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Maximizing U.S. Interests in Science and Technology Relations with Japan 5 U.S.-Japan Technology and Competitiveness Trends in Key Industries SUMMARY POINTS The task force examined technology and competitiveness trends in the United States and Japan in several key industries. These case descriptions are based on discussions with industry experts at the January 1995 task force meeting and have been supplemented with background research. In recent years U.S. companies in a number of industries have improved their competitive performance. In automobiles, U.S. companies have responded to pressure from Japanese competitors, and Japanese investments have contributed to overall U.S. capabilities. In biotechnology and health care, a strong fundamental research base and a financial structure enabling commercialization of technologies through the formation of new companies have been the most important factors. In semiconductor manufacturing equipment, a resurgence of the U.S. semiconductor device industry and improved cooperation between companies and with government have played major roles. In information industries, a strong research base and the dynamic U.S. market have enabled U.S. companies to play a leading role in setting de facto standards and architectures. Japanese companies are still major competitors, and Japanese government and industry are still pursuing policies designed to attain global technological and market leadership. But changes are occurring as well. Japanese companies are more open to reciprocal relationships. Japanese markets are somewhat more open, particularly in consumer products. However, US-Japan differences in regulatory approaches, intellectual property protection, private-sector business practices, and other areas are likely to persist. How quickly opportunities to participate in Japanese and Asian high-technology markets expand will play a major role in determining whether the United States derives maximum economic benefit from science and technology cooperation. AUTOMOBILES Besides being a significant contributor to the U.S. and Japanese economies as the largest employer among manufacturing sectors, the automobile industry is increasingly a high-technology sector, owing to its growing utilization of electronics, advanced materials, and information systems. If production and engineering systems are included in the definition of "technology," it is clear that a great deal of U.S.-Japan technological interaction (competition, learning, technology transfer through direct investment) has occurred over the years and continues in this industry.
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Maximizing U.S. Interests in Science and Technology Relations with Japan Market Access Asymmetries The competitiveness setbacks suffered by the U.S. auto industry and the corresponding gains by Japanese manufacturers during the 1970s and 1980s have been extensively studied and documented.1 One advantage enjoyed by the Japanese auto industry from the early postwar rebuilding period is the asymmetry in market access between Japan and other major autoproducing and auto-consuming countries, most notably the United States. Although Japan committed to deregulate foreign capital and exchange controls upon joining the Organization for Economic Cooperation and Development and the International Monetary Fund in 1964, moves toward capital liberalization did not begin until the late 1960s.2 By this time the U.S. Big Three automakers were very interested in entering the Japanese market, but the Ministry of International Trade and Industry (MITI) and most of the domestic industry argued that the Japanese industry was still too weak and fragmented. Resistance by several second-tier firms to MITI's consolidation plan for the industry led to a partial opening. Chrysler and General Motors took minority equity stakes in Mitsubishi Motors and Isuzu. Ford purchased a minority share in Mazda in the late 1970s.3 These investments did not lead to significant market participation by the Big Three. The Japanese industry had already built considerable competitive strength in its protected domestic market. Before the U.S. companies could devote much effort to penetrating the Japanese market, Japanese autos were making considerable headway in the United States. Japanese Industry Advantages The Japanese auto industry's gains during the 1970s and 1980s were made possible by significant advantages it enjoyed over the U.S. industry in three areas.4 The first advantage was in management. General Motors and Ford were (and still are) the largest manufacturing companies in the world. Their competitive environment during the post-World War II period allowed them to focus on the lucrative U.S. market and on each other as competitors. This led to complacency and the development of organizational structures and management styles that were ill suited to the competitive environment that emerged in the U.S. market and globally in the 1970s. Relations between manufacturers and external suppliers, labor and management, and industry and government were at arms length and often adversarial. During the late 1940s, the Japanese auto industry experienced severe business conditions and fierce labor disputes and nearly collapsed. Survival was ensured by U.S. military procurement of Japanese vehicles during the Korean War. With rapid recovery in the overall economy, Japanese companies were able to step in and meet rising demand, developing vehicle characteristics (such as smaller size) suited to the domestic market. During the industry's period of stress, companies such as Toyota became less vertically integrated and instead made greater use of external, but 1 For example, the automobile case study that appears in Michael L. Dertouzos, Richard K. Lester, and Robert M. Solow, Made in America: Regaining the Productive Edge (Cambridge, Mass.: The MIT Press, 1989), pp. 171-187. 2 See Mark Mason, American Multinationals and Japan (Cambridge, Mass.: Harvard University Press, 1992), p. 201. 3 There is considerable debate over how interested the Big Three were in reentering Japan in the 1940s and 1950s. It is also argued that the U.S. auto industry investments in Japan in the late 1960s and early 1970s were motivated largely by a desire to source small cars from Japan for the U.S. market. Phyllis A. Genther, A History of Japan's Government-Business Relationship: The Passenger Car Industry (Ann Arbor, Mich.: Center for Japanese Studies, 1990). 4 Much of this section is drawn from the presentation of Michael Smitka at the meeting of the Competitiveness Task Force held January 12-13, 1995.
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Maximizing U.S. Interests in Science and Technology Relations with Japan often affiliated, suppliers as a cheaper alternative to direct control of the supplier chain. 5 This approach, taken out of necessity, led to the development of a more flexible auto production system, which has become popularly known as the Toyota Production System or "lean manufacturing." By the late 1970s, the manufacturing practices associated with this system ensured higher quality and productivity than the production systems of U.S. manufacturers. The quality difference was critical in allowing Japanese automakers to maintain and expand their inroads into the U.S. market during the 1980s, as consumers who had good experiences with their first Japanese cars developed strong loyalty. A second advantage enjoyed by Japanese auto companies was in cost structure. Lower Japanese labor costs relative to the United States and the fact that wage increases lagged behind productivity gains gave Japanese auto companies a significant edge by the late 1970s. The gap was widened by a strengthening of the dollar in the early 1980s. Several serendipitous trends in the global economy during the 1970s and 1980s also were favorable to the Japanese auto industry and hindered U.S. producers. The rapid rise in oil prices during the 1970s led to greater demand for small cars in the U.S. market, which Japanese companies were better equipped to fill. Simultaneous pressure to meet new environmental standards and increase fuel economy strained the engineering capabilities of the Big Three and contributed to declining quality and performance. These conditions set the stage for the rapid gains made by Japanese auto companies in the U.S. market beginning in the late 1970s. The U.S. recession of the early 1980s combined with market share losses put severe stress on U.S. automakers. With the imposition of a voluntary restraint agreement in the early 1980s that limited the number of Japanese autos exported to the United States, Japanese manufacturers moved toward setting up U.S. production facilities. Table 5-1 shows trends in world auto production. TABLE 5-1 Motor Vehicle Production 1977 1982 1987 1992 World total (millions of vehicles) 40.9 36.1 45.9 47.7 North America 14.7 (36%) 8.7 (24%) 12.9 (28%) 12.7 (27%) Europe 15.9 (34%) 14.8 (41%) 17.5 (38%) 17.5 (37%) Asia 8.8 (22%) 11.2 (31%) 14.0 (31%) 14.6 (31%) Japan 8.5 (21%) 10.7 (30%) 12.2 (27%) 12.5 (26%) Korea 0 0.2 1.0 1.7 Other Asia 0.3 0.3 0.8 0.4a Rest of the world 1.5 1.4 1.5 2.9 a The 1992 figure does not include China. SOURCE: Compiled by the American Automobile Manufacturers Association. 5 Japan's auto industry provides support both for those who argue that Japanese industrial policy was a key to industrial development, and those who argue that it had a marginal impact. For an account of business-government relations in Japan's auto industry, see Genther, op. cit. Chapter 5 deals with the development of the Japanese auto parts industry.
