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Introduction

Since the birth of the semiconductor industry with the invention of the transistor at Bell Laboratories in 1947, the most significant product and technical advances in microelectronics have been achieved by U.S. companies. Besides the transistor, U.S. companies pioneered the integrated circuit, the dynamic memory, the microprocessor, and other critical products and processes. American companies continue to hold an innovative edge in a number of product areas.

Yet today, the Japanese semiconductor industry is the world market share leader. In 1991, Japanese companies held 46 percent of the $60 billion world market for semiconductors, and U.S. companies held 39 percent. Of the top ten merchant semiconductor companies in the world, six are based in Japan and three in the United States. The current situation contrasts with that of 1970, when Japanese companies held 20 percent of the world market and American companies held 60 percent.

Will the United States continue to lose ground in the semiconductor industry to Japan and other countries? How U.S. semiconductor companies fare carries significance greater than the U.S. industry's $25 billion in sales. Semiconductors are critical components for the nearly $400 billion U.S. electronics industry. Advances in microelectronics will continue to enable systems companies to push the frontiers of information processing and communications, holding out the possibility of new products with widespread impacts—like those of the personal computer during the 1980s. In addition, semiconductors increasingly allow companies to build more



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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy 1 Introduction Since the birth of the semiconductor industry with the invention of the transistor at Bell Laboratories in 1947, the most significant product and technical advances in microelectronics have been achieved by U.S. companies. Besides the transistor, U.S. companies pioneered the integrated circuit, the dynamic memory, the microprocessor, and other critical products and processes. American companies continue to hold an innovative edge in a number of product areas. Yet today, the Japanese semiconductor industry is the world market share leader. In 1991, Japanese companies held 46 percent of the $60 billion world market for semiconductors, and U.S. companies held 39 percent. Of the top ten merchant semiconductor companies in the world, six are based in Japan and three in the United States. The current situation contrasts with that of 1970, when Japanese companies held 20 percent of the world market and American companies held 60 percent. Will the United States continue to lose ground in the semiconductor industry to Japan and other countries? How U.S. semiconductor companies fare carries significance greater than the U.S. industry's $25 billion in sales. Semiconductors are critical components for the nearly $400 billion U.S. electronics industry. Advances in microelectronics will continue to enable systems companies to push the frontiers of information processing and communications, holding out the possibility of new products with widespread impacts—like those of the personal computer during the 1980s. In addition, semiconductors increasingly allow companies to build more

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy sophisticated functions into nonelectronic products such as automobiles. The role that microelectronic devices play in high-technology weapons systems—already significant—will likely increase as well. These issues form the context for this assessment of U.S.-Japan strategic alliances in the semiconductor industry, which focuses on alliances that transfer or develop technology. The purpose of the study is to examine the scope and nature of alliances, to identify the forces behind them, and to consider the impacts on the participating organizations and the United States as a country. Strategic alliances have long played a limited role in the semiconductor industry. By the time the Japanese industry had established its leading position in the mid-1980s, however, it was clear that the number of U.S.-Japan alliances was increasing sharply from the low level of activity prior to 1980. This general trend has continued to the present. Further, U.S.-Japan strategic alliances appear to have become deeper and more significant in terms of their impact on companies and on the semiconductor industry's competitive landscape. To summarize some of the major themes of this report, a number of forces have contributed to the expansion of U.S.-Japan alliances. From the U.S. perspective, small start-up firms increasingly turn to large Japanese companies to supplement or replace traditional sources of financing for growth, such as venture capital. For small U.S. firms and large American companies, linking with Japanese partners can provide access to advanced manufacturing capability and to the rapidly growing Japanese market—now the largest in the world. For the large, integrated "silicon majors" that dominate Japanese industry, linkages with small U.S. firms provide access to complementary technical capabilities that can be leveraged to gain a stronger position in new, design-intensive semiconductor markets as well as downstream systems. In the mid-and late 1980s the majors were joined in forming U.S. alliances by "lateral entrants"—large Japanese steel and equipment companies that used linkages with U.S. companies to acquire the critical mass of technology necessary to diversify into semiconductors and other information industry markets. Extensive U.S.-Japan alliance activity in an environment of fierce bilateral competition is here to stay for the foreseeable future. When structured properly, alliances can bring substantial short-term benefits to both sides. Because of a more favorable environment for intellectual property protection, some small U.S. companies have been able to structure better alliances than they could in years past, and U.S. access to the Japanese market has been facilitated by alliances. Yet the spread of alliances raises concerns as well. This report documents that the prevailing flow of semiconductor technology through alliances is from the United States to Japan. Growing U.S.-Japan technical interdependence in semiconductors may reinforce structural weaknesses—particularly

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy on the U.S. side—that lead to an imbalance in long-term benefits. A largely one-sided outflow of technology from the United States to Japan, if continued over the 1990s, could have the cumulative effect of eroding the foundations of America's capacity to innovate in this industry. This erosion would have serious consequences for U.S. computer and telecommunications companies that use semiconductors, for the overall U.S. economy as we move into the information age, and for national security. For strategic alliances to bring balanced, long-term benefits to participants and to the United States and Japan as countries, it will be necessary to redress these structural weaknesses, which include manufacturing and process technology in the United States, and generic research and new product design-in Japan. For this to happen, significant changes will be required on both sides. There are increasing opportunities for U.S. companies that have built the necessary capabilities to access Japanese technology, as well as some encouraging signs that actions on the part of both industry and government are strengthening the manufacturing infrastructure for U.S. industry. Despite these encouraging signs, however, the larger competitive calculus of an expanding Japanese global market share persists. New trends in the computer industry and other downstream sectors that buy semiconductors—such as global consortia built around microprocessor standards—will heighten competition in the years to come. The ascendance of companies in South Korea and elsewhere in the most capital-intensive segments of the semiconductor industry will create new challenges for U.S. and Japanese companies. The critical question for individual U.S. companies and industry leaders is how to build and implement strategies for maximizing the benefits of alliances with Japan so that the United States remains a front-line player in all aspects of the semiconductor industry, from basic research and design to manufacturing and marketing. The main issue for the U.S. government is to adopt policies favorable to U.S. industry strategy building and long-term competitiveness. This report was prepared by a working group of experts as part of a project initiated by the National Research Council's Committee on Japan to examine technology linkages between Japan and the United States. Co-chaired by Daniel Okimoto of Stanford and Sheridan Tatsuno of NeoConcepts, the working group was formed in the fall of 1990 and met a number of times in 1991 to deliberate and confer on analysis and data collection. A workshop on U.S.-Japan Technology Linkages in Semiconductors was convened in September 1991 to gain additional insights from other experts in the United States and Japan. The staff of the National Research Council's Office of Japan Affairs, which also serves as the staff for the Committee on Japan, assisted the working group in data collection, and in analysis and compilation of results.