotive industry is not a new development. What is new is the capability that the industry now has to use these operations, irrespective of their location, to design and manufacture products for sale to customers who have an option to choose from a variety of products made by companies located in all regions of the world. The globalization of the industry is probably a necessary but not a suffi- cient condition for homogenization of the technology. The presence of manufacturers in a wide variety of markets, the capability to acquire and analyze the products of all manufacturers, and the opportunity through vari- ous business relationships to share technology suggests that the current homogeneity of capability is a logical consequence of this diversity of loca- tion and business arrangement. International professional societies, such as the Society of Automotive Engineers, have been important contributors to

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INDUSTRY PROFILES 101 States an admittedly extreme situation the United States would lose the infrastructure, including the supply base, necessary for a viable industry. Once lost, it is likely that regaining it would be impracticable. At the other extreme, it would be unwise to suggest that the U.S. auto industry should not take advantage of the many opportunities that exist for developing joint business arrangements with foreign companies. Such arrangements often afford the U.S. industry access to foreign markets, provide a basis for shar- ing the burden of investment, and provide a means by which technology can be assessed and evaluated. Should a decision by a United States manufacturer to locate a new engine or transmission plant overseas be cause for alarm? If it were one of many such plants that exist in the United States, the chances are slim that this decision would lead to a serious decline in the technical capability of the United States-based industry. If it is one of a few, the answer could be different. Because of the dynamic and complex nature of the system, one cannot easily establish a priori a standard that indicates that a fixed level of capability is essential. The best one can do is to examine continually the many issues that determine the viability of an industry and to assess trends as they occur. Recognition of this fact led the NAE Committee on Technology Issues That Impact International Competitiveness (1988) to the following recommendation: Before joint government-industry actions are undertaken, an important early step must be sound analyses of all aspects of the problem, including an under- standing of the technological status of critical sectors of U.S. industry, the impli- cations of emerging technologies for the health of engineering and technology in all sectors of U.S. industry, and deficiencies in the technological infrastructure of particular sectors.... A small activity, perhaps located outside the structure of the government, staffed by highly qualified analysts who are keenly aware of industri- al problems in detail, could be of great value. With analyses of the type described above, the government would be better prepared to respond to industry initiatives. A few general observations regarding the automotive industry also are pertinent to the role that the industry infrastructure plays in the development and use of technology. First, the Japanese industry has long developed a closer working relation- ship with its supplier base than has the U.S. industry. This has created a feeling of belonging to the "family" that has contributed greatly to the capa- bility of the Japanese industry to implement just-in-time systems, improve quality, and introduce new technology in components and subsystems. Although U.S. manufacturers are making progress in achieving some of the same relationships with suppliers, the Japanese industry continues to benefit greatly from a long-standing tradition in such relationships. One should note that this represents a form of vertical integration without the actual legal or

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INDUSTRY PROFILES 127 Ongoing Technologies and Competencies Emerging Technologies and Competencies Medium and Low Voltage - Decreasing U.S. supply - Increasing foreign ownership. Surge Arresters Increasing foreign ownership. Motors Large (above 2500 HP) and Medium (to 2500 HP) - Increasing foreign manufacture. Small (1 to 200 HP) - Adequate U.S. suppliers with increasing U.S. manufactured foreign-owned motors. Switches U.S. dominates manufacture. Gas Insulated Substations All foreign supplied and manufactured capabilities, Europe, Japan. High Voltage Direct Current (HVDC) No U.S. maufacturers. Decreasing number of foreign manufacturers, increasing business. Wire and Cable High-voltage cable. 1 l5kV and above - extruded wire cable- one U.S. supplier, foreign manufacturers lead. 1 l5kV pipe type - several U.S. manufacturers, foreign manufacturers lead. 69kV- Several U.S. manufacturers. Medium Voltage (5 to 35kV) and Low Voltage (less than Sky) - Primarily U.S. owned and manufactured. Circuit breaker monitoring - Japan leads some U.S. developments. Development of arrester materials with lower discharge voltage, better lifetime stability and higher energy capability - U.S. leads. Superconductivity - U.S., Europe, and Japan. Variable-speed motors - U.S., Europe, Japan. Development of manufacturing techniques and materials to reduce equipment size with increasing capabilities, Europe, Japan. HVDC circuit breaker development. Higher rated equipment - Europe, Japan. Thyrister technology - U.S., Europe, and Japan. Foil barriers for waterproof cables - foreign owned. Fiber optics - U.S. patents, Japanese technology. Table A-3 continues

