CASE 1

THE RISE AND FALL OF THE JAPANESE SEMICONDUCTOR INDUSTRY,

1970-2001

SYNOPSIS

US enterprises dominated the world semiconductor market from the 1950s until

the early 1980s. During the 1980s, however, the market share of US firms

plummeted, falling to 29% by 1990, while the share held by Japanese producers

rose from 24% at the end of the 1970s to 49% by 1990. By the end of the 1980s

the US was a net importer of semiconductors, while 5 of the 10 largest

semiconductor producers were Japanese. By the mid 1990s, however, US firms

had regain global market share (to 42%) while the Japanese share had dipped to

41%.

Japanese industrial policy had a great deal to do with the success of Japanese

firms. Japan denied direct access to the Japanese market, and had firms

aggressively pursue technology-licensing agreements from US manufacturers.

While these agreements were financially attractive for US firms in the short run,

they were not these firms’ first choice for accessing the Japanese market, and

they resulted in a significant transfer of technology to Japanese firms.

As a result of political pressure from US semiconductor manufacturers, in 1986

and 1991 the US and Japan signed trade agreements that attempted to increase

free trade in semiconductors. While different interest groups and politicians on

both sides of the Pacific clearly have differing opinions on the appropriateness

and effectiveness of these two agreements, the US manufacturers did improve

their worldwide and Japanese market share during this time period. Of course

the increasing strength of the Yen also contributed to this, and South Korean

manufacturers made significant inroads in addition. When a global economic

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slowdown occurred in 200, Japanese firms were hit hard. The Japanese cut

thousands of jobs and announced an exit from the DRAM business. Global sales

contracted, but American firms increased their share of the world market.

Question 2 :

Does the rise of Japanese semiconductor companies during the 1970s and

1980s indicate that government industrial policy can play an important

role in facilitating national competitiveness in industries targeted by that

policy ?

Answer :

The semiconductor industry took birth in 1947 at Bell Telephone laboratories. It was

an US based company and its invention was commercialized in 1950s. Between 1970

and 1980, much of the market was conquered by the Japanese firms and the

underlying factor behind this success can be traced to the policies formed by the

Japanese government.

The Japanese government through the Ministry of International Trade and Industry

(MITI) formed policies those were designed to support the Japanese semiconductor

industry. Such policies can be referred to the “infant industry argument” by Alexander

Hamilton, where Japanese government attempted to support its domestic firms to gain

competitiveness in the world market. In the 1980s, Japan was seen to be very lucrative

market among the US firms. However, MITI policies required that US firms can only

go for licensing with Japanese firms but cannot do any green-field investment. In this

way, the Japanese firms gained access to the know-how technology of the

semiconductors. It also required that the know-how technology be shared with any

other Japanese firm who wants to enter the industry. As a result and because of

efficiency, Japanese firms got access to the US technology and started to compete

with other US firms. Along with that, competition among Japanese firms itself was

intense that helped to improve the industry’s competitiveness. Moreover, tariff and

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quota by the government also restricted foreign semiconductors to penetrate the

Japanese market, providing a cousin for the local firms.

Along with that, Japanese yen also depreciated during this year’s making Japanese

semiconductors more price competitive in the international market. However, it was

the Japanese government’s industrial policy that played an important role in

facilitating the national competitiveness of the Japanese semiconductors industry.

Question 3 :

What explains the relative decline of Japanese semiconductor firms since 1988?

Can it be attributed to the 1991 semiconductor pact or to other economic

factors ?

Answer :

The Japanese were so successful in the global semiconductor industry between the

1970s and late 1980s because of the industrial policy of the Japanese government. At

that time the Japanese government has limited the foreign industry to run their

business in Japan. For that reason the foreign industries can not run their business

solely in Japan and there were no foreign competitors in Japan for the semi-conductor

industry. So the share of the Japanese industries (for example NEC, TOSHIBA etc)

was growing very rapidly and they compete head to head with the US firms by the

mid 1970s. By the mid 1980s, the changing fortune of US and Japanese industries has

given birth to the new trade dispute between two countries. By this time, the

agreement they have signed was going to expire. At that time both the countries sit in

a meeting and US shows some obligations regarding this agreement. Their point was

that, there must be a fair trade policy both for the countries. Japan can not sell their

semiconductors less than their production cost and US must had to have 20% share of

the Japanese semiconductor companies as well. So after many arguments both the

countries came to the agreement by 1986 and there will be fair market value for the

semiconductors. So from that time, US has captured the shares of the Japanese

companies and the Japanese semiconductor firms started to decline since 1988.