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Maximizing U.S. Interests in Science and Technology Relations with Japan U.S. Resurgence Over the past 15 years or so, the U.S. auto industry has been engaged in the sometimes slow and difficult effort of responding to Japanese competition and closing these gaps. Prompted by competitive pressure and, some have asserted, the demonstration effect of Japanese manufacturing operations in the United States, U.S. automakers and suppliers have made significant strides in manufacturing and product development performance.6 In the mid-1980s, the dollar depreciated significantly against the yen, and another large rise in the value of the yen occurred in 1993-1994. These currency trends reversed the cost advantage that had been enjoyed by vehicles built in Japan. Trends external to the industry also contributed to a U.S. resurgence. The upward trend in oil prices was reversed in the mid-1980s, and oil has been moderately priced since that time. This has dulled the appetite of U.S. consumers for smaller vehicles and sparked increasing demand for larger vehicles such as minivans, light trucks, and sport utility vehicles, categories that U.S. companies pioneered and are better positioned than the Japanese to serve. Over the 1993-1994 period, U.S. automakers reaped the benefits of these accumulated favorable trends, as rising demand produced record profits and market share gains. Chrysler's resurgence has been particularly conspicuous, while GM's market share has continued at a level far below that of the mid-1970s. At the same time, the Japanese auto industry suffered from sluggish demand in the domestic market and cost pressure on exports of vehicles and parts to the United States. Most Japanese automakers reported losses during this period. Some of the second tier Japanese producers, such as Mazda, have suffered a great deal during the downturn.7 More recently, the Japanese vehicle market has recovered somewhat, the dollar appreciated considerably during 1995 and 1996, and conditions for Japanese automakers have stabilized and improved. Even during the 1993-1994 period, Japanese automakers as a whole did not lose a significant amount of market share in the United States, particularly in passenger cars. Transplant production has played an important role. Future Technology and Competitiveness Issues The main issues for the world auto industry over the coming decade are (1) continuous improvement in manufacturing and product development performance to deliver value to customers—a fundamental competitive necessity for vehicle manufacturers and suppliers; (2) achieving effective participation in emerging markets, particularly in Asia, while balancing related technology and production transfer demands—a key determinant of growth; and (3) companies and national industries may create competitive advantage for the twenty-first century based on new technologies such as "intelligent" vehicles and highways. The Japanese and U.S. auto industries, and individual companies, bring different strengths to this competition. Manufacturing and Product Development High-quality manufacturing and effective product development performance are fundamental competitive necessities for auto manufacturers seeking to establish and maintain leading 6 Wellford W. Wilms, Alan J. Hardcastle, and Deone M. Zell, "Cultural Transformation at NUMMI," Sloan Management Review, Fall 1994, documents the positive impact of combining Japanese and U.S. management approaches at the plant level. 7 "Matsuda, kokunai baibai haisui no jin" (Mazda's Last Stand in the Domestic Market), Nihon Keizai Shimbun, October 13, 1995, p. 11.
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Maximizing U.S. Interests in Science and Technology Relations with Japan positions in the most sophisticated and profitable markets. Although the top Japanese companies remain the world benchmarks in these areas, U.S. companies have made considerable strides in recent years.8 During the 1990s, for example, Chrysler adapted a number of lessons from Japanese "best practices" and improved its product development process considerably. One of the most significant challenges faced by the Japanese auto industry in recent years has been to maintain manufacturing and product development excellence while reducing costs. Although the yen has stabilized and weakened recently, cost pressure has been acute, particularly in the U.S. market for cars exported from Japan. The Japanese industry has been aggressively adjusting to these imperatives. Shifting production to the United States, Asia, and elsewhere is one approach. Japanese companies have made modest efforts to procure components for their U.S.-assembled vehicles in Asia in order to cut costs. Table 5-2 shows several examples. For Japanese manufacturers and suppliers to retain long-term competitive advantage, it will be necessary to globalize manufacturing while maintaining productivity and quality. Japanese companies also have sought to ensure the continued competitiveness of domestic operations by increasing the reusability of parts, cutting management staff, and in some cases slowing new product introduction cycles.9 Japanese automakers are encouraging their suppliers to sell to a broader base of customers to support higher volumes and lower costs, encouraging weaker suppliers to merge and increasing purchases from nontraditional suppliers. Relationships between manufacturers and suppliers are critical to overall manufacturing and product development performance. Automobile value added is likely to come increasingly from the incorporation of electronics, new materials, and other innovations originating outside the automobile manufacturers themselves.10 TABLE 5-2 Examples of Asian Parts Utilized by Japanese Automakers in U.S.-Built Vehicles Company Part Country Toyota Cylinder block Thailand Honda Cast and forged components Chinaa Mitsubishi Press components Korea Mazda Radiator Korea a Under consideration. SOURCE: Nihon Keizai Shimbun, September 15, 1995, p. 11. 8 Kim B. Clark and Takahiro Fujimoto, Product Development Performance: Strategy, Organization and Management in the World Auto Industry (Boston, Mass.: Harvard Business School Press, 1991), describes the elements of effective product development and documents the superiority of Japanese management practices. 9 Gerald Conover, presentation to the Competitiveness Task Force, January 12, 1995. See U.S. Department of Commerce, Market Research Report, "Japan-Auto Parts Development Plan," July 21, 1994. This report describes new cooperation, even between bitter traditional rivals, to develop common parts for the good of the entire Japanese auto industry. 10 Ulrike W. Hodges and Rob van Tulder, The Chemistry of Dependence: Cars, Chemicals and Technological Change in the United States, Germany and Japan (Berkeley Roundtable on the International Economy Working Paper 69, November 1994).
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Maximizing U.S. Interests in Science and Technology Relations with Japan The U.S. supplier base is characterized by a relatively small number of large, technologically sophisticated companies that compete on a global basis and smaller second-and third-tier suppliers. In the decade or so since it entered the automotive seating business, Milwaukee-based Johnson Controls, Inc. (JCI) has established itself as a leading representative of the first-tier supplier group.11 JCI supplies each of the U.S. Big Three automakers with seats and supplies almost all of Toyota's vehicle programs outside Japan.12 JCI credits its relationship with Toyota with helping to hone its manufacturing and product development capabilities. Since being selected to supply seats to NUMMI, the Toyota-GM joint venture, JCI has worked to incorporate the lessons of continuous improvement into its overall manufacturing operations. JCI has also contributed to moves on the part of U.S. auto manufacturers, most notably Chrysler, toward adapting Japanese methods of product development that involve greater technological and engineering responsibilities for first-tier suppliers.13 For the future, JCI is focusing on incorporating higher levels of proprietary technology into its automotive seating systems and leveraging its capabilities to boost its presence outside the United States. It recently acquired Prince, an auto supplier with strong electronics technology. Although a number of U.S. auto manufacturers and suppliers are pursuing continuous improvements in manufacturing and product development by adapting Japanese practices and have achieved world-class performance, many others, particularly smaller suppliers, have not yet implemented these approaches successfully. Recent studies indicate that Japanese auto suppliers remain the most productive and deliver the highest quality.14 Global Strategies and Approaches to Rapidly Growing Asian Markets Tapping rapidly growing markets in Asia will be key to future growth for U.S. and Japanese automakers. Asia has long been a secondary overseas market focus (after the United States) for a number of Japanese auto companies. These efforts have given Toyota, Mitsubishi, and others a head start in several of the most important markets.15 In recent years, Japanese manufacturers have increased their investments and marketing activities in Asia. For example, Toyota hopes to build a leadership position in the rapidly growing Asian auto market through the development of its "Asia car."16 Japanese auto suppliers belonging to a particular group or keiretsu often invest in Asia as a group. For example, several of Toyota's suppliers have announced plans to launch manufacturing 11 In 1994, sales of JCI's automotive segment were about $2.9 billion, or about 42 percent of the corporate total. See Hoover's Company Profile Database (Austin, Tex.: The Reference Press, 1996). 12 Larry Hagood, from his presentation to the Competitiveness Task Force, January 12, 1995. 13 Rajan R. Kamath and Jeffrey K. Liker, "A Second Look at Japanese Product Development," Harvard Business Review, November-December 1994, p. 170. 14 Andersen Consulting, Cardiff Business School, and the University of Cambridge, Worldwide Manufacturing Competitiveness Study: The Second Lean Enterprise Report, 1995, as reported in National Center for Manufacturing Sciences, Focus, July 1995. 15 Japanese companies have proven more willing to comply "with national local content programs initiated in the early 1970s." See Richard F. Doner, "Japanese Automotive Production Networks in Asia," in Eileen Doherty, ed., Japanese Investment in Asia (Berkeley, Calif.: The Asia Foundation and Berkeley Roundtable on the International Economy, 1995), p. 101. 16 "Ajia ka: Toyota, 22 man dai ni" (Asia Car: Toyota Plans Production of 220,000), Nihon Keizai Shimbun, August 20, 1995, p. 1.