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128 Table A-3 continues NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY Ongoing Technologies and Competencies Emerging Technologies and Competencies Nuclear grade cable - significant decrease in number of vendors. Extrusion equipment - Majority is foreign produced. ~ ~ 1 ransm1ss10n 1 owers Decreasing U.S. manufacturers, increasing foreign competition, with decreasing growth. MECHANICAL Major Pipe Supports and Hangers - Two domestic suppliers, no significant foreign ownership. Thermal Insulation - U.S. sources - small foreign presence. Valves - U.S. leads, foreign presence increasing, U.S. lags Japanese and European in casting technology. Heavy Wall Pipe and Pipe Fabricators - Very limited domestic production capability - Japan, Korea, and W. Germany . . 1ncreasmg presence. Turbo Generators - Steam Turbines - Limited domestic suppliers, rapidly advancing foreign suppliers. U.S. losing technological advantage. Gas Turbines - Multiple domestic and foreign sources; Domestic manufacturing through GE and Westinghouse; Strong competitive market; Active R&D efforts by all manufacturers; Technology advancements held by all major manufacturers. Major R&D efforts in NOx control and high efficiency combined cycles. R&D product development driven by environmental and health issues. Specialized control valve designs to improve operating life. Superconducting generators - U.S., Japan, Europe. Ceramics, high-temperature blade coatings, high- strength, single crystal blade technology - U.S., European, Japanese all have a strong presence in this research.

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INDUSTRY PROFILES 129 Ongoing Technologies and Competencies Emerging Technologies and Competencies Steam Generators and Coal Pulverizer Equipment - Strong U.S. market share. Forming joint technology ventures with Japanese and European suppliers. U.S. lead but losing edge. Large Centrifugal and Axial Fans - Consolidation of U.S. suppliers. Foreign entry through domestic company purchase. Matured technology. Pumps - Major reduction in U.S. suppliers. European companies increasing their presence. Feedwater Heaters - Adequate U.S. sources. Cooling Towers - U.S. supply adequate. Condensers - Through reduction in suppliers, adequate U.S. presence. Material-product-no current R&D effort. Precipitators - Increasing foreign presence. Flue Gas Desulfurization System - Weak market, reduced U.S. suppliers. Increasing foreign supply capability. Instrumentation and Control Strong U.S. presence. CausticlChlorine- U.S. dominates. NUCLEAR Products Used in Nuclear Plants but also Found in Fossil Plants - Nuclear qualification requirements becoming more expensive to obtain. See listing individual items above under Electrical and Mechanical. High-speed (15,000-20,000 rpm) pumps. Only one U.S. firm in R&D. Higher operating voltages (80-lOOkV) European technology. Advanced chemistry and material applications - U.S. leads. Artifical intelligence - U.S. leads. Table A-3 continues

