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APPENDIX B POLICIES OF FOREIGN GOVERNMENTS JAPAN Government policy has played an important role in stimulating Japan's machine tool industry. Japan's Ministry of International Trade and Industry (MITI) has described three stages of an industry's development: growth, maturity, and decline. MITI's greatest influence is during the first and third stages--supporting growing industries and cushioning the effects of decline. The Japanese machine tool industry is currently considered (by MITI) to be in the maturity stage. MITI played a major role in helping the industry to reach maturity; however, its influence has diminished considerably in r ecent years .1 Thus, although much has been said about the large number and variety of Japanese policies that support its machine tool industry, many of these policies are no longer in effect. Industrial Planning As par t of its statutory function of identifying and promoting industr ial growth, MITI has been author ized to: provide funds for modernization approve rationalization cartels stimulate mergers, joint ventures, and further modernization of equipment move domestic firms toward increased specialization and international competitiveness2 As an example of moves toward specialization, MITI now requires Japanese firms to discontinue manufacturing 111

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112 types of machines that are less than 20 percent of a f irm's total production and where the firm's share of national production3is less than 5 percent (excluding machining centers) . Thus, Japanese machine tool builders benefit from economies o f scale and reduced competition. Availability of Capital Japanese firms needing capital for expansion or modern- ization can draw on a range of incentives and traditional practices going beyond what is available in the United S tates . These include: policies that keep interest rates artificially law for loans to favored manufactur ing industr ies ~ a relatively concentrated commercial banking sector, which enables the Ministry of Finance and the Bank of Japan to "rations credit4 a }sigh rate of domestic saving, helped in part by tax preferences on interest income a tradition of close cooperation among government agencies that sets economic pr for ities and commercial lending agencies generous depreciation allowances, including a special accelerated depreciation rate for numerical control (NC) machine toolaS Although many of these policies were conceived at a time when capital was scarce and when extraordinary efforts were needed to revive a war-damaged industrial base, the same policies now provide Japan with subs stantially greater investment incentives than exist in any other DECO country. R&D Incentives A quasi-governmental corporation, Flexible Manufacturing System Complex (FMC), involves machine tool builders and others in a large-scale, government-sponsored effort to further the state of the art in manufacturing processes. Although perhaps the most visible, this is but one of a number of government-sponsored research projects involving government laborator ice, universities, and industry.

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113 Japanese tax laws allow generous credits for research and development (25 percent of incremental Rod. Because R&D is typically no more than S percent of sales, subsidized R&D cannot account for much of the price differential between Japan and the United States. Subsidized R&D does, however, have one major advantage that is not just financial. The government's involvement in R&D lends strategic directions and legitimacy to R&D work and has helped the Japanese develop NC and electronic discharge machines quickly. The bicycle and motorcycle race wagering tax also pro- vide. direct subsidies to the machine tool industry. Though their extent is unknown, total collections in 1981 from this tax, which in earmarked For promotion of industries related to bit ales and other machines,.7 were almost S100 million. FRANCE Industrial Planning France has a long tradition of government involvement in the economy having used a variety of market and non-market tools to promote the national economy while reducing dependence on foreign manufacturers. With the election of the Mitterrand government, France has begun to emulate the Japanese, placing greater reliance on market signals but utilizing various government policies to stimulate targeted Growth sectors and sponsoring national research projects. On June 29, 1982, the government announced the creation of a Super ministry of research and industry, modeled after MITI.10 This ministry will implement the various tools of French industrial policy, including industry restructur ing, subsidies, joint ventures, foreign acquisitions by French firms, and research spending to promote growth industr ies . The Ministry of Research and Industry has begun Implementing a major restructuring plan for the machine tool industry, expected to last through 1986. The establishment of the French Heavy Machinery Company (MFL), a holding company, was announced in July 1982 and was formalized in September as the first step in this restructuring. MEL currently has two subsidiaries, one devoted to milling machines and one to lathes, each formed by the merger of two machine tool companies. The Ministry of Research and Industry has a development

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114 contract with MEL that calls for a 200 million franc investment between 1983 and 1985 to increase its share from 4 percent of world production to 6 percent. .~IFL is the first of 3 poles around which the machine tool industry will be regrouped. Of the nearly 150 machine tool companies, the most important will be regrouped around 15 industry leaders through mergers and acquisitions. Such arrangements are expected to increase the international competitive position of French machine tools by reducing R&D and manufacturing costs.12 Shortly after its creation, the Ministry of Research and Industry announced the "production plan n to be ing together various industries--including machine tool--in a national automation effort.13 This plan aims for 25 percent growth in process control each year for 3 years. In addition, the government has called for a drastic cut in imports of NC machine tools, from a 60 percent market share to 30 percent by 1984. This reduction is to be achieved through government contracts and subsidies, leading to an increase in NC machine tool production from 27 percent to 60 percent of total machine tool production by 1985, with total machine tool output doubling by 198 S . The government expects f irms to conceit 5 percent of sales to R&~; in return, the government will award contracts o f 2 00 million francs over the next three years. R&D Incentives The French government's 1982 budget plans call for a 37 percent increase in the research and development program f ram the previous year and a quintupling over the next few years. During this time, in contrast, the total budget will r ise only slightly. This, combined with recent nationalization of several high technology companies, means that the government controls approximately 75 percent of R&D. Several programs exist to assist private firms in R&D. One program, Lettres d'Agrement, is a means to encourage f irms to develop and manufacture a product in the national interest. The government provides loan guarantees or low-interest loans to assist the firm, with preference given to priority sectors. Aide au Development is a program to assist firms in commercialization of public and private R&D results. The government provides subsidies for prototypes and pilot plants, as well as loans for 50 percent of the pro ject cost. The loans ar e