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Maximizing U.S. Interests in Science and Technology Relations with Japan facilities in China.17 In September 1995, 70 Japanese auto suppliers affiliated with Nissan announced plans to transfer technology to counterparts in Korea's Samsung group.18 Although it had appeared until recently that most of the U.S. auto industry had "written off' Asian markets besides China, the Big Three and a number of major suppliers are now pursuing more aggressive initiatives. With trade barriers in Asia likely to fall in coming years, concerns about tying up large fixed investments to serve several small segmented markets are receding. Leveraging their recent success in the domestic U.S. market and a desire on the part of some Asian nations to balance an already large Japanese direct investment presence, it appears much less likely at this writing that U.S.-based companies will be "left behind" in Asia. During 1995, U.S. automakers stepped up plans to increase their presence in Asia. Ford, which has 11 existing plants and engineering sites in Asia, announced plans to invest $53 million in two component plants in Thailand.19 China's leading automaker chose General Motors for a $1 billion venture, and as of this writing GM was in the process of choosing a location for a large manufacturing operation in Southeast Asia. Chrysler, which has operations to assemble Jeep Cherokees from kits in Thailand, Malaysia, and Indonesia, is considering plans to build a small affordable car for Asian markets such as Vietnam and India.20 A number of U.S.-based auto suppliers also have announced various investment and joint venture plans in China.21 Although Japanese and U.S.-based companies are taking somewhat different approaches to investment and market participation in Asia, they will face similar challenges in managing technology transfer in order to ensure a long-term presence and avoid aiding potential competitors. Willingness to transfer technology was reportedly a factor in China's decision to choose GM as the foreign partner for its sedan venture.22 Proton, the Malaysian auto company, consistently requests expanded technology transfer from its Japanese partner, Mitsubishi Motors.23 Access to the Japanese market remains an issue for U.S. automakers and suppliers. Recently, there have been a number of indications that the Japanese market is becoming more open to imports. Sales of imported vehicles have grown rapidly in Japan in recent years, albeit from a very small base, partly due to the cost advantage enjoyed by imports.24 In 1995 the United States and Japan reached agreement on measures to increase sales of imported autos and auto parts in Japan after contentious negotiations. The access problems of foreign auto suppliers are somewhat different than those of vehicle producers.25 Access to the Japanese replacement-parts market would likely be improved through 17 "Aitsugi Chugoku shinshutsu" (Advancing into China One After Another), Nihon Keizai Shimbun, August 1, 1995, p. 11 18 "Sansei gurupu ni gijutsu kyoyo" (Furnishing Technology to the Samsung Group), Nihon Keizai Shimbun, September 13, 1995, p. 15. 19 "U.S. car makers are investing heavily in Asia," The Wall Street Journal, January 25, 1996, p. A4. 20 "Chrysler Considering Building a Small Car for Markets in Asia," The Wall Street Journal, October 16, 1995, p. A4. 21 "Tai-Chu toshi o kasoku" (Chinese Investment Accelerates), Nihon Keizai Shimbun, December 27, 1995, p. 7. 22 "Price of Entry into China Rises Sharply: U.S. Firms Face Growing Pressure to Transfer Technology," The Wall Street Journal, December 19, 1995, p. A14. 23 "Mitsubishi Jiko ni yosei" (Demand to Mitsubishi Motors), Nihon Keizai Shimbun, November 22, 1995, p. 1. 24 In 1995, Japan's imported car sales reached 388, 162, representing a 29 percent rise over 1994. The 10.2 percent share of the market held by imports represents a near doubling in two years. German models represented 43.1 percent of import sales and U.S. models 33.9 percent. Japan Automobile Importers' Association figures reported in The Washington Post, January 11, 1996, p. D10. 25 The U.S. government still considers implementation of the 1995 auto agreement to be a major issue, particularly in auto parts. See U.S. Trade Representative, National Trade Estimate 1997 (Washington, D.C.: U.S. Government Printing Office, 1997).
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Maximizing U.S. Interests in Science and Technology Relations with Japan the elimination or easing of several specific regulatory requirements. In the original-equipment market, however, Japanese business practices may continue to act as a ceiling on foreign participation, regardless of price and quality considerations.26 Even in cases where Japanese automakers and first-tier suppliers purchase foreign-made components for vehicles intended for export or made in U.S. transplant facilities, they are reluctant to utilize the same parts for autos made and sold in Japan. Even during the 1994-1995 period, when many Japanese automakers were losing money and were eager to cut costs, proposals by U.S. suppliers that would have led to significant cost savings were reportedly rebuffed.27 Although many U.S. parts makers will continue to be largely shut out of the Japanese domestic OEM market, the experience of JCI and other U.S. suppliers indicates that a focus on supplying the production of Japanese companies outside Japan can deliver many of the market participation benefits—revenue for future technology development and learning from demanding customers—that contribute to maintaining and enhancing technological capabilities. Since the production of Japanese auto companies outside Japan is likely to grow much more quickly than production inside Japan, this will represent a significant growth market during the coming decade. Advanced Technology Advanced technology is increasingly incorporated into automobiles. One U.S. program aimed at speeding the development of new technologies and their incorporation into automobiles is the Partnership for a New Generation of Vehicles (PNGV). PNGV is a partnership between a number of U.S. government agencies and the Big Three automakers. The goals are to improve competitiveness in manufacturing, implement commercially viable innovations from ongoing research in conventional vehicles, and develop vehicles that can achieve up to three times the fuel efficiency of comparable 1994 family sedans.28 Over the next several decades there is a good possibility that more fundamental technological shifts will occur in the auto industry. These include increasing utilization of electric and other alternatively powered vehicles to reduce emissions and increase energy efficiency and advances to facilitate higher traffic volumes and greater safety through the use of advanced vehicle navigation and control systems. Electric vehicles are one area of significant R&D effort in the United States and Japan. Table 5-3 compares the U.S. and Japanese approaches toward electric vehicles. In contrast to U.S. efforts, which have focused on research and development and mandates to establish a market, approaches by Japan and several other countries have placed relatively more emphasis on public demonstration projects for government and utility fleets that establish public recharging and maintenance facilities.29 The Japanese government also helps support the Japan Electric Vehicle Association (JEVA), which acts as an information clearinghouse and promoter.30 26 U.S. Department of Commerce, International Trade Administration, "Japan-U.S. Auto Parts Sales Trends," December 4, 1994. 27 Ibid. 28 Partnership for a New Generation of Vehicles, Program Plan, November 1995. 29 U.S. Congress, General Accounting Office, Electric Vehicles: Likely Consequences of U.S. and Other Nations' Programs and Policies (Washington, D.C.: U.S. Government Printing Office, December 1994). 30 See "JEVA Continues NEDO Contract to Promote Electric Vehicles," EVNetwork August 28, 1995.