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130 Table A-3 continues Ongoing Technologies and Competencies NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY Emerging Technologies and Competencies Nuclear Fuel Assemblies and Related Components - U.S. sources dominant, but some foreign ownership. Reactor Pressure Vessels and Reactor Internals - No U.S. production - Current production in France, Japan, and U.K. Steam Generator Fabrication - Small U.S. replacement market controlled by Westinghouse. New plants in France, Japan, and U.K. Containment Construction - No current U.S. activity. Some activity in France, Japan and U.K. Nuclear Fuel Handling and Storage Equipment - Large number of U.S. sources. Uranium Conversion - U.S. maintains capability with increased Canadian participation. Uranium Enrichment - U.S. DOE retains most domestic business but DOE facilities are in trouble. Reactor System Design - No new reactors being constructed in the U.S. U.S. DOE is funding GE and Westinghouse to develop LWR designs using the natural laws of physics to accomplish reactor safety functions. U.S. showing strong leadership in light water reactor (LWR) fuel innovation. Ceramic-coated Particle Fuel Design for Gas Cooled Reactors - Lead shared by U.S. and West Germany. Graphite Fabrication - U.S. development equal to competition in U.K. and West Germany. Prestressed Concrete Reactor Vessel. Leadership shared between Sweden, West Germany, and U.S. Liquid Metal Technology for Fast Breeder Reactors - France leads. Japan making a committed effort. Some U.S. activity. New material development (1690 Steam Generator Tubes) - high U.S. involvement. Laser enrichment technology for Uranium Enrichment - U.S. maintains lead. Helium circulators - Most experience in West Germany - some in U.S. Thermal Barrier"Density Locks"- Sweden leads, some R&D in U.S.

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INDUSTRY PROFILES 131 Ongoing Technologies and Competencies Emerging Technologies and Competencies Reactor Fuel Reprocessing and Plutonium Recovery - No U.S. activity. Spent Fuel Disposal proceeding slowly. - U.S. effort INNOVATIVE CLEAN COAL TECHNOLOGIES Precombustion Cleaning (Advanced Coal Cleaning) Will be dominated by U.S.-owned companies in the foreseeable future. During-Combustion Cleaning Fluidized-Bed Combustion - Atmospheric Bed When commercially available, over 80% will be dominated by U.S. suppliers/manufacturers. Pressurized Bed (PFBC) Combustor Assemblies: Presently envisioned that U.S. companies will serve domestic market. Boiler tubes: U.S. manufacturing capability declining. It is expected that the majority of tubing will come from foreign sources. Cyclone/Hot Gas Cleanup: Both U.S. and foreign suppliers are expected to share the market. France and U.K. are world leaders. Japan has strong effort. If and when advanced enough, U.S. companies will have major share of the market. U.S. will have competitive edge in developing more sophisticated I&C systems. Strong emerging European technology in circulating fluid beds. European and Japanese companies are expected to provide significant competition in this area. U.S. has taken the lead in focusing on in- bed tube wastage. Germany and Japan are spending considerable funds to develop an advanced hot gas cleanup system. As the development moves to high-tech, Westinghouse, Accurex Corporation, and other U.S. companies could influence the market, especially in the area of ceramic candle, ceramic cross-flow filters, etc. Table A-3 continues

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132 Table A-3 continues NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY Ongoing Technologies and Competencies Emerging Technologies and Competencies Coal preparation and injection system: Both U.S. and foreign suppliers and manufacturers share the market. Sorbent Feed System: Currently, both U.S. and foreign suppliers and manufacturers. Economizer: All boiler manufacturers in U.S. have capabilities of supplying this equipment. Instrumentation and Control: Software-foreign suppliers. Hardware- Both U.S. and foreign suppliers and manufacturers. Valves and Piping: Mostly U.S. suppliers. Bed and Cyclone Ash Removal System: Current technology developed by foreign developers and manufacturers. U.S. has capability to enter this market when this technology matures. Gas Turbine: Currently only single foreign manufacturer. Market yet to be developed. Slagging Combustors None Improved and advanced systems may be dominated by foreign manufacturers. No emerging technologies are expected in this area. With advancement of manufacturing technology, U.S. manufacturers would be more competitive. Foreign manufacturers (and especially Japan) may become more competitive with U.S. This area will probably be dominated by U.S. suppliers after the maturity of the technology. Expected to be dominated by U.S. suppliers. Development of new technologies would put U.S. in a competitive market. More U.S. manufacturers are expected to enter this market after the maturity of technology. However,U.S. manufacturers may not be able to compete in this area. The technology has been developed in the U.S. as an after-growth of magnetohydrodynamic combustor development. All major suppliers are U.S.-owned. The market is expected to be dominated by U.S. companies, such as TRW, Rockwell, AVCO, and other conventional power plant equipment manufacturers.

