High Tech's Fickle Helping Hand

By Philip Elmer-DeWitt

The change of strategy was so sudden and striking that even veteran policymakers were taken aback. After stressing for months how important it was for the U.S. to stay competitive in high technology, the Bush Administration was getting ready to pull the plug on its two most widely publicized high-tech initiatives. According to reports circulating in Washington, the Administration was determined to cut not only the $10 million it had pledged for research into high-definition television, but all federal support -- including $100 million in 1991 -- for Sematech, the Reagan-era industrial consortium designed to catapult the U.S. into the lead in the technologies for manufacturing computer chips.

Then last week, amid a chorus of complaints from Congress and industry, came the results of two blue-ribbon studies, one by the National Advisory Committee on Semiconductors and the other by the Economic Policy Institute (EPI). Both concluded that what American high-technology industries need is more Government leadership, not less. Said Ian Ross, president of AT&T Bell Laboratories and chairman of NACS: "Every trend you look at is in the wrong direction for the U.S." Next day the Administration reversed itself again, denying that it had any plans for technology budget cuts.

The high-level waffling was the latest manifestation of a debate that has raged within the White House over the proper role of Government in what is becoming an increasingly global economy. Is federal intervention necessary to tip the scales of corporate decision making from short-term gain to long-term planning? Can the state stimulate private industry without making firms dependent on Government handouts? The Bush Administration is torn. Many staff members, at the Commerce and Defense departments believe that robust electronics industries are vital to the national security and should be fostered by the Government. But conservatives led by Budget Director Richard Darman argue with equal vehemence that it is counterproductive for the Government to try to "pick winners and losers" in high tech.

What complicates the issue is that the electronics industry is as divided as the Administration on these questions. Even as U.S. chipmakers cry for tough Government action to open Japan's vast chip market to increased sales of American-made semiconductors, U.S. computer makers, who stuff their machines with foreign chips, are worried that trade tension could endanger their supply. In recent months, joint ventures between U.S. and Japanese chipmakers have multiplied at such a rate that it is getting hard to tell where one country's interests end and the other's begin.

Nowhere is this creeping globalism more striking than in high-definition television. Six months ago, American electronics manufacturers were using apocalyptic terms to describe the race to build tomorrow's TV sets, calling it a life-and-death struggle for economic survival. But plans for a coordinated U.S. effort quickly got bogged down in arguments over technical standards.

By summer, the Administration was beginning to back away from HDTV. By September, the Commerce Department had withdrawn a proposal for a U.S. initiative. This month several U.S. chipmakers announced plans to develop chips for TV sets built according to standards set by NHK, Japan's national broadcasting corporation. In effect, the companies were agreeing to become subcontractors in a technology dominated by Japan. The race is not over yet; several U.S. firms are working on promising technologies without Government help. But the federal cheerleading has stopped. "The matter had been too much politicized in the U.S.," says NHK executive Masahiko Ohkawa, with evident relief. "I think it's better to cool it down a bit."

The problems of the semiconductor industry will be more difficult to resolve. Chipmakers are vital suppliers to the overall electronics industry, which represents the U.S.'s largest manufacturing business (projected 1989 revenue: $300 billion), bigger than steel, aerospace and automobiles combined. But as semiconductor-making equipment becomes increasingly sophisticated, the cost of staying competitive may grow beyond the capacity of even the largest U.S. firms. Japanese semiconductor manufacturers, with the active encouragement of their government, are spending 50% more on research and development than their U.S. counterparts.

The electronics race is a high-stakes contest. The report issued by the EPI last week estimates that the U.S. stands to lose 2 million jobs and suffer a $225 billion increase in its annual trade deficit by the year 2010 if it does not develop a coherent strategy to compete in HDTV and associated industries. "The Bush Administration appears content to allow American high technology to wither away," complained Democratic Representative Norman Mineta of California. "It is as though they woke up one morning and decided calmly to throw away our future."

Opposition to U.S. research cutbacks proved too much even for Budget Director Darman. By last week he was backpedaling, telling reporters that the press accounts of proposed research cuts were "totally wrong. Not just 60% wrong, but 100% wrong." He refused any further comment, however, and sources within the Administration speculate that rumors of R.-and-D. cuts were a trial balloon floated by Darman himself -- one that has now been emphatically shot down. The funding for Sematech and HDTV research is likely to survive, at least until next year. But the debate about the proper role of Government in the age of electronics is likely to remain every bit as contentious as the high-tech race itself.

CHART: NOT AVAILABLE

CREDIT: TIME CHART BY CYNTHIA DAVIS; SOURCE: DATAQUEST

CAPTION: THE RESEARCH RACE

Trouble ahead: Japanese merchant chipmakers spend 50% more on research and development than do their U.S. competitors

With reporting by Gisela Bolte/Washington and Seiichi Kanise/ Tokyo