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Maximizing U.S. Interests in Science and Technology Relations with Japan TABLE 5-3 Key Elements of Electric Vehicle Programs United States Japan Number of electric vehicles in operation, December 1994 1,000 1,600 Goal for Year 2000 70,600 (based on state requirements) 200,000 (national target) Purchase programs and incentives $4,000 federal tax credit for tax credit for fleets; some state incentives; California-type mandates (six states) 50% national cost subsidy; various local sudsidies; reduced purchase and possession tax; 7% business tax credit; subsidized leasing Vehicle and infrastructure small fleet demonstrations Ecostation 2000; several national and local demonstrations Vehicle and battery research U.S. Advanced Battery Consortium Lithium battery project SOURCE: Adapted from U.S. Congress, General Accounting Office, Electric Vehicles: Likely Consequences of U.S. and Other Nations' Programs and Policies (Washington, D.C.: U.S. Government Printing Office, 1994) Electric vehicles face significant technological and market barriers. Current electric vehicles utilizing lead acid batteries require difficult trade-offs in performance, range, and ease of recharging. Batteries are therefore the focus of electric vehicle R&D efforts. The United States and Japan appear to be the only countries with large-scale publicly-funded advanced battery programs. In the United States the Big Three automakers formed the U.S. Advanced Battery Consortium (USABC) in 1991, and later that year reached agreement with the U.S. Department of Energy (DOE) and the electric utility industry to cooperate in support of research and testing of advanced batteries.31 The program has involved contracts with battery developers and cooperative research and development agreements with DOE labs to support a variety of approaches toward battery technology development and testing. As the name suggests, Japan's main battery research program, the Lithium Battery Electric Power Storage Research Association (LIBES), is also focused on lithium batteries. There are several interesting differences between the U.S. and Japanese efforts. First, the USABC involves a significantly higher overall level of funding than LIBES, but the Japanese effort does not include development of intermediate technologies as USABC does. Second, in contrast to USABC, where participation by automakers is a central element of the program, auto 31 U.S. Congress, General Accounting Office, Electric Vehicles: Efforts to Complete Advanced Battery Development Will Require More Time and Funding (Washington, D.C.: U.S. Government Printing Office, August 1995).
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Maximizing U.S. Interests in Science and Technology Relations with Japan manufacturers are not direct participants in LIBES. Third, because the U.S. industrial base in rechargeable batteries is somewhat thin, several of the participating battery companies are non-U.S. firms, and most of the participating U.S. battery firms are either small or are not in the battery business, one exception being Duracell. No foreign-owned companies are participating in LIBES. Another interesting aspect of the Japanese program is that it does not include Sony, the current market leader in lithium ion batteries for portable electronics applications. Japan currently leads the world in developing and mass producing rechargeable batteries.32 Research on a rechargeable lithium ion battery was first reported in a scientific conference in Japan in 1985.33 Although they have a number of advantages, and Japanese companies are already marketing small lithium ion batteries for use in a variety of portable electronic devices, making the technology feasible for use in electric vehicles is a difficult long-term proposition. Still, the Japanese government program encourages the makers of batteries to invest in long-term research. Even if lithium ion batteries are not widely used in future automobiles, this basic research could deliver benefits in consumer electronics and in other downstream sectors. Japanese battery makers also appear to be taking a global view toward marketing and partnerships. Although they have only been commercialized in the past few years, Japanese companies have already announced several joint ventures and other plans to produce lithium ion and other advanced batteries outside Japan.34 Intelligent vehicle and highway systems are also a focus of government and industry technology development efforts in the United States, Japan, and Europe. Efforts are driven by a common need to improve traffic flows and safety on increasingly crowded highways. Intelligent vehicle and highway systems are a huge potential market, not only in developed countries but in rapidly growing Asian economies where traffic congestion is already a major problem in large cities. Vehicles and systems will draw on a wide range of technologies, including sensors, electronics, radar, human interface, information systems, and image processing. The Japanese government has increased R&D in this area in recent years. Five ministries budgeted 62.5 billion yen for this effort in fiscal 1996 (over $500 million at current exchange rates), compared with U.S. government funding of $222.8 million.35 Outlook for 2007 While Japanese companies still hold a manufacturing and product development edge, the U.S. auto industry has made considerable progress in catching up. A more level playing field is emerging in the industry as access to the Japanese market improves and Japanese-owned manufacturing and R&D facilities in the United States make greater contributions to U.S. employment and living standards. Although the nationality of companies is becoming less of a differentiating factor in the auto industry, the US. economy still derives relatively greater benefit from the success of U.S.-based companies. Japanese and U.S. companies will likely remain in the forefront of the global auto industry. Current production trends are likely to continue for at least the next few years. Although appreciation of the dollar in 1995 and 1996 slowed progress, the US. auto trade deficit with Japan will likely continue to shrink somewhat. 32 ''Lithium-ion Cells in Mass Production," Road Warrior News, April 1995. 33 Ko Shimada, "Lithium Ion Battery: A Key Device for the Multimedia Age," Japan 21st, October 1994. 34 "NEC to Produce Batteries in Canada," Nikkei Weekly, August 1, 1994, p. 8. 35 Asian Technology Information Program, "Intelligent Transport Systems: 1996 Japanese Budget/Strategy," ATIP Report, February 1996.