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INDUSTRY PROFILES 133 Ongoing Technologies and Competencies Emerging Technologies and Competencies Post-Combustion Cleaning Induct Scrubbing: Presently all U.S. manufacturers. Advanced Flue Gas Desulfurization System Most developers/suppliers are foreign- owned. However, some U.S. manufacturers under foreign licenses are willing to enter the market if the technologies could be applied with high- sulfur U.S. coal. Coal Gasification Combined Cycle Over 85% U.S. suppliers and manufacturers, such as Texaco, Dow, Shell, Westinghouse, General Electric, M.W. Kellogg, etc. Only 15% of total will be supplied by West German, Swiss, and British suppliers. No real market has developed yet. General Materials R&D (Basic Materials Research for all innovative clean coal technologies). Over 50% is dominated by Japan, Sweden, Switzerland, and West Germany. U.S. could dominate this market. Development of high-tech manufacturing processes is not expected to change the market domination by foreign suppliers and manufacturers. Development of high-tech could put U.S. in excellent shape to dominate the market. When the world market develops, the greatest proportion of that market is expected to be in the United States. Japan is expanding in this area to overtake the lead from U.S. and West Germany.

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VIII Semiconductor Industry WIGWAM G. HOWARD, IR. The semiconductor industry typifies many of the processes now driving the internationalization of engineering in many fields. The semiconductor business was recently dominated by U.S. technical efforts, but other coun- tries are beginning to achieve technological parity (see TableA-4~. Five major factors at work in this industry are as follows: 1. The semiconductor industry is seen to be one of the critical founda- tions for a national electronics industry, which in turn has been identified as a central focus by many countries seeking to develop industrial strength for the future. Semiconductors form the critical base for efforts in consumer electronics, computers, and communications hardware capability and sup- port other related industrial efforts such as automobiles, aircraft, and robotics. Semiconductor competence also underlies much modern military hardware functionality for communications, avionics, guidance, radar, and electronic warfare weapons systems. As such, virtually all industrially emerging nations have semiconduc- tor industry development strategies. Those of Japan, Korea, Singapore, Hong Kong, Taiwan, and the People's Republic of China are noteworthy. Major efforts in the European Economic Community to strengthen semicon- ductor technology competence have also been mounted under the ESPRIT, RACE, Alvey, and Eureka programs. The most aggressive strategies target not only the semiconductor device business, but the manufacturing and materials industries as well. These semiconductor strategies are designed to be stepping-stones to estab- lishing more lucrative electronics hardware and systems businesses. 134

