GLOBAL ECONOMIC COMPETITION Today's Warfare in Global Electronics Industries and Companies

GLOBAL ECONOMIC COMPETITION Today's Warfare in Global Electronics Industries and Companies

by

George Kozmetsky IC2 Institute University of Texas, Austin

and

Piyu Yue IC2 Institute University of Texas, Austin

.... "

Springer Science+Business Media, LLC

Library of Congress Cataloging-in-Publication Data

A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN 978-1-4613-7878-5 ISBN 978-1-4615-6271-9 (eBook) DOI 10.1007/978-1-4615-6271-9

Copyright ~ 1997 by Springer Science+Business Media New York. Second Printing 1999. Originally published by Kluwer Academic Publishers, New York in 1997 Softcover reprint of the hardcover 1 st edition 1997

Ali rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+-Business Media, LLC.

Printed on acid1ree paper

TABLE OF CONTENTS

Preface: Facing the Challenge of Global Competition Acknowledgment

Chapter 1: AN OVERVIEW OF INTERNATIONAL ECONOMIC COMPETITION

1-1 International Economic Competition - The Reality of Human Societies

1-2 The Infonnation Age and the Electronic Technology Chain 1-3 National Efforts to Develop the Electronics Industry 1-4 Comparative Analyses of International Economic Competition 1-5 DEA - A Novel Methodology for Comparative Analyses

Chapter 2: THE CHANGING ECONOMIC CONDITIONS OF THE WORLD

2-1 Economic Growth 2-2 Components of Aggregate Demand 2-3 International Trade Performance 2-4 A Comparison of National Economy Fundamentals

Chapter 3: INTERNATIONAL TRADE PATTERNS IN THE GLOBAL ELECTRONICS INDUSTRY

3-1 International Trade in the Global Electronics Industry 3-1-1 The Expansion of Trade in the Global Electronics

Industry 3-1-2 Fast-growing Trading Countries in the Global

Electronics Industry 3-1-3 The Evolution of Comparative Advantages in the

Global Electronics Industry

ix xiii

1

1 5

10 18 20

27

28 32 42 64

69

69

vi Table of Contents

3-2 International Trade in Electronic Components and Devices 3-2-1 TV-Tubes 3-2-2 Special Electronic Tubes 3-2-3 Transistors 3-2-4 Integrated Circuits

3-3 International Trade in Computers and Office Machines 3-3-1 Office Machines 3-3-2 Computers 3-3-3 Computer Parts and Accessories

3-4 International Trade in Telecommunications Equipment

3-5 International Trade in Consumer Electronics 3-5-1 TV Sets 3-5-2 Radios 3-5-3 Sound Recorders and VCRs

3-6 International Trade in Industrial Instruments 3-6-1 Optical Instruments 3-6-2 Medical Instruments 3-6-3 Measuring Instruments

Chapter 4: INTERNATIONAL COMPETITION: GLOBAL ELECTRONICS COMPANIES

92

109

126

131

144

159

4-1 Introduction 159 4-1-1 The Study of Competition Among Companies:

A Theoretic Framework 4-1-2 A Summary of Comparative Analyses of Global

Electronics Companies A. Comparative Performance B. Who Are the Major Players? C. What Are International Benchmarks for Competition?

4-2 Comparative Performance of Electronic Components Cluster 180 Introduction 4-2-1 Market Share and Economic Growth 4-2-2 Employment and Labor Productivity 4-2-3 DEA Cost Efficiency 4-2-4 Profit Margin 4-2-5 R&D Expenditure Ratio

Global Economic Competition

4-2-6 Market Value 4-2-7 Relationship of Company-Level Variables - Dynamic

Econometric Modeling

vii

4-3 Comparative Performance of Computer Manufacturing Cluster 222 Introduction 4-3-1 Market Share and Economic Growth 4-3-2 Employment and Labor Productivity 4-3-3 DEA Efficiency Indices 4-3-4 Profit Margin 4-3-5 R&D Expenditure Ratio 4-3-6 Market Value

4-4 Comparative Performance of Computer Software Cluster 257 Introduction 4-4-1 Market Share and Economic Growth 4-4-2 Employment and Labor Productivity 4-4-3 DEA Efficiency Indices 4-4-4 Profit Margin 4-4-5 R&D Expenditure Ratio 4-4-6 Market Value