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Maximizing U.S. Interests in Science and Technology Relations with Japan Asia will be a major competitive battleground of the global auto industry. The ability to invest will depend on strengths built in core developed-country markets as much as effective Asia strategies per se. It is likely that firms from neither country will be able to dominate. The South Korean industry will be a major wild card over the next few years. South Korea is building significant capacity, and Korean companies could pose a challenge to U.S. and Japanese firms within the next decade. The European industry is likely to experience significant consolidation. Both U.S. and Japanese companies will be prominent in the emerging global supplier base, although second-and third-tier companies in each country will face significant challenges. U.S. suppliers will need to make further progress in implementing the Toyota Production System, and Japanese suppliers will need to follow their customers offshore and develop new international business. The ability of foreign-based companies, particularly suppliers, to participate in the Japanese market is still an issue. ADVANCED MATERIALS The field of advanced materials is comprised of a diverse group of technologies, including high-performance glass and ceramics, polymers, specialty metals, precision coatings, and composite materials. They are applied in a wide range of industries, including chemicals, electronics, aerospace, and automobiles. A comprehensive evaluation of U.S.-Japan capabilities and cooperation is beyond the scope of this study. Fortunately, a number of evaluations of specific areas of advanced materials research and application have been done in recent years by the Japan Technology Evaluation Center.36 This section will review several general features of technology development and commercialization activities in the two countries and the implications for the future. General U.S.-Japan Differences The United States and Japan both possess strong capabilities in advanced materials R&D and commercialization. U.S.-based companies tend to be strong in such areas as gas membranes, polymers and polymer composites (although Japanese firms are strong in carbon fiber), specialty metals (particularly for aerospace applications), and utilization of modeling and simulation in the development of materials. Japanese firms are strong in coatings (as are German companies), 36 Relevant studies include Lawrence Tannas, Jr., William E. Glenn, Thomas Credelle, J. William Doane, Arthur H. Firester, and Malcolm Thompson, JTEC Panel Report on Display Technologies in Japan (Baltimore: Loyola College in Maryland, 1992); Dick J. Wilkins, Moto Ashizawa, Jon B. DeVault, Dee R. Gill, Vistap M. Karbhari, and Joseph S. McDermott, JTEC Panel Report on Advanced Manufacturing Technology for Polymer Composite Structures in Japan (Baltimore: Loyola College in Maryland, 1994); Michael J. Kelly, William R. Boulton, John A. Kukowski, Eugene S. Meieran, Michael Pecht, John W. Peeples, and Rao R Tummala, JTEC Panel Report on Electronic Manufacturing and Packaging in Japan (Baltimore: Loyola College in Maryland, 1995); C. Judson King, Edward L. Cussler, William Eykamp, George E. Keller II, H.S. Muralidhara, and Milton E. Wadsworth, JTEC Panel Report on Separation Technology in Japan (Baltimore: Loyola College in Maryland, 1993); M.S. Dresselhaus, R.C. Dynes, W.J. Gallagher, P.M. Horn, J.K. Hulm, M.B. Maple, RK. Quinn, and RW. Ralston, JTEC Panel Report on High Temperature Superconductivity in Japan (Baltimore: Loyola College in Maryland, 1989); and Stephen R. Forrest, Larry A. Coldren, Sadik C. Esener, Donald B. Keck, Frederick J. Leonberger, Gary R. Saxonhouse, and Paul W. Shumate, JTEC Panel Report on Optoelectronics in Japan and the United States (Baltimore: Loyola College in Maryland, 1996).
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Maximizing U.S. Interests in Science and Technology Relations with Japan Japanese industry and government appear to be learning lessons from SEMATECH as well. Several new public-private research programs have been launched in the past few years. With total funding of $190 million per year, these programs represent the largest-scale government-industry research effort in semiconductors since the 1970s.96 Outlook for 2007 The prospects for the U.S. SME industry will remain tightly linked to those of U.S.-based device makers. Due to its relatively small size and segmentation, the industry is likely to retain a more "national" character in terms of employment and technology base, compared with device makers that are increasingly global, and other industries examined in this report. Despite considerable gains by US. companies, the management of Japanese device makers and their relations with equipment suppliers still deliver a manufacturing edge. This is likely to persist in the future. The development of an independent Korean SME base and expanded cooperation between Korean, U.S,. and Japanese vendors are possible future trends. Although the US. industry is in a much better position than it was a few years ago, access to the Japanese market is still a concern of all but the strongest companies, and limited access to Japanese-owned fabs outside Japan may raise additional problems in the future. Given the sudden onset of unfavorable circumstances, the industry could find itself in deep trouble once again. SEMATECH appears to have facilitated better cooperation between U.S. device makers and SME vendors and can serve as a positive example for other industries, but the experience in lithography exposes the limitations of technology policy solutions in reestablishing a U.S.-based presence in key market segments. INFORMATION INDUSTRIES The information industries sector is somewhat difficult to define precisely because of rapid technological changes, market growth, and structural shifts. Fast-moving innovations are blurring the lines between industries that have been considered the primary information-related sectors (such as telecommunications services, computer hardware, and computer software) and other industries such as entertainment, consumer electronics, and publishing.97 Although the sector is so large and diverse that a comprehensive examination of U.S.-Japan competitiveness and technology trends would require an extensive study in itself, the Competitiveness Task Force 96 Kenneth Flamm, "Japan's New Semiconductor Technology Programs," Asian Technology Information Program Report 96-091, October 1996. In contrast with the United States, where civilian technology programs are extensively debated, the new Japanese programs and organizations were developed through government-industry consultation and coordination. 97 See National Research Council, Keeping the U.S. Computer and Communications Industry Competitive: Convergence of Computing, Communications, and Entertainment (Washington, D.C.: National Academy Press, 1995) and Council on Competitiveness, Endless Frontier, Limited Resources: U.S. R&D Policy for Competitiveness (Washington, D.C.: Council on Competitiveness, 1996), p. 107. The latter report defines the information technologies sector as including telecommunications and networking equipment and services, computers, storage devices, terminals, peripheral equipment, software and associated services, office machinery, packaged software, data processing, information services, facilities management, and other associated services.
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Maximizing U.S. Interests in Science and Technology Relations with Japan reviewed several key issues that have broader implications for the overall U.S.-Japan science and technology relationship. Computers, Software, and the Development of U.S. and Japanese Capabilities Most of the industries and technologies underlying the ongoing "information revolution" were pioneered in the United States, and U.S. institutions and companies still enjoy widespread leadership in research and commercialization.98 U.S. leadership was forged and extended during the Cold War period, with U.S. policies and market factors spurring technology development and diffusion, particularly in the areas of computer hardware and software.99 The U.S. government invested large amounts in computer and communications research and education, leading to the emergence of a broad human resource base for research and commercialization. The government was also a lead user of advanced information systems and enabling technologies, such as the SAGE air defense system in the 1950s and the space program in the 1960s, and promoted the diffusion of knowledge through its research support and antitrust policies. By the 1960s, a growing commercial market for data-processing equipment and services had emerged, and U.S. companies, most prominently IBM, had established themselves as the market and technological leaders. The mainframe computer was the central product, and business demand drove market growth. The Japanese government and the integrated Japanese electronics firms were aware of the significance of mainframe computers from an early date. A catch-up strategy was developed, with one key priority being to control market participation by IBM and other foreign vendors while promoting the transfer of critical technologies. A government-subsidized leasing company was set up to match IBM's marketing edge, which lowered market risks for hardware makers and stoked demand for mainframes and data-processing services. A series of government-industry collaborative R&D projects was designed to strengthen the domestic technology base and eventually establish Japanese leadership in innovation.100 This strategy, combined with the decision by two of the three Japanese computer companies to adopt IBM-compatible architectures, was quite effective for a number of years. The Japanese computer makers were able to build sufficient capabilities to meet the needs of domestic users and gradually closed much of the technology and market gap with IBM and other U.S. companies. By the mid-1980s, Japan's IBM-compatible mainframes were competitive, and the Japanese computer industry was making important inroads in supercomputers. At the same time, spillovers between U.S. government computer procurement in defense and other areas and the fastest-growing commercial sectors had become less common. It began to appear that U.S. companies had to take Japanese competition seriously and that Japanese strength in associated components such as logic circuits, memory, and storage devices would allow the Japanese computer industry to compete effectively, while government-industry collaborative research programs such as the Fifth Generation Computer Project would establish technological leadership. Several technological and market developments prevented this from happening. Continuing rapid innovation led to dramatic improvement in the cost performance characteristics of data 98 U.S. industry accounts for about half of global revenues in these sectors. Council on Competitiveness, op. cit. 99 See Richard N. Langlois and David C. Mowery, "The Federal Government Role in the Development of the U.S. Software Industry," in David C. Mowery, ed., The International Computer Software Industry: A Comparative Study of Industry Evolution and Structure (New York: Oxford University Press, 1996). 100 Marie Anchordoguy, Computers, Inc.: Japan's Challenge to IBM (Cambridge, Mass.: Harvard University Press, 1989).