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INDUSTRY PROFILES 135 2. The U.S. semiconductor industry, despite its commanding global lead during the 1960s and 1970s, is vulnerable to international competition. Unlike its counterpart in several European and Asian Pacific countries, the U.S. industry has little vertical component. Each tier of the U.S. industry, from manufacturing equipment suppliers and materials vendors, to semicon- ductor device makers, to the primary semiconductor product users is made up of separate corporate entities, each dependent upon realizing a return on investment at their own point in the supply chain. with the exception of two or three captive lines, there is no mechanism whereby benefits realized at the system level are translated to priorities at the device, materials, or equipment levels. The retarded development of the gallium arsenide device business in the United States as compared with the leadership achieved in Japan, partic- ularly by Fujitsu and NEC, is a reflection of capability in the two countries to translate system-level needs into component business priorities. Furthermore, close working relationships between materials suppliers and device makers within Japanese company groups has significantly helped develop materials suppliers' technology. U.S. companies, particularly in the manufacturing equipment area, tend to be small fogs with little staying power when it comes to battling in the global marketplace against major, diversified company groups. This has led to serious loss of U.S. manufacturing and technology leadership, espe- cially in parts of the industry concerned with fabrication materials, manu- facturing equipment, dynamic memory, and consumer electronics compo- nents. 3. During the 1960s, the U.S. industry moved much of its labor-intensive manufacturing offshore to take advantage of lower labor costs and to gain access to foreign markets. Other international semiconductor manufactur- ers, particularly the Japanese, did the same but had strong incentives to find economic ways to repatriate manufacturing back into the home country in the 1970s. As a result, the Japanese tackled the problem of low-cost, auto- mated manufacturing in an environment of high labor costs, while U.S. mer- chant manufacturers continued to move more activities to lower cost areas abroad. Virtually all volume assembly of semiconductors is now performed outside the United States, and technical control of those activities has fol- lowed. As offshore manufacturing activities increased, critical engineering and technical support activities followed in order to remain in close proxim- ity to factories and foreign customers. Engineering activities were staffed with foreign nationals, who now represent the core competence in a number of critical technical areas in some major U.S. firms. 4. As the semiconductor industry has matured, the technology has spread across the globe. The process started with U.S. multinational corporation

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136 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY trained foreign engineers, spread to U.S. university-educated scientists and engineers returning to their home countries to work in local firms or as semiconductor users, and has achieved critical mass with the establishment of competent semiconductor and solid-state physics engineering programs in universities worldwide. Possession of the technology is no longer unique, and the open, international technical publication and conference system helps sustain the universal understanding of many of the latest developments. In the semiconductor industry, the genie is out of the bottle but, realistically, could never have been confined in the long term. The recent success of major Korean companies at purchasing and adapting the technical know-how with which to start up several semicon- ductor producers demonstrates how freely the technology, materials, and manufacturing equipment flow worldwide. 5. The semiconductor technology continues to evolve rapidly. With each major change, the established patterns of competition in the industry are subject to upset. This vulnerability has been evident at major turning points in semiconductor technology: Vacuum tubes to discrete transistors Discrete transistors to integrated circuits Small Scale Integrated (SSI) circuits and Medium Scale Integrated (MSI) circuits to microprocessors and memories Standard, high-volume commodity products to application-specific products At each of these technologically driven transitions, new entrants have displaced older, less adaptive companies in the fastest growth segments of the business. Similar dynamic processes have been at work in the materials and manufacturing equipment portions of the semiconductor industry. Technological changes have provided opportunities for new entrants at every level of the business to compete on an equal footing with more estab- lished current leaders. Each of these five forces can be seen at work in other industries as well. However, the rapidity with which they have made major shifts in the international engineering balance is striking in the semiconductor case.

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INDUSTRY PROFILES TABLE A-4 Semiconductor Industry Technology Profile 137 Ongoing Technologies and Competencies Emerging Technologies and Competencies 1. Lithographyloptics Foreign leadership, U.S. sources flagging, foreign control of lens supply. 2. Fabrication equipment Japanese control, U.S. lags with some exceptions. 3. Design U.S. lead. 4. Computer-aided desigul Computer-aided manufacturing U.S. lead. U.S. suppliers sell to all comers. 5. General materialslceramics Crystal silicon: 2 German, 4 Japanese films dominate, most U.S. sourcing offshore, U.S. has lost this capability. 6. Manufacturing skills Automated equipment, materials. U.S. lag. 7. Diffusion implant U.S. lead, but sell to all comers. 1. Galium Arsenide Japanese lead, U.S. users turn to Japanese suppliers. 2. Molecular beam epitaxy (MBE)lMetallo-organic oxidative chemical vapor deposition (MOCVD) U.S. lead MBE, Japan lead MOCVD. 3. X-ray lithography Japanese lead. 4. Engineered materials U.S. lead. 5. Electron beam lithography JEOL/Cambr~dge (Japan/UK) lead.