Cutting rough with Japan’s chip makers

Press, 11 February 1986, Page 29

Cutting rough with Japan’s chip makers

Hard times in the semiconductor industry have bred harsh words between American chip makers and their Japanese competitors over memory chips. The Americans say that the Japanese are selling at a loss in order to dominate markets at home and abroad. The Japanese reply that price-cutting is what competition in glutted markets is all

about.

From the ‘Economist,*

London

America’s trade negotiators are getting tough with Japanese semiconductor companies. The Commerce Department has proposed imposing countervailing duties against Japanese firms allegedly dumping 64K memory chips into American markets, and it is investigating complaints that the Japanese are also dumping the newer and larger 256 K memory chips. Its report is expected later this month. Meanwhile, the office of the trade representative is trying to talk the Japanese into opening up their domestic market for chips — largely, and controversially, by raising prices.

The sheer misery of semiconductor firms is raising trade tensions. The American industry’s backlog of orders nearly trebled between the end of 1982 and early 1984, to just over SUSI.2 billion (SNZ2.4 billion), but has since shrunk almost as much. Although some parts of the. semiconductor market are still healthy, memory-chip prices have plummeted. The average price of 256 K memory chips fell from ?USIB to ?US2O in 1984 to ?U53.50 in

1985; recently they have been selling for as little as SUS2. Prices for 64K memory chips dropped from ?US3 to ?US4 in 1984 to as little as 30 cents in 1985. Americans blame the Japanese for the sharp fall in prices. In 1984, Japanese firms invested in new capacity the equivalent of roughly 30 per cent of their sales’ revenue; Americans spent only 19 per cent. Faced with both the American computer slump and a downturn in sales of videotape recorders, big Japanese chip makers like NEC, Hitachi, Toshiba, Fujitsu and Matsushita badly need new markets to keep their new plant busy. Orders are hard to come by everywhere: the semi-conductor industry has, world wide, roughly twice as much capacity as it needs at the moment.

Nor does 1986 promise

easier pickings. Most people in the industry expect an increase in sales of only five to 10 per cent this year — and even that depends on orders continuing the recovery that began in the fourth quarter of 1985. Although demand for memory chips is expected to be a bit stronger than the industry’s average, it will do little to reduce manufacturers’ overcapacity. Largely by dominating sales of memory chips, Japanese firms have raised

their share of the whole American semiconductor market to 20 per cent. Dataquest, a market-research firm in America, estimates that the Japanese last year accounted for 63 per cent of the 300 million 64K memory chips sold and about 78 per cent of the 97 million 256 K memory chip market. One American chip maker, Intel, abandoned memory chips in 1985. So heavy were the losses at another, Mostek, that its parent, United Technologies

Corporation, sold it to France’s Thomson; otherwise the plant would have had to shut down. Americans — both within the industry and the administration — say that the Japanese did not win their sales fairly. The Commerce Department recently proposed countervailing duties — to penalise those chips sold for less than their cost of production — against 64K chips sold by, among others, Mitsubishi, Hitachi and NEC.

What scares the Japanese is the Commerce Department’s investigation into alleged dumping of the new 256 K chips. Japan’s shares of the American market for these is shrinking (see chart). Nonetheless, the Commerce Department reckons that over the life-

time of the chip American firms will lose up to ?USI billion trying to produce it in the face of falling prices, and 5000 jobs will be lost to imports. The Commerce Department’s investigation is its first anti-dumping snoop unprompted by the industry. Since its announcement the Japanese have raised prices for memory chips sold to America (and nowhere else) by 20 per cent. And NEC and Hitachi have announced cuts in 256 K-chip production. By March, NEC will be producing about half as many of these chips as it had originally planned. Meanwhile, America’s trade representative is trying to negotiate ways to open the Japanese chip market to American firms. American companies have

only about 11 per cent of the Japanese chip market, half the share that the Japanese have in the United States. American officials have rejected a proposal from Japan’s Ministry of International Trade and Industry to increase purchases of American chips by about 12 per cent next year. The talks now seem to be concentrating on chip prices.

The Americans claim that Japanese companies can sell chips for less than the cost of production through cross-subsidies. American chip makers, most of whom lack other products with which to cross-subsidise chip production, will not be able to sell into many Japanese markets until prices increase. So the American negotiators want

the Japanese to set the prices of their chips both at home and abroad so that they stay above production costs.

The Japanese say they could not enforce such a formula even if a fair way of measuring the marginal costs of chip production could be devised. The Americans are still pushing for an agreement. Besides making it easier to sell into Japanese markets, higher prices for chips will hasten the day when the one-mega-bit memory chip will compete with the 256 K variety. The Japanese may dominate 256 K-chip markets and production now; however, the race to be the first to make one-megabit chips commercially is still wide open.