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The foreign shares of the Japanese semiconductor market reached 20 percent in the

fourth quarter of 1992. Though it felt back, but still they recover it and they have

pushed their shares to 19.4 percent. By 1994 they gained a record 23.7 percent market

share. Many of the analysts thought that it was because of the agreement pact. But the

thing is Japanese YEN has strengthened by about 40 percent against the US dollar

since 1991. As the YEN goes high, the terms of semiconductor market has swung

sharply toward foreign producers who now had a distinct cost advantage over the

Japanese rivals. The foreign firms such as Intel, Motorola did really well in 1994 and

1995. Even some Korean firms like Samsung, they didn’t even produce DRAMs in

1988, also captured 12.7 percent of the world DRAM market share in 1994. So the

YEN did all the works. Investment decisions by Japanese firms (although perhaps

affected by the trade disputes) imply that the Japanese firms are perhaps finding other

investment opportunities to pursue and consciously have allowed their market share to

decline. So at that time Japanese shares had cut in half and the consumers were

switching to low cost producers to market leader Samsung and Micron Technology.

US firms have entered the Japanese market and they got to know the market, the

customers and they have set their marketing strategies. Japanese firms didn’t have any

innovative ideas and they only stick to the DRAMS and even many firms from

Taiwan entered the market and captured their shares.

The relative decline in the Japanese semiconductor industry can be attributed to the

1991 semiconductor pact. Lets talk about the 1970s to 1980s, at that time no foreign

firms can enter the Japanese industry and the domestic firms can enjoy the profits and

they will lead the world semiconductor market. But after the fair market agreement in

1991, US has started to enter Japan and they started to capture the Japanese market

and from 1996-2000, US had captured 30 percent of the Japanese firms. Its all due to

the agreement on the fair market value of the semiconductors. Many analysts

criticized on the agreement and it helped the US firms to boom a lot.

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CASE 2

CATERPILLAR INC.

SYNOPSIS

This case focuses on the bumpy ride that Caterpillar Tractor has experienced in

international markets over the past twenty years. Caterpillar Inc. (Cat) is the world's

largest manufacturer of heavy earthmoving equipment. In 1980, Caterpillar was

widely considered one of the premier manufacturing and exporting companies in the

U.S. In 1981, 57 percent of its sales were outside the U.S. Unfortunately, the next

three years were disastrous. As a result of emerging competition from Komatsu (a

Japanese heavy equipment manufacturer), a sharp rise in the dollar against other

currencies, and the Third World debt crisis, Cat found itself losing market share and

profitability. The biggest problem was the unprecedented rise in the value of the

dollar. In the period of 1980 to 1987, the dollar rose an average of 87 percent against

major currencies. The strong dollar substantially increased the dollar price of Cat's

machines, which made them unattractive to overseas buyers. Cat scrambled to

respond to this challenge by cutting costs and investing in flexible manufacturing

technologies to increase quality. The company also lobbied hard to decrease the value

of the dollar against other currencies. Fortunately for Cat, things began to take a

change for the better in early 1985. The U.S. government met with representatives of

Japan, Germany, France, and Great Britain at the Plaza Hotel in New York. The

resulting "Plaza Accord" put forces in motion that eventually brought the value of the

dollar back to its 1980 level. The retreat of the dollar enabled Cat to regain

momentum in global markets. Today, the company is competitive again, and has

regained market share from Komatsu.

One thing that helped Caterpillar during the bleakest days of the early 1980s was a

decision by the International Monetary Fund (IMF). In response to the Third World

debt crisis, the IMF stepped in and provided loans to Third World countries that were

heavily in debt. This action by the IMF helped restore the financial integrity of many

of these countries, which has put them in a position to be Cat customers again today.

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Question-2:

If u were the CEO of Caterpillar, what actions would you take now to make sure

that there is no repeat of the early 1980’s experience ?

Answers:

If I were the CEO of the Caterpillar I would like to take several measures to make

sure that there will be no repeat of the early 1980’s experience.