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115 repaid only if the project is successful. Other programs promote cooperative R&D between private, government, and university labs. Three canters for goal-oriented machine tool research were designated by the government in 1982; the Machine Tool Study and the Research Center (CAM), the Agency for Development of Automated Production (ADEPA), and the Mechanical Industries Technical Center (CETIM) will be the s ites of the programs. Machine tool companies will be encouraged to take advantage of the technological advances developed at these centers. FEDERAL REPUBLIC OF GERMANY (FRO) Industrial Planning Our ing the past decade, the government of the Federal Republic of Germany (FRO) has become increasingly involved in directing industrial development and change. The lead agency in industrial planning is the Ministry of Research and Technology (BMFT), which was created in 1972. Like MITI, BMFT has encouraged rationalization of industries in structural decline and promoted knowledge-intensive sectors. Like Japan in the late 1950s and early 1960s, the FRG has encouraged mergers, consolidations, and offered grants, low-cost loans, and tax concessions during the late 1960s and early 1970s. However these programs have primarily been designed to benefit declining industries; the Germans have no official priority list of growth sectors to be supported. Priorities are set through market mechanisms, while business response to market changes are guided by an informal system of ~concertation. based on input from government, banks, and labor. The Economics Ministry and the BMFT provide grants to industry for research and development. A variety of research institutes, both independent and university associated, receive government funding. For example, the Technical Research Institute at Aachen is considered by many to be the best machine tool laboratory in the world; 69 percent of its funds for research come from the government--either federal or Lander (states).14 The 17-20 Fraunhofer Institutes in the FRG are an important source of industrial research. Fraunhofer Institutes specialize in industrial technology, especially in high growth, advanced technology industries, under

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116 contract to companies and government agenc ies . Th e government matches the institutes' contract funding with an equal amount to be used for basic research. 15 Since the early 1970s, a major project to develop flexible manufacturing systems (E?4S) has been sponsored by the f ederal government, involv ing many institutions and f irms and receiving heavy subsidies. Elements of the project include CAD/CAM technology; technology for parts fabrication and assembly methods: and highly flexible manufactur ing systems based on machining centers grouped around programmable industrial robots. The federal government plans, coordinates, and funds various R&D projects in academic and industrial labs related to EMS. For example, university research centers at Aachen, Berlin, and Stuttgart have been encouraged deco develop a r esearch center for CAM. T he f ederal government has also implemented the Follow-on Production Technology R&D Program to run through 1984 and probably longer. This program is designed to consolidate the development of EMS research by encouraging utilization of R&D results to batch manufacturing processes. Interest free loans and rapid depreciation are provided by the government to promote installation of R&D results, including applications of industrial robots and automatic controls. Over the long term, the Follow-On Program is intended to encourage the use of various FMS in all plants to create computer- integrated automated factories. NOTES TO APPENDIX B 1. Houdaille Industr ies , Tr~c., petition to the President of the United States Through the Office of the United States Trade Representative for the Exercise of Presidential Discretion, Author ized by Section 103 of the Revenue Act of 1971, 26 U.S.C. Section 48(a) (7) (D) ,. Hay 3, 1982, p. 64. Ministry of International Trade and Industry, The Vision of MITI Policies in 1980s, Summary,. Provisional Translation, March 17, 1980, p. 15. 3. National Machine Tool Builders' Association, Japanese Study Mission, Meeting the Japanese Challenge,. September 14, 1981, p. 16.

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117 4. koudaille, pp. 61, 74-75. 5. Comptroller General of the United States, Industrial Policy: Japan's Flexible Approach, U.S. Government Printing Office, June 23, 1982, p. 30. 6. James A. Gray, America Needs You." NMTBA, p. 2. 7. Comptroller General of the United States, p. 36. 8. Houdaille, pp. 110-111. 9. MMTBA, Japanese Study Mission, p. 16. 10. Several national research projects are in areas related to machine tools, including electronics, computers, and robotics. 11. G. Bidal, With the 'Productics' Plan, National- Scale Automation is at Stake,. Electroniquetualites, Paris, September 3, 1982, p. 1, translated in West Europe Report on Science and Technology. 12. George LeGall, in L'U~ine Nouvelle, Paris, Octobe r 1, 198 2, p . 8 2, and Lubka, Stephane, "Mach ine Tools: Official Birth of the French Heavy Machinery Company, n Les EChos, Paris, September 3, 1982, p. 6. Both translated in West Europe Report on Science and Technology. 13. AEP Sciences, Paris, July 1, 1982, p. 1, translated in West Europe Repor ~ on Sc fence and Technology . Andre Larane, Heathen, a Mecca for Machine Tools, ~ Industr ies & Techniques, Par is, June 1, 1982, p. 7 7. 15. Department of Commerce, Office of Productivity, Technology, and Innovation, Cooperative R&D in Major OECO Countr ies, June 30, 1982, p. 7.