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U.S. chip makers may lose way in Japan

As the deadline looms for the U.S.-Japan trade pact, American semiconductor vendors may have to go it alone in Japan and many will probably suffer as a result.

As senior U.S. and Japanese trade officials huddle in Canada in a last-ditch effort to renew the countries' semiconductor trade pact, market analysts say that failure to reach agreement won't likely result in an immediate drop in orders for U.S. chips but that the U.S. hold on the huge Japanese market is still likely to erode over time.

At negotiations this week in Vancouver, British Columbia, U.S. chip makers are looking ahead to competing in a Japanese market without government help for the first time in ten years. The U.S.-Japan Semiconductor Agreement, signed in 1986 and scheduled to expire Wednesday, has allowed foreign companies to jump from 8 percent to 30 percent of Japan's semiconductor market by imposing quotas and anti-dumping provisions.

Two-thirds of that 30 percent share is controlled by American companies. Although the United States would like to renew the agreement, the outlook is not bright, with government and industry negotiators for both sides loathe to budge from mutually unacceptable positions.

Chip market analysts say lack of an agreement would likely hurt many semiconductor manufacturers, except for those giants that have managed to establish themselves in the Japanese domestic PC market, most notably Intel. "Dependency on a certain processor from a certain vendor could keep the international market share fairly high," Gary Grandbois, semiconductor analyst at research firm Dataquest, said in reference to Intel's dominance of the PC market.

Other companies such as Motorola that have cultivated long-standing relationships in Japan will also remain strong, as will emerging companies that produce the latest chips that drive popular multimedia, multifunctional entertainment systems like karaoke, said Jim Feldhan, president of Semico Research in Phoenix.

But, as in the United States, Intel may be the only one to stay healthy.

"The question is, can that market share be increased without an agreement or will it erode over time?" Feldhan said. "Those are two possibilities, and it's more likely that the market will slowly erode."

Japan accounts for a sizable share of the worldwide semiconductor market, though the market is not nearly as important as it was in 1986 when the trade accord was signed. Japan was in fact the single largest market until 1993, when the home PC boom in the United States pushed the North American market out ahead, according to Semico Research.

In 1995, Semico estimated that the worldwide market pulled in $144 billion, North America accounting for $47 billion, and Japan, $39.6 billion. Europe accounted for $28.2 billion and the rest of the Asia-Pacific market for $29.5 billion.

The Japanese home market for PCs is now poised to follow the same curve as the United States market, but Intel is likely to be the chief American beneficiary of that growth. Intel is an investor in CNET: The Computer Network.

Chip makers in other Asian countries are also likely to benefit. Asian-Pacific manufacturers grabbed 17 percent of the world market in 1995, led by South Korea's Samsung, which is now the number-one DRAM maker in the world, according to International Data Corporation.

With semiconductor companies already suffering from increased price pressure, the American side is eager to prevent the rest of the U.S market from being squeezed on one side by the Koreans and and on the other side by Intel. The American side is willing to give up quotas but still insists that the two governments should continue monitoring market share to prevent the the Japanese industry from once again closing itself off to foreign competition and reverting to overseas dumping of its own products.

In fact, new accusations of product dumping--selling products overseas for less than the cost of production in order to gain market share--have just been raised by supercomputer maker Cray Research against NEC.

"What we're seeking is the continued monitoring by governments of what the market numbers are," said Jeff Weir, spokesperson for the U.S. Semiconductor Industry Association. "That gives you the ability to measure if there's progress in opening the market."

The Japanese want to replace the deal--including the quotas and the anti-dumping provisions--with a global forum that would gather Europeans and other Asian countries, as well as the U.S. and Japan, to discuss such questions but without any actual correction mechanisms, or even any market share goals, to be determined in advance. "I don't think that the Japanese government is interested in number crunching," said Tom Steindler, counsel to the Electronic Industry Association of Japan, which represents the Japanese chip industry.

Weir scoffs at the Japanese global forum proposal, referring to it as a "chat room": "It doesn't strike me as [leading to] opening trade markets between two countries," he said.

Still, many analysts say that U.S. companies have established too strong a foothold for Weir's more pessimistic projections to likely come true. Some even go so far as to say the U.S. industry's position is "hypocritical."

Jeremy Young, editor of semiconductor trade publication Electronic Buyers' News, accuses a handful of "old guard" U.S. chipmakers, including Motorola, of practicing exactly the opposite of what they're preaching to their Asian competitors.

"[U.S.] companies that refuse to share distribution 'shelves' with Asian companies are open to the charge of hypocrisy," Young said. "They are advocates of increased market share in Japan, while their policies with major distributors here limit Japanese access to distribution channels in the U.S. It's not a consistent policy with respect to what we demand of Japan."

Regardless of the expiration date and the ethics of the American position, Young anticipates that the Clinton administration will continue to keep the pressure on the Japanese government to keep its market as open as possible, at least until the election is over.

"Clinton will probably [continue to] show the semiconductor industry that he's working on their behalf," Young said. "I would expect to see some increase in the 'toughness level,' but if something is achieved by the election it will probably be symbolic."

Related stories:
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