The measure are stated below-

1. First of all, I would try to increase the increase the superior labor productivity.

2. I would again try to increase the extensive deal network and excellent after

sales service and support functions.

3. I would try to monitor more closely than ever before that what is happening in

the foreign exchange market worldwide. The rationale behind this statement is

that dollar instability was the major issue during the 1980 that forced

Caterpillar to stay behind Komatsu for some short period of time. But later,

after so many initiatives we regained our lost position.

4. I would try to maintain a intimate relationship with government of USA so

that if any unexpected things happen, we can persuade other government high

officials to stabilize the situation and turn the situation in favor of us.

5. I would try to focus more on macro-economic condition of the other countries

so that we can anticipate how much effect it might create if something bad

happens in the world economy.

6. I would explore more on untapped market where we can earn substantial profit

and I would try to keep away from risky ventures.

7. I would try to keep our machines price down and try to increase the market

share in the world as much as possible.

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8. And lastly I would be seeking more investors to invest in plant and make our

equipment available in every corner of the world.

Question -3

What potential impact can the actions of the IMF and World Bank have on

Caterpillar’s business? Is there anything Cat can do to influence the actions of

the IMF and World Bank ?

Answer:

IMF's stated goal was to stabilize exchange rates and assist the reconstruction of the

world’s international payment system. Normally, countries contributed money to a

pool from which countries with payment imbalances could borrow funds on a

temporary basis. Through this activity and others, the IMF worked to improve the

economies of its member countries which is also seen in the Cater Pillar’s case.

The action that was taken by IMF and World Bank was not in favor of Caterpillar’s

business. One of the major factors that triggered the problem was Third world debt

crisis which occurred in 1982. In the early 1970’s the nations of OPEC countries

quadrupled the price of oil, which ultimately resulted massive flow of funds into these

nations. As a result, in the face of liquidity crisis, commercial banks around the world

had to borrow money from the OPEC countries and lent it to the government of many

to finance massive construction projects which eventually led to a global boom in

demand for heavy earthmoving equipment. Although initially Caterpillar benefitted

from the development but, by this time bank lent too much money in risky ventures,

which in turn threatened to suspend debt payments.

Finally, International Monetary Fund stepped in to stabilize the situations by

arranging new loans to indebted countries, on condition that they adopt deflationary

monetary macroeconomic policies. The situation again went out of favor of CAT by

not getting any more orders from the dealers and all of those orders transferred to the

lowest bidder, KOMATSU. As a result of these unanticipated situations, Caterpillar

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fell into deep trouble by late 1982. The company responded quickly and between

1982 and 1995 by cutting cost of more than 20 percent. This was achieved by a 40

percent reduction in the workforce, the closure of nine plants and a $1.8 billion

investment in flexible manufacturing technologies designed to boost quality and lower

cost. As we mentioned above the impact was leading to destroy the CAT business.

Being a third largest US exporter, Cat could take scenario changing measure which

they ultimately did when they pressed the government to lower the value of the dollar

on foreign exchange markets. By 1984, CAT was a leading voice among US exporters

trying to get the Reagan administration to intervene in the foreign exchange market.

Things began to go Caterpillars way in early 1985 prompted by CAT and other

representatives of the US government who met with the representatives of Japan,

Germany, France and Great Britain at Plaza hotel in New York. In the resulting

communiqué which is also known as the Plaza Accord- the five government

acknowledged that the dollar was overvalued and pledged to take actions that would

drive down its price on the foreign exchange market. Later on, the central bank of

each country intervened in the foreign exchange market by selling dollars and buying

other currencies. In the mean time, the dollar fell and Caterpillar took the advantage

of holding foreign currencies in early 1985, using the strong dollar to purchase them

and when the dollar fell, the company was able to convert these currencies back into

dollar for healthy which was worth $32 million dollar without foreign exchange gains

of $89 million dollar.

Eventually, Komatsu had to increase the cost by 18 percent whereas Caterpillar was

able to hold its price increase to only 3 percent. It was Caterpillar’s actions which led

them to back in business and regained some of it lost market share.

In brief, impact on Caterpillar-

Cutting Cost by 20 percent

40 percent reduction in workforce

Closure of plants

$1.8 billion dollar investment to boost quality

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