4-5 Comparative Performance of Telecommunications Equipment Cluster 288 Introduction 4-5-1 Market Share and Economic Growth 4-5-2 Employment and Labor Productivity 4-5-3 DEA Efficiency Indices 4-5-4 Profit Margin 4-5-5 R&D Expenditure Ratio 4-5-6 Market Value

4-6 Comparative Performance of Industrial Instruments Cluster 314 Introduction 4-6-1 Market Share and Economic Growth 4-6-2 Employment and Labor Productivity 4-6-3 DEA Efficiency Indices 4-6-4 Profit Margin 4-6-5 R&D Expenditure Ratio 4-6-6 Market Value

4-7 Comparative Performance of Consumer Electronics Cluster 349 Introduction 4-7-1 Market Share and Economic Growth 4-7-2 Employment and Labor Productivity 4-7-3 DEA Efficiency Indices

viii

4-7-4 Profit Margin 4-7-5 R&D Expenditure Ratio 4-7-6 Market Value

Chapter 5: THE CORE COMPETITION OF GLOBAL GIANT ELECTRONICS COMPANIES

Table of Contents

377

5-1 Development of U.S. and Japanese Giant Electronics Companies 379 5-2 Increasing Relative Share of the Japanese Giant Electronics

Companies 380 5-3 Behind the Growing Relative Share 384 5-4 Competitive Advantage and Disadvantage 388 5-5 Performance in the Stock Market 393 5-6 Strategic Shift and Restructuring 395 5-7 Acting Ahead of 'Semiconductor Cycle' and Expanding into New Areas 398 5-8 The Evolution of Competitive Market Systems: Two Competing

Types of Market-Driven Companies 404

Appendix: A List of the Sample Companies (316 in Total) 409

References 417

Index 421

PREFACE

FACING THE CHALLENGE OF GLOBAL COMPETITION

Many books and articles have been published on the issues involved in international competitiveness, including global strategies and policies for industries and firms, and trade conflicts between the United States and Japan. Differing opinions about international economic competition have arisen among economists, management strategists, business leaders, policy consultants, and even such national leaders as the President of the United States and the Prime Minister of Great Britainl. The debate about competitiveness has become so heated, there seems to be little hope for a consensus about what actually occurred in the international system during the past two decades, what the present situation is, and what actions national leaders should take, particularly those of the U.S. governmenf.

This book attempts to shed some light on the past, present, and future of the global electronics market by presenting empirical evidence in a series of comparative analyses of economic competition using data pertaining to specific countries, industries and companies. We believe international economic competition is a complex dynamic process that deserves detailed analysis from various angles. It is unwise to characterize economic competition among nations by a simple arithmetic formula or economic logic at the aggregate level, particularly when economic theory and logic rely on restrictive assumptions that have drifted away from reality. Even the sophisticated large-scale economic models used by today's fastest supercomputers may not be able to provide a solution to the competitiveness debate because existing economic knowledge does not fully allow us to understand the complex dynamics of the international economic scene.

We believe deeper and more disaggregate approaches are needed in order to thoroughly analyze the competitive advantage of a nation's economy, its industries, and its individual companies. Since the economic performance of industries and corporations is the foundation of a nation's economy, the macroeconomic analysis

I Paul Krugman, Competitivencu, A Dangerous Obses.ion, Foreign <1ffairs, March/April, 1994. 2 See Head to Head: The Coming Economic Bante Among Japan, Europe, and America, by Leiter Thurow, New York, Morrow, 1992;Mlnding America's Business: The DecUne and Rise o/the American Economy, by Ira Magazine and Robert Reich, New York, Vintage Boon, 1983; Peddling Prosperity, Economic Sense and Nonsense In the Age 0/ Diminished Expectations, by Paul Krugman, W. W. Norton & Company, 1994; The Fight Over Competitiveness, A Zero-Sum Debate? Foreign AfTain, July/Augullt, 1994.

x Preface

of the nation's competitiveness must be based on the microeconomic analysis of its industries and firms. Since no existing aggregation theory can readily be applied to the task of discovering a quantitative association between the economic performance of industries and firms with macroeconomic indicators, we have used comparative analyses of nations, industries, and corporations to show the empirical linkage of a nation's economy and its industries and corporations. No attempt has been made, however, to relate these comparative analyses directly to existing economic theory. We do not identify this study with any specific discipline of economics or of strategic management science, but have based the comparative analyses on empirical data as much as possible.

The approach we adopted in this study might be called a dynamic comparative analysis in that it contains two dimensions of comparisons: across time and across entities, with those entities including nations, industries, and corporations. We first compared the macroeconomic performance of selected nations, then compared the performance of their electronics industries, and finally looked at the performance of corporations in the clustering groups that spread along the electronic technology chain, which will be defined later.

The improvement or erosion of a nation's economic performance over a given period is of importance to this study. More emphasis was given to its economic performance as compared with that of its competitors. We do not make the bold and oversimplified conclusion that one nation's poor economic performance is caused by other nations' good performance, or vice versa. As complicated as international economic competition is, the rise and fall of a nation's economic performance depends as much on domestic factors as on the complicated interactions with other nations within the changing economic environment and shifting global market conditions. In the global marketplace, we see fierce competition among clustering industries as well as among the firms of those clustering groups. The final outcome of this competition profoundly determines a nation's economic status and extent of its power within the international system. Therefore, our comparative analyses emphasize relative performance - performance as compared with other countries -rather than viewing it in isolation. The comparison should be conducted in all three levels in order to have a better understanding of the flux of problems and prosperity within individual nations and in the worldwide network.

Another reason for analyzing industries and firms is that an economic analysis limited to the use of macro indicators always gives rise to controversy about the number of high-paying jobs that have been eliminated in the U.S. by foreign imports, and of the degree to which the American standard of living has been reduced by its failures in the global marketplace. Unfortunately, the existing macroeconomic theory is unable to provide a convincing quantitative answer to these difficult questions. Considering the disagreement regarding the validity of the Phillips curve, how can we be certain that U.S. unemployment in the 1980s had absolutely nothing to do with foreign competition? In light of the increasing mobility of capital, goods, and labor in today's international system, we must look at any and all activity in the clustering industries and corporations of the global market, rather than confining ourselves to macroeconomic variables.

Global Economic Competition xi

In Chapter 1 of this book, we express views about international economic competition and national competitiveness. We briefly review efforts to develop electronics industries in various nations to illustrate how deeply their governments have been involved in the promotion and protection of these industries. We then discuss some methodology issues related to the electronic technology chain and comparative analysis, including Data Envelopment Analysis (DEA).

Chapter 2 contains a comparison of the macroeconomic performances of nations that are major exporters orland importers of electronic products. The 22 nations studied come from four regions: North America (Canada and the United States), Asia (China, Japan, Malaysia, the Philippines, Singapore, South Korea, and Thailand), Western Europe (Austria, Belgium, Denmark, France, Germany, Great Britain, Italy, the Netherlands, Spain, Sweden, and Switzerland), and Latin America (Brazil and Mexico). Hong Kong and Taiwan Province are also included in this study. We compared these nations' economic growth in terms of the world GDP share and the average growth rates of real GDP from 1970 to 1992. This comparison indicates that the center of international economic gravity is shared by three groups of nations, with a steady increase in the economic weight of the Asian group.

Our comparison of the nations' economic performance also uses the components of aggregate demand, including consumption, private investment, government expenditure, and savings. The data clearly indicate that a substantially higher rate of savings and investment is the major domestic factor that has brought an economic surge to the Asian group. In contrast, the significantly lower rate of savings and investment is the primary impediment to economic growth in the United States and in Great Britain and several other European countries.

In Chapter 3, we analyze the national competitive advantages and disadvantages within the global electronics industries, using Michael Porter's competitive cluster of industries to represent a nation's competitive advantage3• We define a cluster according to the technological background that provides a close linkage among the industries. This linkage is called a "technology chain." Many technology chains exist within a national economy. One of the key technology chains that exists in advanced economies is the electronic technology chain, which is the focus of this study. We compared the performance of the nations' industries that spread along the electronic technology chain in terms of export and import shares. The growth trend of international trade in each clustering industry has been estimated to show the dynamics of the nations' competitive advantage. These analyses cover the period from 1978 to 1992.

The comparative analyses indicate that Japan has developed the strongest electronic technology chain in the world. Every clustering industry in the Japanese chain has generated a large amount of national wealth for the Japanese economy. Asia's newly industrialized countries -- Hong Kong, Singapore, South Korea, and Taiwan -- have been working hard to establish their electronic technology chains and

, The Competitive Advantage of Nations, by Michael E. Porter, The Free Press, New York, 1990.

xii Preface

have been emerging as aggressive competitors in the global marketplace. Conversely, economic erosion appears to be occurring in all the clustering industries of the U. S. electronic technology chain, indicating that some profound problems exist in this key sector of the U.S. economy that deserve attention from both the public and private sectors.

In Chapter 4, we extend our comparative analyses to the corporations within each clustering industry, which include electronic components, computer manufacturing, computer software, telecommunications equipment, industrial instruments, and consumer electronics (e.g., household appliances and audio and video equipment). The company studies include the largest multinational corporations of Canada, Japan, South Korea, and the United States, and of Germany, Great Britain, and other Western European countries. The time period of the analyses covers 1982 through 1992.

Using company-level data, we compare a company's performance within each clustering group in terms of several criteria: growth trends, market share, labor productivity, cost efficiency, profit margin, research and development expenditure, and market value. The comparative analyses indicate very different behaviors among the British, German, Japanese, and U.S. companies. A pattern emerged in all the clustering groups that clearly indicates the Japanese companies have paid greater attention to economic growth and market share, but less attention to cost efficiency and profit margin. As a result, the Japanese companies' labor productivity generally has been increasing, though it fluctuated when world demand conditions changed, and the Japanese companies' market shares have risen steadily during the time period studied with the exception of the 1991-1992 recession. An eroding trend in market share and profit margin can be seen in all the clustering groups for the U.S. companies, indicating that the U.S. electronics industry has been less successful than Japan's in the global electronics market.

In Chapter 5, we present the core competition among the world's top 26 giant electronic companies each with more than $10 billion of sales revenues in 1994. The latest data are used to show how these giant companies performed in 1985-1994, a time period with the dramatic appreciation of the Japanese currency and the worldwide economic recession.

Based on empirical evidence from both global electronics industries and companies, we argue that the economic doctrine of free trade is irrelevant within the international system. All the nations of the world must compete and cooperate in order to enjoy political peace and economic prosperity. The comparative advantage of individual nations is subject to dynamic changes over time. Our ancestors' concept of comparative advantage was based on nations' natural endowments, such as land, minerals, climate, and other factors related to simple technologies. Modem economies, on the other hand, have been built on advanced technologies, which have made production factors move toward knowledge-based investments, highly skilled personnel, and abundant financial assets. Key production factors no longer rely on natural endowments, but can be created and accumulated by any nation that chooses to pursue industrialization by following the example of Japan in the 1960s and 1970s. The technology revolution has completely changed production methods and offers a

Global Economic Competition xiii

relatively equal opportunity to all nations around the world. The changing pattern of comparative advantage has also facilitated government promotion of corporations, industries, and national economies. All these new ideas and concepts have been operating in the real world, though they violate some economists' credos.

In conclusion, we emphasize the importance for both u.s. public and private sectors to acknowledge this changing world and to recognize the emerging threats to u.s. corporations, and industries, the U.S. economy, and eventually the u.s. core national interest around the world. Reinforcing the existing U.S. comparative advantage and creating a new comparative edge in key technology chains is a desirable and feasible mission for U.S. economic leaders in the years to come. Such actions are imperative if the United States desires to continue in its role within the international system in terms of maintaining world peace and sharing its prosperity with other nations.

ACKNOWLEDGMENT

We wish to express our gratitude to Professor William W. Cooper for his many stimulating and helpful comments and wise advice. We also wish to thank Dr. Sten Thore and Dr. Fred Phillips for their comments and Kelvin Guo for his research assistance in preparing this monograph. We are grateful to Liz Morris and Yana Lambert for their editorial support.