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Maximizing U.S. Interests in Science and Technology Relations with Japan processing equipment during the 1970s and 1980s. With the advent of the minicomputer, workstation, and particularly the personal computer, the market for computers grew from its base in large businesses and government agencies to include a wider range of organizations and eventually individuals. Just as the Japanese computer industry was catching up with IBM and Cray, the center of gravity for information technologies markets shifted dramatically toward distributed computing, the development of packaged applications software for open architectures, and more recently to new business and entertainment applications enabled by the Internet.101 In this environment the continuing advantages of the U.S. system, including a strong human resource and university research base, financial institutions well adapted to support investment in the commercialization of new technologies, and most importantly an open and dynamic market for information technology products, have enabled innovative U.S. technologies and firms, both new and established ones, to flourish. In the case of key technologies such as the MS-DOS operating system and Intel's microprocessor architecture, a strengthening of U.S. intellectual property protection and the emergence of these products as de facto standards put U.S. firms in a stronger position than past U.S. innovators, such as RCA (in color television) and Fairchild (in basic semiconductor production technologies), which had been forced to license key technologies to Japanese industry in return for market access in the 1950s and 1960s.102 By contrast, the PC standards developed by Japanese companies remained fragmented and incompatible, the price performance characteristics of Japanese PCs did not improve as quickly as the U.S.-determined global standard, and the technology did not diffuse quickly within Japan until recently. Structural features of the Japanese system, several of which provide sharp contrasts to characteristics of the U.S. system, also have hindered overall Japanese progress in information industries. Japan's strategy of utilizing government-industry cooperation to encourage inward technology transfer while developing domestic industry strengths has proven difficult to pursue effectively in the rapidly growing and largely unregulated markets centered on PCs. The government-industry collaborative R&D programs of the 1980s focused on several areas of information technology considered critical at the time, but these either failed to reach their technical goals or shifts in markets and participating company strategies rendered them irrelevant before they were completed.103 Japan lacked the education and advanced research base, financial infrastructure for commercializing new ideas, and dynamic open markets in information technology that pushed innovation in the United States. Japan's lower emphasis on software and its different approach to software development, described below, also have played a major role. Finally, the patterns of globalization pursued by U.S. and Japanese companies also have had an impact. In the late 1980s it appeared that the collective strength of Japanese companies in many areas of computer hardware would be leveraged to gain greater control over global information technology markets. However, competition from companies based in Asia in 101 National Research Council, Realizing the Information Future: The Internet and Beyond (Washington, D.C.: National Academy Press, 1994), Appendix A, contains a primer on the development and key features of the Internet. See also National Research Council, Evolving the High-Performance Computing and Communications Initiative to Support the Nation's Information Infrastructure (Washington, D.C.: National Academy Press, 1995). 102 It should be pointed out that the relationship between intellectual property protection, industry structure, and innovation are complex, particularly in these industries. Strong intellectual property protection encourages innovation, but may also contribute to the emergence of an industry structure that discourages new entry. Therefore, the impacts and interaction of intellectual property policy and competition (antitrust) policy are very important. See Robert P. Merges, "A Comparative Look at Intellectual Property Rights and the Software Industry," in Mowery, ed., op. cit. 103 The MITI-led Fifth Generation and Supercomputer consortia, and the Ministry of Education, Science, and Culture-led TRON project are relevant here. These are described by Scott Callon in Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy (Stanford, Calif.: Stanford University Press, 1995). As pointed out in other parts of the report, however, these programs probably produced less tangible benefits in the form of training and improved research infrastructure.
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Maximizing U.S. Interests in Science and Technology Relations with Japan hardware products created alternative sources for critical components. Different approaches to direct investment in Asia by U.S. and Japanese companies were largely responsible for this turn of events. 104 U.S. electronics investments in Asia have been aimed at the U.S. and global markets and have transferred significant capabilities to Asian manufacturers. This has created an alternative supply base and competition for Japanese firms. In contrast, Japanese investments in Asia have until recently tended to focus on local markets and to transfer less sophisticated products and processes. Current Capabilities and Trends As a result of their disparate development paths and institutional legacies, Japanese and U.S. information technology markets and capabilities are quite different. Several aspects of Japanese industry approaches and business practices are currently seen as disadvantages. The first is the lower level of diffusion of information technologies, particularly PCs, relative to the United States. Figure 5-1 shows trends in U.S. and Japanese investments in information-related products. Despite accelerated growth in recent years, Japan still lags the United States in the diffusion of PCs, particularly networked PCs used in business.105 Another characteristic of Japanese information industries is a relative emphasis on the development of custom versus packaged software. Experts have noted Japanese strength in developing customized software and the advantages of the ''software factory" as an organizational tool.106 However, the Japanese capability to produce custom software for proprietary systems represents the flip side of a dearth in capability to develop packaged applications software for open systems.107 According to one estimate, over 60 percent of Japan's total 1990 software production was accounted for by a combination of users' in-house capabilities and software houses spun off from, and still closely associated with, users.108 Japanese demand is likely to shift toward packaged software as distributed processing becomes more widespread. For Japanese users the cost differential between maintaining large investments in unique solutions (run mainly on mainframes) and switching to standardized solutions (run mainly on distributed open systems) is growing as the U.S. packaged software industry has grown more innovative. Adaptation of foreign-developed applications to run on Japanese systems also is becoming less expensive. A key turning point was the development of the Japanese version of Microsoft Windows, which has spurred rapid growth in the Japanese PC market and is spelling the demise of the closed proprietary PC standards maintained by Japan's leading computer manufacturers. 104 See Michael Borrus, "Left for Dead: Asian Production Networks and the Revival of U.S. Electronics," in Eileen Doherty, ed., Japanese Investment in Asia (Berkeley, Calif.: The Asia Foundation and Berkeley Roundtable on the International Economy, 1995). 105 According to a projection by IDC Japan, the diffusion rate of PCs in U.S. business will be close to 60 percent, versus 25 percent or so in Japan. About 90 percent of U.S. business PCs are expected to be networked, versus just under 50 percent in Japan. See Nihon Keizai Shimbun, July 22, 1996, p. 34. 106 Michael A. Cusumano, Japan's Software Factories: A Challenge to U.S. Management (New York: Oxford University Press, 1991). 107 William V. Rapp and Hugh T. Patrick, The Future Evolution of Japanese-U.S. Competition in Software: Policy Challenges and Strategic Prospects, Report to the Japan-U.S. Friendship Commission, August 1995. 108 Yasunori Baba, Shinji Takai, and Yuji Mizuta, "The User-Driven Evolution of the Japanese Software Industry: The Case of Customized Software for Mainframes," in Mowery, ed., op. cit.
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Maximizing U.S. Interests in Science and Technology Relations with Japan FIGURE 5-1 Information-related investment. NOTE: PPP (purchasing power parity) and MER (market exchange rates) from Organization for Economic Cooperation and Development. SOURCE: Nihon Keizai Shimbun, July 22, 1996, p. 34. Today, Japanese companies are largely absent from the packaged software market, including operating systems as well as the most important and rapidly growing application segments for businesses and consumers such as groupware, Internet browsers, and relational databases.109 Japanese companies are only now beginning to develop strategies for the Internet and "intranets" that link corporations. However, it would be a mistake to make too much of these relative weaknesses or to downplay Japan's strengths. Japanese companies remain quite strong in significant areas of information technologies. These include computer and video games, high value-added hardware components of information systems (displays, optical storage), embedded software in products such as numeric control software for machine tools, and vector supercomputers. In these areas, differences in the structure of the Japanese market have not constituted a disadvantage. For example, fragmented standards have not been a major barrier to the diffusion of "stand-alone" systems like games and machine tools.110 The needs of supercomputer users are usually highly specialized, with applications software developed in house or by contractors, so purchasing decisions are largely determined by price and hardware capabilities. Japanese companies and the Japanese government are also taking steps to adapt and become more competitive. For example, anecdotal evidence indicates that the large Japanese electronics companies are maintaining their investments in longer-term research and expanding their collaborative work with Japanese universities.111 Recent Japanese policy initiatives are aimed at 109 As of June 1996, 85 percent of the 20 top-selling software packages in Japan were localized versions of foreign programs. See John Boyd, "The Past, Present, and Future of Japanese Software," Computing Japan, June 1996. 110 However, the PC is even mounting a strong challenge in numeric controllers. See Steve Glain, "PCs Undercut Top Factory-Robot Maker: Fanuc of Japan Sees Its Market Clout Slipping Away," The Wall Street Journal, May 20, 1997. 111 For example, a group of 21 Japanese univerisities and 10 electronics companies, including foreign capital companies such as Texas Instruments and IBM, announced plans for a four-and-a-half-year, 1 billion yen research effort in the area of parallel computing. See "San-Gaku kyodo de sentan kenkyu" (Advanced Industry-Government Research), Nihon Keizai Shimbun, October 2, 1995, p. 17.
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Maximizing U.S. Interests in Science and Technology Relations with Japan promoting the diffusion of information technologies and strengthening the university research base-areas where Japan is weak relative to the United States.112 In addition, Japanese companies have responded very rapidly and aggressively to the competitive challenges of the past few years, such as the assault on the Japanese PC market by Compaq and others, by rapidly globalizing their sourcing patterns. NEC, Fujitsu, and others are now positioned to reenter the U.S. PC market, which they had largely abandoned in the late 1980s. There are also signs that the business culture in Japan is changing. One company that is pursuing a very different strategy toward information industries than other Japanese firms is Softbank Corporation. From its base in Japan as a software and peripherals distributor, Softbank has concluded a broad and dynamic array of acquisitions, minority investments, and strategic alliances, mainly involving U.S. firms, in the past several years (see Table 5-4). In contrast to traditional Japanese corporate strategies in this industry, which are focused on hardware, inward technology transfer, and catching up with U.S. front-runners, Softbank has moved to establish a dominant position in key areas of the infrastructure for information businesses, such as publishing and information technology trade shows. Also, a number of Softbank's alliances appear to be aimed at facilitating access by small-and medium-sized U.S. technology start-ups to the Japanese market. Softbank's ultimate degree of success remains to be seen, but the existence of a maverick Japanese firm pursuing high-risk strategies raises the possibility that U.S.-Japan cooperation and competition in this sector will be different than in the past. Although Softbank is something of an outlier in the Japanese context, Japanese companies are increasingly willing to engage in reciprocal relationships with U.S. partners, particularly in this industry.113 By the same token, some U.S. software firms are aggressively investing in Japan, as illustrated by Intuit's acquisition of Milky Way, a small Japanese software company, in 1996. Despite current leadership in this industry by U.S. firms, particularly in establishing the most important information technology architectures and standards, U.S. advantages should not be overstated or taken for granted. For example, despite global market leadership by U.S. companies, the U.S. trade balance in information technology products moved from a small surplus in 1990 to a $20.9 billion deficit in 1994.114 Also, it appears that U.S. industrial R&D in these industries is increasingly focused on product development, while longer-term corporate R&D has been reduced.115 Events of the past decade show that today's winners in information industries can quickly become tomorrow's losers.116 112 See Government of Japan, "Science and Technology Basic Plan," July 2, 1996. 113 One important example was Hitachi's decision to purchase microprocessors for its mainframe computers from IBM. "Hitachi Turns to IBM, Eyes Power PC," Electronic Engineering Times, May 2, 1994, p. 14. 114 Council on Competitiveness, op. cit., p. 109. 115 See Ibid., p. 107. There is some debate among experts about the extent and significance of this trend. 116 For example, a significant market shift from PCs to the emerging "network computer" could lead to new opportunities for Japanese firms.
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Maximizing U.S. Interests in Science and Technology Relations with Japan TABLE 5-4 Selected Recent Softbank Acquisitions, Minority Investments, and Strategic Alliances Partner Form of Partnership Business Interactive Marketing minority investment computer trade shows, publishing Yahoo! minority investment on-line services Ziff-Davis Publishing acquisition publishing Comdex acquisition computer trade shows CyberCash Inc. minority investment on-line services Unitech Telecom minority investment telecommunications Microsoft joint ventures games NTT joint venture on-line services Decisive Technology Corp. minority investment on-line services Kingston Technology acquisition memory boards I-Search minority investment on-line services Phoenix Publishing Systems Inc. acquisition publishing Firefly Network Inc. minority investment on-line services I/Pro minority investment on-line services US Web minority investment on-line services Trend Micro minority investment on-line services Live World Productions joint venture on-line services Chase Manhattan joint venture internet investments Time Warner/Intel joint venture on-line services Verisign minority investment on-line services News Corp. joint venture digital satellite television Iota Industries minority investment document search software Tabula Interactive minority investment on-line services Asymetrix minority investment on-line services Sega joint venture publishing Dentsu joint venture advertising SOURCE: Compiled by Office of Japan Affairs from news reports. Future Questions and Issues Market Dynamism The dynamic, rapidly growing U.S. market for information technology products will continue to be a strong force in driving innovation. One important question for the future is whether the Japanese market will come to play a similar role. Japan's competitive, dynamic market plays an important role in pushing new technology in areas such as consumer electronics and games. Despite the fact that Japan's markets in computing and communications are somewhat more open
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Maximizing U.S. Interests in Science and Technology Relations with Japan and competitive than they were a few years ago, cost levels and regulatory barriers are still significantly higher than those of the United States (see Figure 5-2).117 Telecommunications services are particularly important. In contrast to the United States, where deregulation and the break-up of the Bell System has led to increased competition and lower costs, the Japanese market is still highly regulated. NTT still holds a dominant position in providing long distance and local service, and costs are still several times higher than in the United States. With the implementation of new legislation in 1996, the U.S. approach is moving further toward deregulation and open competition. Meanwhile, debate in Japan over deregulation of telecommunications markets and restructuring NTT has focused on how changes would FIGURE 5-2 Annual cost of leased-line service for 1.5 Mbps service. SOURCE: Goldman Sachs & Co., as compiled in The Wall Street Journal, February 14, 1996, p. A 0. 117 Some observers also believe that Japan's business culture will hinder utilization of information technology in industry. See "Wiring Corporate Japan," The Economist, April 19, 1997.
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Maximizing U.S. Interests in Science and Technology Relations with Japan impact international competitiveness.118 In December 1996 the Japanese government announced plans to divide NTT into three operating divisions, owned by a single holding company.119 Nevertheless, however Japan's policies and strategies change in coming years, it is very unlikely that a U.S.-style approach emphasizing openness and free competition will be instituted in the near future.120 Asian Markets and Technology Networks Asian markets and technology networks will also play an increasing role in information technologies. The Asian market for personal computers, for example, is expected to grow by 20 to 30 percent a year until the end of the century.121 This growth presents significant opportunities and challenges for U.S. and Japanese companies. Although the Asian electronics production networks of U.S. and Japanese companies have served as valuable suppliers, balancing short-term demands for technology transfer and the longer-term risk of creating new competitors is a growing challenge.122 Asia will increasingly serve as a source of innovation and technology as well. Both U.S. and Japanese companies have been active in building R&D capabilities in Asia.123 As in regulation, U.S. and Japanese approaches to Asian markets and innovation show significant differences. The U.S. government tends to pursue liberalization in trade and regulation both bilaterally and through multilateral organizations.124 U.S. companies pursue their own strategies for accessing Asian markets and technological capabilities. The approach of Japanese government and industry to the Personal Handy-Phone System (PHS) is instructive by way of contrast. PHS is a digital mobile communications system developed collaboratively by the Ministry of Posts and Telecommunications and the private sector.125 NTT is now making aggressive efforts in Asia, including R&D cooperation, to establish PHS as an international standard to compete with cellular technologies.126 This is just one example of the comprehensive Japanese government and industry approach to science and technology cooperation in Asia.127 For the United States, balancing the long-and short-term interests of individual companies and the U.S. economy as a whole in trade and technology relationships with Asia will continue to be a challenge. Some experts assert that Japanese investment in Asia, particularly in electronics, represents a shift in the U.S. trade deficit with Japan to a deficit with Asia.128 118 "Kenkyu kaihatsu ryoku ne genkai" (Limitations on R&D Capability), Nihon Keizai Shimbun, September 14, 1995, p. 3. 119 "Global Competitors Have Little to Fear in NTT," Reuters Yahoo! News, December 6, 1996. 120 Steven K. Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Ithaca, N.Y.: Cornell University Press, 1996). 121 "The East Is Wired," Far Eastern Economic Review, June 15, 1995, p. 71. 122 "Price of Entry into China Rises Sharply," The Wall Street Journal, December 19, 1995, p. A14. 123 "Ajia de kenkyu kaihatsu kyoka" (Strengthening R&D in Asia), Nihon Keizai Shimbun, February 6, 1995, p. 8. 124 "Pacific Rim Nations Pledge Tariff Cuts: Clinton Wins Accord on High-Tech Goods," The Washington Post, November 26, 1996, p. 1. 125 "Japan's Personal Handy-Phone," Asia Technology Information Program Report 95-26, May 1995. 126 "NTT Singapore Representative Office," Description of activities, NTT World Wide Web Homepage. 127 National Science Foundation Tokyo Office, "Japan's Technical Cooperation with Asian Countries," NSF Tokyo Office Report Memorandum 96-17, July 1996. 128 For example, Kozo Yamamura and Walter Hatch, "A Looming Entry Barrier: Japan's Production Networks in Asia," National Bureau of Asian Research, February 1997; Mitchell Bernard and John Ravenhill, "Beyond Product Cycles and Flying Geese: Regionalization, Hierarchy, and the Industrialization of East Asia," World Politics, January 1995; and Mark Z. Taylor, "Dominance Through Technology: Is Japan Creating a Yen Bloc in Southeast Asia?'', Foreign Affairs, November/December 1995.
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Maximizing U.S. Interests in Science and Technology Relations with Japan Investments in R&D Federal spending on basic research, advanced education, and leading applications of information technology have played an important role in U.S. leadership in information technologies.129 The High Performance Computing and Communications Initiative, an interagency initiative of the federal government, continues the tradition of strong federal support and has contributed to the development of technologies that have advanced U.S. competitiveness in information technologies, such as the Mosaic Internet browser.130 At the same time, the lack of a strong fundamental research base and advanced computer science and engineering training has been seen as one of Japan's primary weaknesses. As noted above, U.S. and Japanese investment patterns are changing in this industry. The U.S. federal government faces budget pressures, that will likely constrain overall R&D spending, and reductions in Department of Defense support for some areas of computer science R&D are already perceived to be having an impact.131 Meanwhile, the Japanese government is working to build a stronger fundamental research base. At this point, it is still difficult to predict the impact of these trends. Intellectual Property Protection As noted above, stronger U.S. intellectual property rights laws and enforcement have been an important factor in maintaining U.S. leadership in information technologies, particularly in setting the most important de facto standards and architectures. Since the United States is likely to remain the leading market for information technology products, and possession of a U.S. patent allows exclusion of infringing products, U.S. intellectual property rights laws are in many cases sufficient to discourage illegal copying and patent or copyright infringement efforts. A nascent Japanese plan to amend its copyright laws to allow unrestricted software decompilation, which might have allowed Japanese firms to reverse engineer U.S. software and market the copied product, was dropped after protests by the U.S. government and U.S. industry.132 U.S. government and industry criticism also caused Japanese standards-setting officials to drop plans for software quality standards that could have evolved into trade barriers.133 Indeed, the U.S. software industry is very active in pursuing its collective policy interests in Japan and other markets. Protection from copyright infringement in the area of pirated products is another important issue.134 In this area, U.S. and Japanese interests may be moving toward greater confluence. For 129 For an overview of the status and prospects of U.S. computer science and engineering, see National Research Council, Computing the Future: A Broader Agenda for Computer Science and Engineering (Washington, D.C.: National Academy Press, 1992). 130 HPPCI a multi-agency initiative that serves as the main vehicle for public research in information technology. It was established in 1991 to (1) extend U.S. leadership in high-performance computing and networking, (2) disseminate new technologies to serve the economy, national security, education, health care, and the environment; and (3) spur gains in the U.S. economy. See National Research Council, Evolving the High-Performance Computing and Communications Initiative to Support the Nation's Information Infrastructure, op. cit. The NRC assessment credits HPPCI with a number of accomplishments, and recommends several modifications in the program. 131 U.S. Department of Commerce, Bureau of Export Administration, Critical Technology Assessment of the U.S. Artificial Intelligence Sector, 1994). 132 U.S. Trade Representative, 1995 National Trade Estimate (Washington, D.C.: U.S. Government Printing Office, 1995), and Japan Economic Institute, JEI Report 22B, June 10, 1994. 133 Japan Economic Institute, JEI Report 33B, September 1, 1995. 134 One difficulty sometimes encountered in enforcing copyright infringement in Japan is the long delay encountered in obtaining search warrants. Japanese police also complain of these delays. See Miyazawa Setsuo, Policing in Japan (Albany, N.Y.: SUNY Press, 1992), p. 90.
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Maximizing U.S. Interests in Science and Technology Relations with Japan example, Japanese companies that are victims of piracy are increasingly willing to pursue legal action to protect their rights.135 At the policy level, the Japanese government has been much less vocal than the U.S. government in pressing copyright issues with China and other developing countries, but has also embarked on a focused effort to cooperate with Asian countries as they develop their intellectual property protection systems.136 In the future it may be possible for the United States to work more closely with Japan and other producers of intellectual property to ensure that patents and copyrights are protected in Asia. Outlook for 2007 Japan 's research base in industry and at universities is likely to become stronger and more important to the global shape of these industries. As was the case in mainframes and vector supercomputers, Japanese companies are likely to narrow the gap in parallel architecture, workstations, PC development, and perhaps even in software. Future market shifts, such as the rise of network computers that replace the PC, also could provide new opportunities for Japanese companies. Both U.S. and Japanese-based information products manufacturers are likely to move more manufacturing offshore. Asian countries will increasingly be the source of components and subassemblies. Some Asian countries could also become the source of engineering development for multinational corporations, as India is today in some areas of software. These trends will result in further intensification of global competition, resulting in consolidation, exit of weaker companies, emergence of important new Asian companies, and market share shifts between companies and countries that cannot be foreseen at this point. 135 "Japanese Games Publishers Team to Fight Piracy," Newsbytes Pacifica Headlines, December 6, 1996. 136 Japan Economic Institute, JEI Report 3B, January 24, 1997.
Representative terms from entire chapter: