National Interests in an Age of Global Technology (1991)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

APPENDIX A Industry Technology Profiles I. Aircraft Engine Industry II. III. IV. V. VI. VII. Electrical Equipment and Power Systems Industry VIII. Semiconductor Industry.................................... Automotive Industry. 93 .98 Biotechnology . ~103 Chemical Process Industry 110 Computer Fainter Industry. 114 119 ...... 123 134 Construction Industry 91

I Aircraft Engine Industry BRIAN H. RowE The current worldwide aircraft engine industry is dominated by three companies: GE Aircraft Engines and Pratt & Whitney in the United States, and Rolls Royce in the United Kingdom. Each of these companies is capa- ble of producing a full line of state-of-the-art engines ranging from small (less than 1,000 horsepower) turboprops/turboshafts to high-performance afterburning military fighter engines to large (more than 20,000 pounds of thrust) high-bypass turbofans. It is in this last category, the high-bypass tur- bofan used on large commercial transport aircraft, that most of the activity related to the so-called globalization of technology has taken place. Between the three full-line suppliers and the vast network of subcontrac- tors and component vendors there exists a layer of second-tier players (Table Am. These consist of several U.S. and foreign companies who have limited whole-engine capability, that is, who are capable of designing, developing, manufacturing, selling, and supporting aircraft gas turbine engines, or major portions thereof, in some but not all segments of the mar- ket. The industry structure Is heavily Influenced by an extremely long prod- uct life cycle. The initial version of a new engine takes four to five years to develop from a well-established technology base, and an engine program, once development has begun, may span more than 30 years before the last engines produced are taken out of service. During this period, the manufac- turer usually introduces several major improvements to the engine model family, secures additional applications for derivative versions of the original design, and enjoys a revenue stream from replacement parts that may equal the sales volume of the original engines. . . .. . ~ 93

94 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY TABLE A-1 Aircraft Gas Turbine Engine Industry Participants UNl lL;D STATES EUROPE JAPAN Rolls-Royce Prime Manufacturers Second-Tier Players GE Pratt & Whitney Garrett Allison Textron Williams Teledyne SNECMA MTU Volvo Fiat Turbomeca IHI Kit MHI As engine systems become more complex and expensive, the success of an engine program has become increasingly dependent on product support. Once an engine is put in operation, customers expect that the cause of ser- vice problems will be quickly identified and that redesigned parts will be readily available. Also, because growth versions of aircraft are usually heavier and have more demanding performance requirements, the engine manufacturer must be capable of improving the original design to produce more thrust without sacrificing interchangeability with earlier models. Together, these growth and reliability requirements dictate that a relatively high level of R&D spending continue well beyond initial certification and throughout virtually the entire production life of the engine. In the past decade, alliances have been established between the prime manufacturers and the second-tier companies, and among the second-tier companies themselves, to share technology, reduce fixed costs, and increase market access. Typically, one of the prime manufacturers establishes a long-term business relationship with one or more of the second-tier compa- nies to develop a new engine, which is then sold in regions or market seg-  ments where the partners enjoy some type of competitive advantage. At a minimum, in return for providing some of the requisite development fund- ing or effort, these second-tier partners are entitled to manufacture some of the major components or subassemblies of the engine, both for new whole engines and for the spare parts, which are replaced throughout the service life of the engine. The industry's competitive intensity has been widely publicized; it has resulted in lower product cost to the customer, more frequent improvements in product performance and reliability, and shorter intervals between major advances in technology. The alliances formed between the prime manufac- turers and the second-tier companies help to reduce the growing financial

INDUSTRY PROFILES 95 burden associated with increasing worldwide competition without jeopar- dizing their technology leadership. For GE and Pratt & Whitney, the direction and pace at which critical technologies advance is heavily influenced by U.S. government require- ments for both applied research and specific military engine development programs. Both companies have engineering functions that spend approxi- mately $1 billion on research and development annually, roughly divided between military (government-funded) and commercial (company-funded) applications. In addition to being the principal source of technology funds, the U.S. government imposes tight export controls on what are deemed to be the most advanced technologies, not necessarily limited to those contained in the latest military systems. Restrictions imposed by security clearance requirements for personnel working on classified military programs practi- cally exclude using engineers who are foreign nationals. A government pol- icy requiring that dependence on foreign sources for raw materials or fin- ished parts be kept to a minimum is somewhat more flexible. To remain competitive, each of the U.S. prime manufacturers maintains its own full set of materials and the design and manufacturing process tech- nologies that are needed for developing and producing new engines across the full product spectrum. Except as required by the U.S. government in case of dual production sourcing, there is no sharing or exchange of tech- nology between the two companies, and yet both companies are viewed as being essentially at technical parity, as is Rolls-Royce. Consequently, the strongest competitive advantage accrues from either having the earliest availability or being able to maintain a sole-source position in a successful aircraft program. Even though finished parts supplied by vendors constitute roughly 40 percent of the typical engine's manufacturing cost, the prime manufacturers perform the total design function on these parts and require their suppliers to adhere to the same stringent manufacturing standards as exist in the prime manufacturers' own factories. However, the industry's sourcing structure for purchased parts does little to isolate one prime manufacturer's process technology from the other's: 24 of GE's 25 largest suppliers also sell simi- lar components to Pratt & Whitney, and several of the second-tier compa- nies have alliances with more than one of the prime manufacturers. In a major engine program, the role of the second-tier companies lies somewhere between the prime manufacturers and the vendor network of fin- ished parts suppliers. In return for incurring a portion of the development expense, the second-tier partners usually receive the technology needed to use the latest machines, production tooling, and process technology, which enable them to produce complex parts from what are generally unique and difh~cult-to-work materials. In those cooperative agreements in which the

96 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY second-tier partners are also responsible for the design of the parts they will produce, there is some transfer of limited aerothermodynamic and structural design technology from the prime manufacturer. However, the prime manu- facturer is able to prevent any erosion of his technology leadership by retaining control over the design of those engine components that represent the greatest technical risk, and the integration of all component designs into the total engine system. In addition to market access, the second-tier partner gains current, component-specific technology (mainly in manufacturing processes but increasingly in design), as well as the scale benefits of greater production loading. As these smaller partners gain experience across sever- al different engine programs, limited but valuable technology begins to flow back to the prime manufacturers (see Table Am. The key to maintaining technology leadership in the U.S. aircraft engine industry is a stable, synchronous relationship with the U.S. government. A national policy that would seek to preserve leadership by compelling U.S. high-tech companies to deny others access to their technology may be self- defeating. In aircraft engines, U.S. leadership has been built upon a healthy balance of sustained public and private investment in a vigorous research and development function staffed by competent, imaginative people. An environment that supports the activity of an entrepreneurial technologist and rewards risk taking will nurture the continued development of leading-edge technology. The accumulation of a series of interrelated new or advanced technolo gies, coupled with the perception of a market opportunity, can trigger the initiation of a new engine development. As the product-specific develop- ment team takes on its task of integrating the new concepts into a total propulsion system, a strong, well-funded applied research function moves on Anew challenges and concepts, seeking major improvements or even another new system for initiation several years away. The span and com- plexity of this process create a time buffer that separates the leading-edge technology from that which is being incorporated into engines in near-term development or production. This inherent natural protection is superior to any restrictive public policy, provided the impetus for advances in tech- nology is maintained. There is a strategic-defensive reason why GE and Pratt & Whitney should continue to share their technology with the Europeans and Japanese. If they become dissatisfied with the existing relationships, they might be driven to form a true non-U.S. alliance possibly led by Rolls-Royce- which would have both the resources and the market access to pose a seri- ous challenge to U.S. industry leadership, as Airbus Industrie has done in large commercial aircraft. There is a vague, judgmental distinction between giving away too much technology and yielding too little; either extreme can weaken U.S. industry.

INDUSTRY PROFILES 97 Today's reality is that alliances are vital to being a world-class competitor, and prudent, controlled technology transfer is essential to strong, mutually- beneficial alliances. Neither of these is as threatening to U.S. leadership as would be our failure to support- with funding and people and public poli- cy and insist on broad, bold initiatives that advance critical aircraft engine technology. TABLE A-2 Aircraft Engine Technology Profile Current Technologies Future New Aircraft Critical Technologies Aerothermodynamics design High-performance Very high temperature U.S. leads in critical hot fighters turbines, combustors section design Vectoring, ventral nozzles Low observables Structures design U.S. leads but Europe High-speed transport Short supersonic, mixed gaining compression inlets Low-emission combusters Controls Low-noise exhausts U.S. leads in applications, Advanced integrated controls but Japan taking the lead in hardware Subsonic transport High pressure, temperature core components Systems integration Low drag/weight nacelles U.S. has slight lead on Europe, High-efficiency fans more on Japan High-temperature composites Materials All Advanced manufacturing U.S. leads but Europe & Japan processes passing U.S. in nonmetallics Testing facilities, methods Manufacturing processes U.S. leads in technology, but Europe and Japan implementing faster

II Automotive Industry W. DALE COMPrON The automotive industry has been transformed in the past decade. Whereas its design and manufacturing facilities were once located near the markets that it serves, the industry now offers products that are designed and manufactured in a dozen or more countries and are marketed in hundreds of countries. The conversion to a world marketplace has created a competitive environment that rewards product quality, product reliability, low cost of ownership, and reliable service, irrespective of where the product is manu- factured. From an international perspective, the automotive industry is technologi- cally more homogeneous than might be surmised from a casual examination of the performance of various manufacturers in the marketplace. Recent comparative studies of the industry in the United States and Japan strongly suggest that the competitive advantage enjoyed by the Japanese does not arise from a technical advantage. Similarly, the technology used by the European manufacturers does not differ substantially from that used by U.S. manufacturers. Neither would a significant difference be found between the level of the technology used by the automotive industry in Brazil, Korea, Taiwan, Italy, Australia, or Canada and that used in the United States, an observation that is not surprising since U.S. companies are strong partici- pants in many of these markets. This homogeneity does not mean, however, that the industry of a particular country may not be technologically superior in a specific area, for example, Brazil's use of alcohol fuels. Although this superiority tends to be the exception rather than the norm, it is important to recognize that regional differences in the marketplace can also strongly affect the technological level of the products offered in those regions. This 98

INDUSTRY PROFILES 99 can be seen in the emphasis on characteristics such as high-speed perfor- mance and fuel economy which are strongly influenced by local customs or government regulations. One must conclude, therefore, that the current competitive advantage enjoyed by some manufacturers, for example, the Japanese, results not from better technology but from a better management of their overall system. This includes, of course, the way that they use technology, their continuing emphasis on quality, and the continuous improvement of all operations, and in some instances, lower costs. For this committee, the following three key questions seem relevant to the discussion of "engineering as an international enterprise" as it relates to the automotive industry. Why did the homogene- ity develop? Is this technological homogeneity likely to change with an accompanying increase in domination of the world industry by companies located in one geographic area? What impact will these trends have on the engineering capability of the United States? The answer to the first question is a direct consequence of an industry structure that can be roughly described as a combination of (1) large multi- national companies with design, manufacturing, and marketing activities in many countries; (2) national companies that design and manufacture prod- ucts in one country but market these products worldwide; and (3) a variety of business arrangements that involve joint ventures, minority ownerships, and purchase agreements for components and vehicles. In this regard, each of the major U.S. companies owns equity in one or more Japanese compa- nies. With regard to national companies, there are local companies such as Citroen and BMW as well as subsidiaries of multinationals that have existed for decades and are often treated and considered by the host populace as local national companies. As examples of the latter, both Ford and General Motors have subsidiaries in Europe, Asia, Central America, and South America that have design, engineering, and manufacturing capability. One should conclude, therefore, that the globalization of the automotive industry is not a new development. What is new is the capability that the industry now has to use these operations, irrespective of their location, to design and manufacture products for sale to customers who have an option to choose from a variety of products made by companies located in all regions of the world. The globalization of the industry is probably a necessary but not a suffi- cient condition for homogenization of the technology. The presence of manufacturers in a wide variety of markets, the capability to acquire and analyze the products of all manufacturers, and the opportunity through vari- ous business relationships to share technology suggests that the current homogeneity of capability is a logical consequence of this diversity of loca- tion and business arrangement. International professional societies, such as the Society of Automotive Engineers, have been important contributors to

pablum alla ul S3lolll3A annul pug u~lsap of asoao of Alan ~snpu! alla HI s3olnos S n ~ldslp Ills s~lnos s~aslaAO ll~lll~ 0~ aolS3p 3~1 Do spuadap 'asmoo JO 'Datsun 3UL `,~a~uu aAIloruolnc plow alll ul Assad -moo of [llllqudeo sll 3S0l Ills SEWS pallun 3ql ~91 1s38Sns s3.ulunoo Polo °1 salulS pollun alla Buoy sol~llloc~ Jo ~u3tuaAotu ponulluoo Alla sang ~lsnpul 3~ Jo uol~uzlu -aSoruo~ Alp Do llama lUUDI.JIU8IS ~ GABS °1~13~1 You sl 1lnsal alp 'laylouo of ~lunoo also mold sallllloc~ JO Sull~llls panulluoo ~ aq of £13~1 sl puns slip JO aouanbasuoo aq~ q~noll~l~ slaq~eru pu~dxa pue slsoo a~npaI o~ Allunlloddo 3lil °l SulpIoooe apcuu aq Ol anulluoo Ill~ sal~lllou~ ~o uollcoo~ Al~unoo auo ~o slaploq all~ Ul~ll~ sallllloc~ ~o uolluIluacuoo 3ll~ Sulpnloald smll '£llrol~d~lSoad sallllloc~ Sullnloc~nucru llall1 a~nqlllslp o~ slalnloo~nu~u aolo~ 01 Ala~l sl ``SN`~1 1ualuoo 1~°l,, o~ Sulpuodsa~ sIaquuoru dulAIAms all1 Suouuc sdlllsuollelal ~ulor pun saouelllc alotu a8emo~ua Ill~ UOIlDPIlUOD 1clll 1oadxa uco auo '~a~eru plIo~ paloadxa 3ll1 (Iddns Ol X~lo~duo ~o ssa~x3 uo se~ Alqrqold ~lsnpul aq1 ~1 SulzluSo~a~ AIa~lun sruaos ~I `,apecap xau aq~ ul aSu~q~ 01 paul~sap Allsnpul all~ ~o aIn~om~s ~uallno alll SI aoIo~ aAI~lladwoa ledloulld ~ sulewal salSoloulloal llall1 puo swa~sAs aq~ SUIScU~W Al3AIlo3~3 Ul 3A~II salu~dwoo 3wos ~ll~ 38~lUcApr aq~ 'sml,L popa puc awl~ llonw allnbaI pue 1inal.~lp AlaA aq uco UOI~cZIUcSIo aSlel ~nolldno~1 sldocuoo h~au ~o UOI~UIW3SSIp pu~ uollonpollul aq1 'sumldoId WOI] SUOSS31 1uPpodwl p3U~31 11U 3Acy rlOAO~ pur '~ 'upz~ 'plO] 98n°91 UGAg ·SOlilpO3Old pUP saollorld Sull~lado ~au ~noqu uo -cw~o~ul Su~a~sucl~ ~o sucaw Apeal ~ la~o Al~oaIlp 1ou saop ~snpul a ~o uol~cz!uaSowoy aq1 'saol~eld ~uawa8eu~w o~ p~eSal q~l~ aSolucApe eolSoloulloa1 ~ uo puadap u~q~ laqleI uolln~axa sl! ul la~xa 1snw Au~dwoo 'as~q lcolSolouq~a~ aq1 ~o uol~czluaSowoq ~ q~l~, 1aq~w aq1 pu~ ~dao -uoo aq~ uaa~aq Aclap 1sa~oqs aq1 q~l~ 'lSOD ~sa~ol aq~ ~e 'Alllen6 dulpuc~s -lno ~o ~anpoId ~ a~npoId o~ £Solouq~a~ ~o aSucI pooIq ~ asn AlaAlloa~3 no ~q~ Au~dwoo aq1 q~l~ slsaI 1! Al~eal~ `,all aSolucApc aAI.~Iladwoo aq~ saop aIaq~ 'ASolouq~al q~no~ aslolaxa o~ alq~ 3q A£W AUBdWoo ~ ~ql a8clurApc aAIllladrnoo aq~ sa~npaI ASoloulloa1 ~o UOI~ZIU380WO~ Slq1 JI iSolouq~a1 ssaD0ld 10 1onpold anblun lO MaU ~ Jo asn lO uollonpollul aq1 q~nolql a8UlucApe lDo -?iOIOU4931 ~Ol-pOgS ~ AOrUG UPO AUEdWOD AUP lU91 'lOA0MO~ 'pOZ!U8ODOl aq 1sHw lI aw!~ ~o pollad papuaixa uP lO] [IIUo!8OlOUllD3l slaq~o llU a~u -IWOp o] AUedWOo aDo lO} 'alq!ssodw! lOU ~! '~Inol.~!p aq plnoM 1! Ic~l S! 3m] -omls Alisnpu! lualmo aq1 Jo aDuanbasuoD aUL uo!~z!ua~owo] o] alnqu] -UOD OSIU sluawaSucllc Su!lnloo~nu~w lU!O~ A8olouq~a1 Su!lnloo~nu~w aq1 Jo uo!l~z!ua~owoq aq1 o1 salnqllluoD s!q,[ sass3~0ld l!a~l 10} slopuaA uommoo asn slaln1~}nuPw AUPW 'A8olouq~al Ionpold 3ql S! uU~l snoGu -adowoq ssal 1ellMawos alP slalnloc}nuPw snollcA aq1 [q pasn sassacold ~ulmloc~nu~w aq1 q~noq~ly ~1snpu! aq~ ~o uo!~ez!uaSowo~ lcoluq~a~ a ]~070NHO]] 7~907D d0 ]~Y NY Nl S]S]~]NI ~NOI1YN 001

INDUSTRY PROFILES 101 States an admittedly extreme situation the United States would lose the infrastructure, including the supply base, necessary for a viable industry. Once lost, it is likely that regaining it would be impracticable. At the other extreme, it would be unwise to suggest that the U.S. auto industry should not take advantage of the many opportunities that exist for developing joint business arrangements with foreign companies. Such arrangements often afford the U.S. industry access to foreign markets, provide a basis for shar- ing the burden of investment, and provide a means by which technology can be assessed and evaluated. Should a decision by a United States manufacturer to locate a new engine or transmission plant overseas be cause for alarm? If it were one of many such plants that exist in the United States, the chances are slim that this decision would lead to a serious decline in the technical capability of the United States-based industry. If it is one of a few, the answer could be different. Because of the dynamic and complex nature of the system, one cannot easily establish a priori a standard that indicates that a fixed level of capability is essential. The best one can do is to examine continually the many issues that determine the viability of an industry and to assess trends as they occur. Recognition of this fact led the NAE Committee on Technology Issues That Impact International Competitiveness (1988) to the following recommendation: Before joint government-industry actions are undertaken, an important early step must be sound analyses of all aspects of the problem, including an under- standing of the technological status of critical sectors of U.S. industry, the impli- cations of emerging technologies for the health of engineering and technology in all sectors of U.S. industry, and deficiencies in the technological infrastructure of particular sectors.... A small activity, perhaps located outside the structure of the government, staffed by highly qualified analysts who are keenly aware of industri- al problems in detail, could be of great value. With analyses of the type described above, the government would be better prepared to respond to industry initiatives. A few general observations regarding the automotive industry also are pertinent to the role that the industry infrastructure plays in the development and use of technology. First, the Japanese industry has long developed a closer working relation- ship with its supplier base than has the U.S. industry. This has created a feeling of belonging to the "family" that has contributed greatly to the capa- bility of the Japanese industry to implement just-in-time systems, improve quality, and introduce new technology in components and subsystems. Although U.S. manufacturers are making progress in achieving some of the same relationships with suppliers, the Japanese industry continues to benefit greatly from a long-standing tradition in such relationships. One should note that this represents a form of vertical integration without the actual legal or

102 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY direct financial commitment that would be required of "true" integration. Second, the linkages among the various engineering functions in the value-added chain of an automotive company are extensive. One need only consider the continuing advantage derived by Japanese companies through the shorter time that they require to bring a new vehicle design to the mar- ketplace to recognize the importance of this linkage. In this example, the issue is whether the Japanese companies possess this advantage through technology or whether it is a result of an improved management system. I believe that the evidence strongly suggests that it is the management system that gives them the advantage, such as early consensus building, few changes in objectives, and few engineering change orders. Third, there are certain capabilities that every manufacturer must have if it is to be competitive. For example, system integration remains a key ele- ment, whether a manufacturer is vertically integrated or depends on a wide supplier base for components and subsystems. Successful system integra- tion depends on a broad expertise in essentially all technologies of the vehi- cle. One cannot expect to be competitive by buying major components and subsystems as "black boxes." In this sense, a broad capability in a wide range of technologies is essential. Finally, one should note that as competition becomes more intense, many of the factors that have been traditionally used to provide product differenti- ation will cease to function in this way. The ability to provide a recognizable value to the customer through the application of technology may ultimately be a key determinant of success in the marketplace. Consequently, the suc- cessful use of technology will likely become a critical determinant of com- petitive success in the future of the automotive industry. REFERENCE National Academy of Engineering. 1988. The Technological Dimensions of Inter- national Competitiveness. Committee on Technology Issues That Impact International Competitiveness. Washington, D.C.

III Biotechnology ELMER L. GADEN, IR. The scope and character of most of the industrial areas considered by the NAE study committee may be defined in terms of the products furnished or the services rendered. Indeed, many are formally defined under the Office of Management and Budget's "Standard Industrial Classification" system. "Biotechnology" presents a significantly different picture. It is not iden- tified with a specific group of products or services. Rather it encompasses a broad range of activities and processes in which living cells-or materials produced by them are used in a technological mode. It therefore compris- es a set of techniques rather than products and services. In fact, many knowledgeable persons strongly object to the use of the term "technology" for what is, in many cases, primarily a set of laboratory techniques, power- ful and sophisticated as they may be. Note the following paragraph: Biotechnology is not an industry per se, but rather an array of tech- nologies that can be applied to a number of industries. These technolo- gies include: molecular and cellular manipulation, enzymology, X-ray crystallography, computer modeling, biomolecular instrumentation, industrial microbiology, fermentation, cell culturing, and separation and purification technologies. (U.S. Industrial Outlook, 1989) In this sense "biotechnology" serves a wide spectrum of industries and commercial activities: · Agriculture and animal husbandry · Food production and processing · Health care · Chemical production; both commodity and specialty products 103

104 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY · Textile manufacture · Mining and mineral processing · Waste treatment and disposal; resource recovery DEFINING "BIOTECHNOLOGY" In the most comprehensive terms, biotechnology may be thought of as comprising all aspects of the technological exploitation and control of living systems. Such a broad interpretation has the virtue of incorporating a wide spectrum of familiar activities of great economic importance; agriculture, animal production, food preservation, brewing, and production of natural rubber and paper are examples. Furthermore, biotechnology in these terms-is hardly new. Indeed it is one of the oldest of mankind's technolog- ical activities. It is unlikely, however, that an appreciation of these traditional practices is a sufficient basis for including "biotechnology" within the committee's purview. Rather, it is the "new" biotechnology, based primarily on the deliberate manipulation of genetic material, that is of most interest here. Nevertheless, despite the promise of the "new" biotechnology, it will not serve the purposes of this study to ignore the traditional aspects of this field. To that end let us return to the general definition offered above "biotech- nology comprises all aspects of the technological exploitation and control of living systems"-and briefly identify the various activities it embraces as follows: Biotechnology · Control · Exploitation - Extraction - Bioprocesses Control: Technologies that either (1) restrict or control the activities of a wide range of organisms in an equally wide range of environments or (2) eliminate all life forms ("sterilization") are control technologies. They include the following examples: · In agriculture fungicides,herbicides, insecticides · Food preservation · Water purification · Preservation of biologically labile materials: Natural wood, cotton, etc. Synthetic-hydrocarbon fuels, polymers, etc.

INDUSTRY PROFILES 105 Extraction: Nature has provided an infinite variety of useful molecules and molecular composites; we need only extract and purify them. The methods employed vary from simple physical separations with little or no effect on the molecular species encountered to more traumatic treatments involving significant chemical transformation. Some examples are as fol- lows: . Extraction of tannins, dyes, medicinals, and oils and fats from plant or animal tissues Sugar (sucrose) from cane or beets · Latex (rubber) from trees or shrubs · Starch from corn, wheat, etc. · Cellulose fibers (for papermaking) from wood or grasses · Charcoal, liquid and gaseous products by pyrolysis of wood Bioprocesses: Complete living systems (cells or tissues) or their compo- nents (enzymes, membranes, chloroplasts) are employed in a directed and controlled manner to bring about desired physical or chemical changes. Examples include the following: · Production of cell matter mushrooms, baker's yeast, etc. · Production of cellular components enzymes, nucleic acids, etc. · Chemical products ranging from "specification" (e.g., ethanol) to "performance" (biopolymers) types · Pharmaceuticals · Waste disposal and conversion · Extraction of minerals from ores and collection of metal ions from dilute solution THE "NEW" BIOTECHNOLOGY The "new" biotechnology rests upon (1) rapid expansion of our under- standing of the mechanisms by which genetic information is stored, trans- ferred, and transformed and (2) the development of laboratory methods for the deliberate manipulation of genetic material. Furthermore, it is truly "new." Specific proposals for commercial exploitation of these advances in basic science were first made about 15 years ago. The first significant prod- uct human insulin produced by a bacterium developed by recombinant DNA methods has been marketed for about 8 years. Several of the most visible applications of the "new" biotechnology have been in the pharmaceutical area insulin, human growth hormone, tissue plasminogen activator, etc. As a result, discussions of the potential for biotechnology often convey the impression that it is a major contributor to

106 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY the large number of new pharmaceutical products (drugs) introduced each year. In fact the overwhelming majority of these new drugs are produced by chemical synthesis, not by biological methods. ONGOING TECHNOLOGIES AND COMPETENCIES Key Elements of Bioprocess Technology If we restrict ourselves to the "new biotechnology" and, even more specifically, to its bioprocess component as defined above, we find that the key elements are as follows: 1. Biocatalyst. The "biocatalyst" is the agent-microorganism, cell, enzyme, etc.-responsible for catalyzing the desired chemical change or synthesizing the product of interest, such as an antibiotic or a biologically active protein. 2. Substrates. The ingredients or raw materials on which the biocatalyst acts or a microorganism is grown are called substrates. These ingredients must include energy (carbon) sources (typically a sugar such as glucose), nitrogen sources, phosphorus, growth factors, and a variety of micronutri- ents (trace components), small in amount but vital in function. 3. Conversion system. Conversion systems include the process equip- ment and controls in which the biocatalyst and substrate interact under con- ditions contrived to provide the "direction and control" referred to in the definition of bioprocesses given earlier. 4. Separation and purification system. Separation and purification are provided by the process equipment and controls that permit recovery of the desired product or products from, first, the large amounts of water ordinarily present and, second, undesirable by-products and contaminants. Biocatalysts Of these four primary technological elements, the first the biocata- lyst is clearly the key; without it nothing is possible. These agents have therefore been closely guarded and, in consequence, have been the focus of a few bizarre cases of industrial theft. The 1980 Supreme Court ruling (Diamond v. Chakrabarty) that microorganisms may be patented under existing law cast a new light on this matter. Nevertheless, the obvious diffi- culties in detecting and policing infringement ensure that secrecy continues to dominate industrial practice. In this context a recent regulatory initiative by the U.S. Patent Office should be noted. Current rules require the deposit of "essential biological material" that is, the microorganism itself-in a suitable depository. The

INDUSTRY PROFILES 107 Culture Collection of the Northern Regional Research Center, U.S. Department of Agriculture, in Peoria, Illinois, is commonly used for this purpose. The Patent Office's new proposal would permit an applicant, under certain circumstances, to provide facts and data interpretation to sup- port an application without depositing the organism. The Patent Office is also considering some post-grant restrictions on public access to deposited organisms. Current practice allows anyone to obtain the deposited organism from the depository once the patent is granted. Also fundamental to the questions of technological interdependence and competitiveness is the manner in which the "new" biotechnology was devel- oped. Most of the novel techniques on which it is based, for example, recombinant DNA, protoplast fusion, and hybridomas, were developed in the United States. Hybridomas, which were first developed and patented by a British national, Milstein, were a notable exception. It was at first assumed that this situation would guarantee U.S. dominance in the field. This has not been the case and the reasons are clear. First, virtually all of the basic research underlying the "new" biotechnol- ogy was carried out in universities and medical research institutes and was supported by federal government funds. Consequently, much of the basic work was both in the public domain and freely and widely published. There were and are-few proprietary positions. Furthermore, once worked out, the laboratory methodologies required are relatively simple, albeit tedious. As a result, even developing countries with relatively young science establishments are active. Separation and Purification The second critical technological element is the separation and purifica- tion system. For many years the attention of the research community, espe- cially its academic component, was focused almost exclusively on the con- version phase. Great improvements were realized, but over the last decade and probably longer-they have tended to be peripheral and mini- mal in economic impact. Only for about 10 years has attention moved to separation and purification. Many believe that it is in this arena that key bat- tles will be fought for future economic advantage. In this connection, a recent development is worth noting. One of the major U.S. pharmaceutical firms, in its first attempt to penetrate the Japanese market, has found that Japanese quality standards are significantly higher than those in the United States. Purity and "elegance factor" (speed of dissolution, clarity of resulting solution, etc.) criteria imposed by the Japanese pharmacopoeia apparently exceed those of the U.S. pharmacopoeia by significant margins.

108 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY THE "BIOTECHNOLOGY" INDUSTRY At its inception the "new" biotechnology epitomized the "high tech- nology" concept. Its appearance on the national and international scenes coincided with rising concern over the decline of traditional manufacturing industries. As a result it rapidly captured the attention of the media, the general public, and government leaders as well as venture capitalists eager to be in on the ground floor of a "new industrial revolution." It should be noted that virtually every Western European country as well as Canada, Japan, and several international agencies, such as the Organization for Economic Cooperation and Development, established special commissions to consider and recommend policies and plans for exploiting the "new" biotechnology. There was no comparable effort in the United States until the Office of Technology Assessment of the Congress published its Commercial Biotechnology: An International Analysis in 1984. One special characteristic of this era was the appearance, primarily in the United States, of a plethora of small "biotechnology" or "genetic engineer- ing" companies. Most of these were built around persons from universities or research institutes who were active in the scientific work underlying these developments. A few have been quite successful, but many have fallen by the wayside or been acquired by established pharmaceutical, food, or chemical companies. At first these larger companies lacked the specialized scientific base for this new field, but they have rapidly acquired it. Furthermore, they were familiar with the development of high-technology products, possessed the marketing networks needed to sell them, and knew their way around the complex regulatory procedures governing the health- care and agricultural businesses. All evidence indicates that this pattern is likely to continue. A major difficulty in the development of the new biotechnology compa- nies is that investors have been led to expect the spectacular. Instead, growth Has been slow and steady. Furthermore, the commercial performance of "biodrugs" has been disappointing because they have been found to be far less useful than originally hoped. Even Genentech, the most successful of the "genetic engineering" firms, is facing difficult times because of the fail- ure of its :-PA (tissue-plasminogen activator) to demonstrate significant advantages over competing drugs. EMERGING TECHNOLOGIES Here we must return to the original argument, namely, that "biotechnolo- gy" does not constitute an industry in the usual sense. Rather it comprises a group of techniques, processes, and procedures applicable in various ways to many industries. Underlying these techniques and procedures is a large

INDUSTRY PROFILES 109 and rapidly expanding base of scientific knowledge, virtually all of it freely published and readily available to technically competent individuals and organizations. The United States clearly continues to be a world leader in developing these techniques and procedures, and the leader in developing the science base on which they rest. Large and effective research efforts are in place in both the public and the private sectors, and new developments are reported almost daily. The difficulties that we face in these areas are therefore not primarily technological. Some claim that excessive public regulation is an impediment. Given the immense public support that biotechnology has enjoyed and the errors, hap- pily few but no less tragic, that have been encountered, it is difficult to sub- stantiate this claim. A primary problem is that technical advances and many of the economic opportunities they offer are very short-lived. Furthermore, foreign countries may impose regulatory barriers that slow down market penetration sufficiently to permit local competitors to move in when accep- tance has been achieved-often at the expense of the U.S. innovator! In conclusion, this is an area in which the United States has been suc- cessful in both innovation and execution. Despite this, biotechnology's con- tribution to our international position has not been impressive. Clearly the problems lie elsewhere. BIOTECHNOLOGY AND "ENGINEERING AS AN INTERNATIONAL ENTERPRISE" The emphasis throughout this profile has been the close relationship between the practice of biotechnology the "biotechnology industry" and the science base on which it rests. Implicit in this point is the lack of signifi- cant engineering contributions. Despite claims (primarily by university engineering faculty in search of grants!) that future progress could be limit- ed by a lack of "engineering skills," there is little credible evidence to sup- port this contention. Biotechnology is and will likely continue to be "science-limited" rather than "engineering-limited" for the next decade at least.

IV Chemical Process Industry EDWARD A. MASON The chemical process industry has developed over the past 90 years and is now one of only two U.S. industries with a positive net balance of pay- ments for exports and imports. Much of its present structure grew out of advances in synthetic chemistry in Germany late in the last century. German chemists conceived new chemical syntheses, but the scale-up to commercial operation was carried out by mechanical engineers who were not well grounded in chemical principles. Thus, many early German plants were merely scale-ups of the batch laboratory syntheses designed by the chemists. It was American engineers, many of whom studied chemistry in Germany in the early decades of this century, who developed the basis for chemical engineering education and practice. These chemical engineering pioneers developed the concepts of unit operations, such as filtration, distil- lation, heat transfer, fluid flow, and crystallization, which are applied in the commercial production of a wide variety of chemicals in continuous proc esses. Consequently, the United States became the leader in the education of chemical engineers from around the world and in the engineering of chemi- cal reaction processes. A wide variety of engineering skills and disciplines are now employed in the development, design, construction, and operation of economically optimized processes for the production of both commodity (large volume, low unit value) and specialty (lower volume, higher unit value) chemicals. From the 1930s to the 1960s, American engineering know-how played a dominant role in the worldwide chemical process indus- try. Although it is still a major influence worldwide, the growth in demand 110

INDUSTRY PROFILES 111 for chemicals of all kinds around the globe has led to expansion in interna- tional chemicals production and engineering expertise. However, American universities are still preeminent in chemical engineering education and research. All developed countries and many developing countries have several large and small chemical companies producing a wide variety of products. A large fraction of chemical products are derived from petroleum and natu- ral gas. Thus, much of the industry draws on a worldwide supply of feed- stocks. In addition to the many independent chemical companies, most petroleum producing and refining companies have large petrochemical oper- ations. The role of engineering in the chemical process industry is manifold, from the development of a new chemical process plant to its construction and operation. Development of the plant begins with chemical research and development, which define the broad parameters of a new chemical process. Usually this involves research chemical engineers, along with chemists to conceive and develop the chemistry itself. These broad parameters are transferred to a process engineering group, where a conceptual design of the process and plant is developed. Then a central process engineering group does the overall design, including the piping and instrument diagrams. During this process, energy balances are developed, and the dynamics of flow in the system are defined, including requirements for fluid transfer pumps, heat exchangers, reactors, heat recovery, concentration or extraction, and purification. After completion of the piping and instrument design, the work becomes more detailed. Electrical, mechanical, and industrial engi- neers are brought in where additional considerations of materials of con- struction, process computer requirements, and process optimization and modeling are developed. Preliminary cost estimates and process optimiza- tion are important aspects of the work. At this point, the scope of the process is defined somewhat conceptually to give the general parameters and sizes of the major equipment in the plant. The standards of the corporation that will own and operate the plant are introduced, and an overall process scope is defined. Because very few chemical process companies have their own engineer- ing construction design teams, the project scope is sent to contract engineer- ing firms for bids. These firms come back with proposals to build the plant on either a fixed-fee or a cost-plus basis. When the proposals are evaluated, the owner's cost estimates, which have been made internally, are updated and estimates of the economics of profitability are then better defined. The contract engineering firm develops a detailed design in which draftsmen, electrical engineers, civil engineers, mechanical engineers, experts in soil mechanics, and environmental engineers are involved in defining the proc- ess and its waste streams and in minimizing environmental impacts.

112 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY Once the contract has been approved and management has decided to build the plant, construction engineering follows and a project team is estab- lished. The project team members are brought in early to work with the design teams. In addition, plant operations and maintenance personnel are also brought in to ensure that their viewpoints are incorporated into the design and construction of the plant. During the final stages of construction, personnel who will be responsible for operating the plant are brought in to check the operation of individual process units, do pressure testing, and gen- erally confirm the integrity of the system. Maintenance personnel check out instruments, and a training program for operators is initiated. The entire plant design, as well as the construction operation, are subject to hazard and operability review to ensure operational safety. Fault-tree analysis is used extensively in the chemical process industry. Once a plant is in operation, engineering continues to optimize its perfor- mance and to eliminate bottlenecks so that plant capacity can be increased. In these plant changes, chemical engineers, mechanical engineers, and proc- ess control engineers work together. The mechanical engineers are heavily involved in many chemical process plants with rotating equipment, while the electrical engineers are concerned with controls, motors, drivers, and the like. Computer-aided design techniques are now being used both for electrical and piping layouts and for process design evaluation and optimization. Statistical process control is widely used in quality improvement programs. An extremely important part of the engineering that goes into the devel- opment and construction of a new chemical process plant is that of project management. This function is extremely important to ensure the efficiency and the integration of the project, which involves the efforts of many people from various disciplines. In the United States, it is generally customary to use U.S. engineering firms and engineering contractors. In other countries, however, the use of American engineers and firms has declined for a number of reasons. Foreign nationals are used increasingly because they know the culture and the local ways of doing business. In most cases, they are good engineers, and in many countries they must be employed. The American owner of the process technology in another country often is not allowed to own a major- ity of the company and is thereby denied control of the project once it is in production. Formerly, many American engineers worked overseas. Changes in the tax laws, however, removed what were perceived as advantages for U.S. cit- izens working abroad, and the cost to American companies increased. This is one reason why many companies that were already experiencing high costs to employ Americans overseas began to pull them back. Thus, it became even more necessary to rely on the indigenous work force for engi

INDUSTRY PROFILES 113 neers and constructors. Foreign nationals naturally tend to specify and order their own country's equipment, whereas American engineers would be like- ly to specify and order American equipment for overseas construction. The American licenser of the process would like to have a technical ser- vice agreement, but this is not always possible. Such an agreement would provide for nondestructive testing, corrosion services, and vibration analy- sis, all of which are needed during plant start-up and operation. Nowadays, it is rare to have in-house construction management. Engineers who work for the engineering design firms and engineering con- structors tend to be somewhat migratory, following jobs from one company to another. Especially critical are good construction managers. Years ago, there was much discussion about the brain drain from over- seas to the United States. Now, as there seems to be a growing shortage of American-born scientists and engineers, it is likely that the chemical process companies, as they begin to expand, will go overseas again to recruit. The need to have an overseas presence, including foreign nationals on overseas ventures, is becoming increasingly critical and will become more so in the l990s as the European Community consolidates. In summary, the chemical process industry depends on skills in thermo- dynamics, fluid mechanics, computational computer science, modeling, materials of construction, chemistry, physics, automatic control, electrical engineering, civil engineering, environmental engineering, safety analysis, procurement, hazardous waste management, vibrational analysis, quality control and assurance, project management (people skills and ability to inte- grate a variety of functions). Because of the increasingly international char- acter of the chemical process industry, the United States no longer holds a unique position in engineering for the industry.

v Computer Printer Industry DONALD L. HAMMOND AND WIGWAM I. SPENCER The modern electronic computer represents a several hundred billion dol- lar global business. Even more important, computing capability has inun- dated almost every aspect of work, play, and education. Today's computers depend on a variety of technologies including integrated circuits, software, communications, and, of growing importance, the ability to access the large amounts of information processed by computers. A key part of the human interaction with computers is through printers that provide textual or graphi- cal information from the entire range of computers from desktops to large mainframe and supercomputers. The major change in computing today is a move from central processors to distributed processing usually in the form of a desktop personal computer or workstation often networked both locally and globally. This move towards decentralized computing is also reflected in the increased presence of personal printers. Today, desktop printers represent a multibillion dollar business that is continuing to grow at a rate of about 10 percent per year. Two technologies are beginning to emerge as dominant in the desktop printer business. The first is laser printers. These quiet, plain-paper devices are built around electrophotographic concepts that were pioneered by Xerox in the development of plainpaper copiers. The light-lens exposure system in a copier is replaced with a solid state scanning system to produce high- quality text on plain paper. The second emerging technology is for lower cost, lower speed printers built around ink jet printing technology. The simultaneous and independent invention of thermally driven ink jet printers by Canon and Hewlett Packard enables high-quality, very low cost printers 114

INDUSTRY PROFILES 115 that provide letter quality print on plain paper in either black and white or multicolor. There are, of course, a variety of other print technologies including impact, thermal transfer, other types of ink printing, and a variety of expo- sure techniques other than laser for electrophotographic printers. Impact printers, both daisy wheel and dot matrix, have dominated the print business in the past for both desktop and centralized printing. However, these mar- kets are rapidly changing and it appears clear that ink jet and laser printers will be the key to computer hardcopy output in the future. Currently, laser printers are made in the United States, Japan, and Europe. The manufacturers of laser printers are usually companies with strong technological capability in electrophotography such as Kodak, Canon, Ricoh, Siemens, and Xerox. The high-speed laser printing business is dominated by European and U.S. suppliers. The low-speed, ten pages per minute and less, are dominated by Japanese suppliers. The total market vol- ume both in bands above ten pages per minute and below ten pages per minute are in the thirty billion dollar range. The newer thermal ink jet printing area is currently dominated by two suppliers: Hewlett Packard and Canon. This position is bolstered by strong patents in ink jet technology, effective distribution channels, and early mar- ket presence. Technologies supporting these two printer areas are divided into current capabilities and emerging capabilities. ~ the current capabili- ties, the follow-in" technologies are considered significant. Current Technologies Solid-State Lasers Japanese Leadership Early laser printers used gas lasers to expose photoreceptors in a raster scanned mode similar to black-and-white television. Gas lasers still domi- nate high-speed laser printers; however, for the smaller, lower speed printers (about ten pages per minute or less), solid state laser diodes have dominated. Solid-state lasers provide higher reliability, lower cost, and provide the flex- ibility for building small printers. The use of solid-state laser diodes required the development of new photoreceptors that were sensitive to the infrared frequencies usually available in solid-state lasers. Solid-state lasers, as well as other optoelectronic technologies, are currently dominated by the Japanese. Except for a few special applications such as high power, all laser diodes and low cost raster scanning systems come from Japan. Ink Jet Technology~.S. Leadership The ability to eject ink droplets at kilocycle rates from thermally driven

16 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY heads has opened a new type of printing capability. Initial discoveries were made almost simultaneously in Japan and the United States. Major volume leadership resides in the U.S. because of design emphasis on very low cost, disposable print heads which contain all of the critical ink jet technology. Major investments in understanding the technology, in designing for manu- facturability and in automating for high volume production (currently 700,000/month has resulted in highly reliable, low selling price ($10 to $15), disposable heads that print with 300 pixels per inch. While color printers using thermal ink jet technology are newer, they benefit from these same advantages and are finding similar market acceptance. That leadership is transitory and will require continued investment to maintain U.S. leader- ship. Manufacturing Costs Japanese Leadership The Japanese have assumed leadership in the manufacturing of most consumer products. Leadership depends on a tightly networked system of materials and components suppliers, and just-in-time delivery techniques. Manufacturing leadership is a result of heavy investment over a long period of time in Japan. The U.S. is catching up in some areas, but overall, the Japanese maintain a significant leadership in manufacturing costs, quality, and the ability to quickly turn around new manufacturing designs. Design Capabiliry Japanese Leadership Closely coupled with manufacturing leadership is the ability to rapidly design low cost, high-quality, highly reliable products. Again, Japan has the leadership in this area as a result of heavy investment over a long period of time. There are, however, exceptions such as the thermal ink jet example. In this field as in others, Japan benefits because design and manufacturing are generally considered more prestigious engineering activities than in other parts of the world. Design leadership is a major competitive advan- tage. Printing Materials~.S. Leadership In the understanding and manufacture of inks, ink-paper interactions, photoreceptors, toners, development systems, and other ink and electropho- tographic materials, the U.S. holds a leadership position. This position is eroding in areas such as low-cost organic photoreceptors and single compo- nent development systems. The United States must regain leadership in these key materials areas if it is to continue to play a leadership role in print- ing technologies, especially for desktop printers.

INDUSTRY PROFILES 117 Software Applications~.S. Leadership The development of printing applications, page description languages, and other systems applications have been an area of U.S. leadership. Again, this leadership is under heavy competitive pressure from large software investments in Singapore, India, Japan, and other emerging countries. The Sigma Project in Japan offers a particular challenge to U.S. leadership. The purpose of this project is to develop and prove methods for software engi- neering and the ability to share software programs between universities, industry, and government laboratories throughout Japan. EMERGING TECHNOLOGIES Color~.S. Leadership As PCs and workstations become more sophisticated, color has become an important capability. Color printers are available in a number of tech- nologies. Color laser printers are currently on the market only from Japan. Color ink jet printers are becoming available from a number of sources. While the Japanese have made early market entry in most areas of color printing, the major advantage of the disposable color ink jet cartridge has given a significant cost (selling price about $1,400) and performance advan- tage to printers from the United States and has resulted in a volume of 8,000 per month or many times the sales of color ink jet printers from Japan dur- ing this early period in the emergence of the high volume color printing market. Just as color television grew to dominance in the consumer televi- sion market, it is clear that color printers will also play a dominant role in the printing market. It is essential that the United States retain and strength- en its capability in these color printing technologies if it is to retain a signif;- cant position in printing. High-Speed Printers~.S. Leadership High-speed printing is usually done by laser printers built around high- speed plain paper copiers. Leaders in this area are Kodak, Siemens, and Xerox. Again this leadership position is eroding due to the movement of Japanese printers from low-speed to moderate and higher speed machines. The key technologies here are the ability to handle paper at high speed, printing materials, and the economical design of these complex machines. Scannin~lapanese Leadership In addition to printing information from computers, it is important to be able to input information into a computer. Scanners are becoming more

118 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY widely used as a way to move from paper-based information into the elec- tronic information realm. The hardware for scanning comes principally from Japan in the form of either charge-coupled devices or amorphous- silicon scanners. The United States has an edge in optical character recog- nition. Future development of scanners will include the ability to go to vec- torized graphical images, retain font information in scanned text, and, gen- erally, the ability to handle complex scanned documents. Facsimile Japanese Leadership A personal workstation with a scanner and printer provides an important communication device. The scanner and printer provide a facsimile capa- bility. Optical character recognition permits the movement between the FAX world and the electronic mail world. The workstation is the key inter- face to the filing and retrieval of information. The combination of worksta- tion, scanner, and printer gives the ability to do communication, filing, retrieval, and processing, all from a desktop facility. It's not difficult to envision the merger of workstations and facsimiles to provide an informa- tion appliance for individuals that could be networked as an important tool for information sharing and joint projects. TECHNOLOGY SUMMARY There are some important conclusions that can be drawn from these brief looks at the technology in the computer printing business. These include: There has been a movement of U.S. technology to Europe and Japan, particularly in the field of laser printers. 2. The loss of market share in the printer business has led to a loss of design and manufacturing jobs to Europe and Japan. 3. These technologies represent large current markets and markets which are continuing to grow rapidly. 4. The future merging of input/output devices with workstations repre- sents a major threat to U.S. manufacturers of workstations and personal computers.

VI Construction Industry MILTON LEVENSON The U.S. engineering/construction il ndustry is basically an assembly industry. While it does major amounts of engineering, much of it innovative and original, it is almost all in the nature of using conventional basic tech- nology in the application of materials, equipment, or components developed by others. In this century, the U.S. construction industry's large-scale pene- tration of world markets has been based more on its ability to manage large, complex projects and control quality than its leadership in specific technolo- gies or technical disciplines. The fact that the United States was among the first to develop a comprehensive system of construction codes and standards also helped U.S. companies expand overseas, since many countries lacking their own codes and standards adopted those of the United States rather than develop their own. In short, technology has not traditionally figured as a major arena for competition within the international construction industry. However, trends of the last few decades suggest that the technological dimension of global competition in the industry is becoming increasingly important, particularly as non-U.S. firms expand their presence in the United States and other foreign markets. The primary source of technological innovation in the construction of new facilities has been the manufacturers and vendors of construction mate- rial and equipment. Since the construction industry has always done world- wide procurement for major projects, its technology base has long been international in character. ~ recent decades, non-U.S. vendors and manu- facturers of material and equipment have increased significantly their pres- ence in world markets, often at the expense of their U.S.-based competitors. 119

120 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY In the process, foreign firms' influence over the industry's technological development has grown disproportionately. Today, a major fraction of the new developments in construction tech- nology are of foreign origin. One example is tunneling equipment and tech- nology. U.S. companies are almost totally dependent on foreign companies for this aspect of construction. At present, U.S. companies appear to be leading in the development of three-dimensional computer-aided-design- and-drafting (CADD). However, some non-U.S. companies appear to be more advanced in the application of CADD, and unless things change, they will certainly pass U.S. firms in the race to expand CADD to a complete computer-aided-engineering and computer-aided-construction (CAE-CAC) system. Unless major changes occur, U.S. dependence on foreign sources of technology is likely to increase, particularly as capital intensive means such as robots and automation displace craft labor. The U.S. lag in construction technology is largely a result of three fac- tors: (1) a higher degree of vertical integration in construction industries abroad than in the United States; (2) more favorable contracting practices overseas than in the United States; and (3) a more favorable regulatory envi- ronment in many foreign construction markets than in the United States. International Differences in Industry Structure and its Consequences For historical and legal reasons, the scope of activities of U.S. construc- tion firms has been largely limited to the integration of design engineering, procurement, and construction functions. In contrast, many foreign con- struction companies also include manufacturing as part of their overall chain of value-added activities. A nonobvious effect of differences in the extent of vertical integration between U.S. and non-U.S. construction companies-one that is amplified by the cyclical nature of the industry is the difference in career paths and commitments of U.S. and foreign engineering staffs. In the United States, many engineers in the construction and design engineering industries are salaried "nomads" moving from company to company as the work moves with minimum commitment to follow-through or improvement. By con- trast, in several European countries and in Japan engineers are involved in much of the lifetime of the facilities they design and build. Linkages between engineering functions in the U.S. construction indus- try, which have long been less extensive than those enjoyed by its non-U.S. counterparts, have become considerably weaker in recent decades. It used to be that U.S. manufacturers and vendors supplied a significant part of the engineering information used to design and to build. They provided inter- face information for application and many actual details, such as equipment foundations or installation engineering. They also provided complete sub

INDUSTRY PROFILES 121 systems. The growing trend toward buying foreign, buying at lowest first cost, and buying components rather than systems, has weakened the link- ages between construction companies and their material and equipment ven- dors. In addition, as components get larger and regulatory requirements become more complex, manufacturers are becoming increasingly unwilling or unable to accept the responsibilities they previously did, thus further weakening their ties to the construction firms. As more procurement goes overseas, and as fabrication and construction follow procurement, the asso- ciated engineering is likely to follow. Contracting Practices When housing and office buildings are excluded, public projects of gov- ernmental entities have accounted for over 50 percent of the total construc- tion expenditures in recent years. The sheer size of public sector demand has meant that government contracting guidelines often serve as models for some sections of the private market. Under most government construction contracts, allowable (or recoverable) costs include direct costs of labor and associated fringe benefits, fixed or negotiated fees, and audited indirect costs such as rent, utilities, and equipment rental. Such contracts do not per- mit recovery of research and development costs and therefore discourage (if not actually prevent) investments in the industry's technological future. Since lowest estimated first cost is often the criteria for awarding contracts, even the use of the most experienced and most competent people is discour- aged. The Regulatory and Business Environment Unlike their counterparts in many other countries, U.S. construction companies have neither protected markets nor public subsidies in the form of below market interest rates (patient money) or direct development sup- port. When these handicaps are combined with a number of residual restric- tive labor practices, more stringent antitrust regulations, and an aggressive liability legal system, technological change occurs very slowly and capital investment to accelerate such change is not readily available. All three fac- tors (lack of vertical integration, contracting practice, unfavorable regulato- ry environment) discourage investment in long-term research and develop- ment for new technology acquisition in the United States and shorten the time horizons of U.S. construction firms. National differences in management styles and managerial time horizons affect not only investment in R&D and new technologies but also the nature of technology flow between countries. For instance, U.S. engineering con- struction companies seem to be generally much more willing to transfer

22 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY technology and know-how to foreign companies to seek short-term benefits of technology licensing or sales than vice versa. Moreover, even when for- eign technology is made available to U.S. firms (even if the adoption of such technology would require zero capital investment by the recipient U.S. fob, Hey are slow in assimilating and using it. In short, while most U.S. construction firms currently discount the commercial relevance or impor- tance of foreign construction technologies, they do so at their own peril. Over the next decade, the importance of foreign technical contributions to the technological vitality and competitiveness of the U.S. construction industry should grow dramatically. The combination of the development of management skills, the investment in technology development, and the higher level of inertia for change that exist in many U.S. companies means that their competitiveness will continue to decline unless the structural, reg- ulatory, and attitudinal barriers to change in the U.S. market are dismantled. One solution might be to develop a "product concept" for the engineer- ing construction industry. If the item sold (and purchased) was a complete design, or a complete building or a bridge or a runway, the "cost" could then include the recovery of research and development costs as is done in most manufactured products, from automobiles to toasters to ballpoint pens. As long as the evaluation and bidding is based on manhours, this cannot be done. The product concept can encourage efficiency and provide an incen- tive to invest in technical advance and applications. How this product con- cept might be achieved and what might be the relative roles of government and industry is not obvious and warrants further discussion. Overall, the construction engineering industry is similar to many other industries. The current emphasis in the United States on the short term, and the disincentives for U.S. firms to invest in the industry's technological future, will undermine their future competitiveness at home and abroad. Back on the farm, this practice is called eating the seed corn.

VII Electrical Equipment and Power Systems Industry WADIS S. WHrrE, IR. This profile of the electrical equipment and power systems industry divides the subject into four pertinent categories: electrical, mechanical, nuclear, and innovative clean coal technology (see Table A-3. The profile was developed by listing the basic component parts of each category and identifying ongoing and emerging technologies and competencies. An analysis of the profile clearly shows that U.S. electrical equipment manufacturing is in decline. This is also true of mechanical and nuclear sys- tem components sectors that make up the power system. The recent refusal of the U.S. government to allow the proposed turbine generator joint ven- ture between Westinghouse and ASEA Brown Boveri highlights the prob- lem. Electronic controls and monitoring along with developing clean coal technology are a few of the areas in which U.S. companies are holding their own. However, this apparent advantage in the area of clean coal technology may vanish if the proposed acid rain legislation passes in its present form. The areas of decline in electric equipment and power systems industry consist of large and heavy equipment manufacturing such as transformers and circuit breakers, which are sometimes perceived as mature technologies. From the manufacturer's viewpoint, such equipment involves large capital commitments, high risks for successful completion, long lead times to man- ufacture, and relatively modest returns. Most of this equipment is tailor- made for the individual purchaser, and enough differences have been speci- fied to make standardization difficult. Currently, research and development (R&D), as applied to this class of equipment, are used mainly for refining basic products. For many years, corporate America worked hard at being the best it 123

124 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY could be in its chosen field of endeavor. Its measure of success was domi- nation of the market with its product reputation. This generally contributed to strong cash flows and modest steady returns. Of course, interest rates and inflation were also low. Plans were based on the long term, and even the individuals in those companies made long-term career commitments. Today we hear discussions of "inner and outer circles." Companies exit businesses if they cannot be in first or second place in the market. Success is measured by a company's stock price. Corporate loyalty fades as individ- uals are shunted to and fro by restructuring, mergers, sell-offs, and dissolu- tions. Product R&D funding evaporates as these funds go toward improving the next quarter's profits. Management is geared for the short term. This short-term syndrome of some U.S. electrical equipment manufactur- ers was typified in a Wall Street Journal article in which reporter Gregory Stricharchuk (1990) wrote, "But for all its successes, some skeptics wonder whether Westinghouse has come to epitomize the short-term mentality in corporate America. In its race to achieve quick returns, it may have dumped businesses that global competitors with more patience will ultimately profit from.9' U.S. manufacturers have built and sold their equipment primarily for the American market, which was so large that there was little incentive to go after business overseas. The Europeans and the Japanese protected their home markets, and through organizations such as the International Electrical Association, coordinated their control of the world market. The U.S. gov- ernment also did little to encourage overseas sales. Moreover, antitrust laws on the books from the late 1800s, to prevent American monopolies from dominating domestic business, effectively discouraged U.S. firms from col- laborating on large international projects. Foreign manufacturers have continued to grow and become stronger in the United States. They look to the American market for additional growth opportunities. Most foreign companies started doing business in the United States as small enterprises importing a few pieces of equipment here and there. As they became better acquainted with this market and their competi- tion, they saw opportunities to buy small firms and in some cases to form joint ventures. For joint ventures, weaker companies that had a need of help were usually chosen. But it was not long before the foreign partner eventu- ally took over the U.S. organization and created its own operating entity in the United States. These foreign firms have in many cases maintained manufacturing in the United States. But, notable changes were emerging. Much of the heavy, low-tech work remains, while the high tech components are imported. Most of the engineering, particularly high-tech engineering, is completed overseas while the application engineering is completed locally. A recent Business Week article stated that foreign companies have approximately a 25 percent share of the U.S. electrical equipment market.

INDUSTRY PROFILES 125 If U.S. manufacturing loses its domestic market to foreign manufacturers, this automatically precludes its participation in the world market. Cohen and Zysman (1987) warn, "The U.S. and its companies must keep their mas- tery over manufacturing. You can't control what you can't produce." Discussions with U.S. Department of Commerce officials have also shown that the government procurement code signed under the aegis of the General Agreement on Tariffs and Trade Treaty excludes electrical equip- ment from its jurisdiction. As a result, the U.S. market is open to all com- ers, while many foreign markets remain effectively closed to U.S. firms. The responsibility for the reduction of U.S. manufacturing in the electri- cal equipment field cannot be placed solely on the manufacturer. Purchasers have some of the responsibility because they choose who will get the busi- ness. The basis of making an award generally comes down to the lowest price for which one can purchase the particular equipment. Intangibles such as reliability, service, and product quality are included in the evaluation. But items such as sources of future supply, the maintenance of technology in this country, the relationship of U.S. educational institutions to healthy manufacturers and their products, and the impact of the manufacturing jobs on the local economy are not often included in the evaluation. In the case of nuclear power equipment manufacturing, the loss of U.S. manufacturing strength can also be tied to a lack of orders for new nuclear capacity. This is the consequence of uncertain regulation, visible political opposition, and a lack of resolve by elected government officials to maintain this energy option. In summary, the reduction in U.S. electrical equipment manufacturing is the consequence of the present operating policies of three groups: manufac- turers, users, and the U.S. government. The policies of these groups have been neither broad enough nor long-range enough to react to the emerging issues confronting the industry. The problems faced by our country today are really nothing new in the fabric of time. In his 1926 book, Today and Tomorrow, Henry Ford dis- cussed foreign competition. In Ford's view, overseas producers can under- sell U.S. manufacturers only when domestic prices are "stupidly high." Then, he predicts, "competition would force the reorganization and replan- ning of these industries." As we enter into the l990s, more than 60 years after Henry Ford's warning, much of American industry is being restruc- tured. REFERENCES Cohen, Stephen S., and John Zysman. 1987. Manufacturing Matters: The Myth of the Post- Industrial Economy. New York: Basic Books. Stricharchuk, Gregory. 1990. Westinghouse relies on ruthlessly rational pruning. Wall Street Journal. January 24.

126 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY TABLE A-3 Electrical Equipment and Power Systems Industry Ongoing Technologies and Competencies Emerging Technologies and Competencies ELECTRICAL System Protection and Control Relays - U.S. has a dominant role but foreign supply and manufacturing . . Owners lip increasing. Line Trap and Coupling Capacitor Voltage Transformers (CCVTs) - Dominated by foreign manufacturers. Asea- Brown- Boveri's (ARE) purchase of Westinghouse's transmission and distribution business eliminates sole U.S. Ownership. Communication and Monitoring Equipment - U.S. dominated, many U.S. manufacturers. Transformers Large (larger than 100 MVA) - One U.S.- owned supplier since ABB purchased Westinghouse R&D business. Medium (40 to 100 MVA) - Rapidly decreasing number of U.S. suppliers. Increasing presence of foreign suppliers. Small (2.5 to 40 MVA) - Large number of U.S. suppliers and a healthy market. Circuit Breakers Extra High Voltage (above 240kV) - An foreign supplied. High Voltage - One U.S. supplier.  Expertise moving offshore, increasing use of programmable logic controllers, computer and microprocessor-based relaying. Optical Potential Transformers and Current Transformers - limited U.S. participation. Fiber optics - good U.S. base. Microprocessor-controlled monitoring equipment. Use of satellites to provide accurate timing for power disturbance monitoring. Improved insulation systems -Nomex, Silicone - Both U.S. and foreign development. Development of self-blast technology - Japanese lead, also European development. Development of higher interrupting capability - Japanese lead, also European development.

INDUSTRY PROFILES 127 Ongoing Technologies and Competencies Emerging Technologies and Competencies Medium and Low Voltage - Decreasing U.S. supply - Increasing foreign ownership. Surge Arresters Increasing foreign ownership. Motors Large (above 2500 HP) and Medium (to 2500 HP) - Increasing foreign manufacture. Small (1 to 200 HP) - Adequate U.S. suppliers with increasing U.S. manufactured foreign-owned motors. Switches U.S. dominates manufacture. Gas Insulated Substations All foreign supplied and manufactured capabilities, Europe, Japan. High Voltage Direct Current (HVDC) No U.S. maufacturers. Decreasing number of foreign manufacturers, increasing business. Wire and Cable High-voltage cable. 1 l5kV and above - extruded wire cable- one U.S. supplier, foreign manufacturers lead. 1 l5kV pipe type - several U.S. manufacturers, foreign manufacturers lead. 69kV- Several U.S. manufacturers. Medium Voltage (5 to 35kV) and Low Voltage (less than Sky) - Primarily U.S. owned and manufactured.  Circuit breaker monitoring - Japan leads some U.S. developments. Development of arrester materials with lower discharge voltage, better lifetime stability and higher energy capability - U.S. leads. Superconductivity - U.S., Europe, and Japan. Variable-speed motors - U.S., Europe, Japan. Development of manufacturing techniques and materials to reduce equipment size with increasing capabilities, Europe, Japan. HVDC circuit breaker development. Higher rated equipment - Europe, Japan. Thyrister technology - U.S., Europe, and Japan. Foil barriers for waterproof cables - foreign owned. Fiber optics - U.S. patents, Japanese technology. Table A-3 continues

128 Table A-3 continues NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY Ongoing Technologies and Competencies Emerging Technologies and Competencies Nuclear grade cable - significant decrease in number of vendors. Extrusion equipment - Majority is foreign produced. ~ · · ~ 1 ransm1ss10n 1 owers Decreasing U.S. manufacturers, increasing foreign competition, with decreasing growth. MECHANICAL Major Pipe Supports and Hangers - Two domestic suppliers, no significant foreign ownership. Thermal Insulation - U.S. sources - small foreign presence. Valves - U.S. leads, foreign presence increasing, U.S. lags Japanese and European in casting technology. Heavy Wall Pipe and Pipe Fabricators - Very limited domestic production capability - Japan, Korea, and W. Germany . . 1ncreasmg presence. Turbo Generators - Steam Turbines - Limited domestic suppliers, rapidly advancing foreign suppliers. U.S. losing technological advantage. Gas Turbines - Multiple domestic and foreign sources; Domestic manufacturing through GE and Westinghouse; Strong competitive market; Active R&D efforts by all  manufacturers; Technology advancements held by all major manufacturers. Major R&D efforts in NOx control and high efficiency combined cycles. R&D product development driven by environmental and health issues. Specialized control valve designs to improve operating life. Superconducting generators - U.S., Japan, Europe. Ceramics, high-temperature blade coatings, high- strength, single crystal blade technology - U.S., European, Japanese all have a strong presence in this research.

INDUSTRY PROFILES 129 Ongoing Technologies and Competencies Emerging Technologies and Competencies Steam Generators and Coal Pulverizer Equipment - Strong U.S. market share. Forming joint technology ventures with Japanese and European suppliers. U.S. lead but losing edge. Large Centrifugal and Axial Fans - Consolidation of U.S. suppliers. Foreign entry through domestic company purchase. Matured technology. Pumps - Major reduction in U.S. suppliers. European companies increasing their presence. Feedwater Heaters - Adequate U.S. sources. Cooling Towers - U.S. supply adequate. Condensers - Through reduction in suppliers, adequate U.S. presence. Material-product-no current R&D effort. Precipitators - Increasing foreign presence. Flue Gas Desulfurization System - Weak market, reduced U.S. suppliers. Increasing foreign supply capability. Instrumentation and Control Strong U.S. presence. CausticlChlorine- U.S. dominates. NUCLEAR Products Used in Nuclear Plants but also Found in Fossil Plants - Nuclear qualification requirements becoming more expensive to obtain. See listing individual items above under Electrical and Mechanical.  High-speed (15,000-20,000 rpm) pumps. Only one U.S. firm in R&D. Higher operating voltages (80-lOOkV) European technology. Advanced chemistry and material applications - U.S. leads. Artifical intelligence - U.S. leads. Table A-3 continues

130 Table A-3 continues Ongoing Technologies and Competencies NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY Emerging Technologies and Competencies Nuclear Fuel Assemblies and Related Components - U.S. sources dominant, but some foreign ownership. Reactor Pressure Vessels and Reactor Internals - No U.S. production - Current production in France, Japan, and U.K. Steam Generator Fabrication - Small U.S. replacement market controlled by Westinghouse. New plants in France, Japan, and U.K. Containment Construction - No current U.S. activity. Some activity in France, Japan and U.K. Nuclear Fuel Handling and Storage Equipment - Large number of U.S. sources. Uranium Conversion - U.S. maintains capability with increased Canadian participation. Uranium Enrichment - U.S. DOE retains most domestic business but DOE facilities are in trouble. Reactor System Design - No new reactors being constructed in the U.S. U.S. DOE is  funding GE and Westinghouse to develop LWR designs using the natural laws of physics to accomplish reactor safety functions. U.S. showing strong leadership in light water reactor (LWR) fuel innovation. Ceramic-coated Particle Fuel Design for Gas Cooled Reactors - Lead shared by U.S. and West Germany. Graphite Fabrication - U.S. development equal to competition in U.K. and West Germany. Prestressed Concrete Reactor Vessel. Leadership shared between Sweden, West Germany, and U.S. Liquid Metal Technology for Fast Breeder Reactors - France leads. Japan making a committed effort. Some U.S. activity. New material development (1690 Steam Generator Tubes) - high U.S. involvement. Laser enrichment technology for Uranium Enrichment - U.S. maintains lead. Helium circulators - Most experience in West Germany - some in U.S. Thermal Barrier"Density Locks"- Sweden  leads, some R&D in U.S.

INDUSTRY PROFILES 131 Ongoing Technologies and Competencies Emerging Technologies and Competencies Reactor Fuel Reprocessing and Plutonium Recovery - No U.S. activity. Spent Fuel Disposal proceeding slowly. - U.S. effort INNOVATIVE CLEAN COAL TECHNOLOGIES Precombustion Cleaning (Advanced Coal Cleaning) Will be dominated by U.S.-owned companies in the foreseeable future. During-Combustion Cleaning Fluidized-Bed Combustion - Atmospheric Bed When commercially available, over 80% will be dominated by U.S. suppliers/manufacturers. Pressurized Bed (PFBC) Combustor Assemblies: Presently envisioned that U.S. companies will serve domestic market. Boiler tubes: U.S. manufacturing capability declining. It is expected that the majority of tubing will come from foreign sources. Cyclone/Hot Gas Cleanup: Both U.S. and foreign suppliers are expected to share the market. France and U.K. are world leaders. Japan has strong effort.  If and when advanced enough, U.S. companies will have major share of the market. U.S. will have competitive edge in developing more sophisticated I&C systems. Strong emerging European technology in circulating fluid beds. European and Japanese companies are expected to provide significant competition in this area. U.S. has taken the lead in focusing on in- bed tube wastage. Germany and Japan are spending considerable funds to develop an advanced hot gas cleanup system. As the development moves to high-tech, Westinghouse, Accurex Corporation, and other U.S. companies could influence the market, especially in the area of ceramic candle, ceramic cross-flow filters, etc. Table A-3 continues

132 Table A-3 continues NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY Ongoing Technologies and Competencies Emerging Technologies and Competencies Coal preparation and injection system: Both U.S. and foreign suppliers and manufacturers share the market. Sorbent Feed System: Currently, both U.S. and foreign suppliers and manufacturers. Economizer: All boiler manufacturers in U.S. have capabilities of supplying this equipment. Instrumentation and Control: Software-foreign suppliers. Hardware- Both U.S. and foreign suppliers and manufacturers. Valves and Piping: Mostly U.S. suppliers. Bed and Cyclone Ash Removal System: Current technology developed by foreign developers and manufacturers. U.S. has capability to enter this market when this technology matures. Gas Turbine: Currently only single foreign manufacturer. Market yet to be developed. Slagging Combustors None Improved and advanced systems may be dominated by foreign manufacturers. No emerging technologies are expected in this area.  With advancement of manufacturing technology, U.S. manufacturers would be more competitive. Foreign manufacturers (and especially Japan) may become more competitive with U.S. This area will probably be dominated by U.S. suppliers after the maturity of the technology. Expected to be dominated by U.S. suppliers. Development of new technologies would put U.S. in a competitive market. More U.S. manufacturers are expected to enter this market after the maturity of technology. However,U.S. manufacturers may not be able to compete in this area. The technology has been developed in the U.S. as an after-growth of magnetohydrodynamic combustor development. All major suppliers are U.S.-owned. The market is expected to be dominated by U.S. companies, such as TRW, Rockwell, AVCO, and other conventional power plant equipment manufacturers.

INDUSTRY PROFILES 133 Ongoing Technologies and Competencies Emerging Technologies and Competencies Post-Combustion Cleaning Induct Scrubbing: Presently all U.S. manufacturers. Advanced Flue Gas Desulfurization System Most developers/suppliers are foreign- owned. However, some U.S. manufacturers under foreign licenses are willing to enter the market if the technologies could be applied with high- sulfur U.S. coal. Coal Gasification Combined Cycle Over 85% U.S. suppliers and manufacturers, such as Texaco, Dow, Shell, Westinghouse, General Electric, M.W. Kellogg, etc. Only 15% of total will be supplied by West German, Swiss, and British suppliers. No real market has developed yet. General Materials R&D (Basic Materials Research for all innovative clean coal technologies). Over 50% is dominated by Japan,  Sweden, Switzerland, and West Germany. U.S. could dominate this market. Development of high-tech manufacturing processes is not expected to change the market domination by foreign suppliers and manufacturers. Development of high-tech could put U.S. in excellent shape to dominate the market. When the world market develops, the greatest proportion of that market is expected to be in the United States. Japan is expanding in this area to overtake the lead from U.S. and West Germany.

VIII Semiconductor Industry WIGWAM G. HOWARD, IR. The semiconductor industry typifies many of the processes now driving the internationalization of engineering in many fields. The semiconductor business was recently dominated by U.S. technical efforts, but other coun- tries are beginning to achieve technological parity (see TableA-4~. Five major factors at work in this industry are as follows: 1. The semiconductor industry is seen to be one of the critical founda- tions for a national electronics industry, which in turn has been identified as a central focus by many countries seeking to develop industrial strength for the future. Semiconductors form the critical base for efforts in consumer electronics, computers, and communications hardware capability and sup- port other related industrial efforts such as automobiles, aircraft, and robotics. Semiconductor competence also underlies much modern military hardware functionality for communications, avionics, guidance, radar, and electronic warfare weapons systems. As such, virtually all industrially emerging nations have semiconduc- tor industry development strategies. Those of Japan, Korea, Singapore, Hong Kong, Taiwan, and the People's Republic of China are noteworthy. Major efforts in the European Economic Community to strengthen semicon- ductor technology competence have also been mounted under the ESPRIT, RACE, Alvey, and Eureka programs. The most aggressive strategies target not only the semiconductor device business, but the manufacturing and materials industries as well. These semiconductor strategies are designed to be stepping-stones to estab- lishing more lucrative electronics hardware and systems businesses. 134

INDUSTRY PROFILES 135 2. The U.S. semiconductor industry, despite its commanding global lead during the 1960s and 1970s, is vulnerable to international competition. Unlike its counterpart in several European and Asian Pacific countries, the U.S. industry has little vertical component. Each tier of the U.S. industry, from manufacturing equipment suppliers and materials vendors, to semicon- ductor device makers, to the primary semiconductor product users is made up of separate corporate entities, each dependent upon realizing a return on investment at their own point in the supply chain. with the exception of two or three captive lines, there is no mechanism whereby benefits realized at the system level are translated to priorities at the device, materials, or equipment levels. The retarded development of the gallium arsenide device business in the United States as compared with the leadership achieved in Japan, partic- ularly by Fujitsu and NEC, is a reflection of capability in the two countries to translate system-level needs into component business priorities. Furthermore, close working relationships between materials suppliers and device makers within Japanese company groups has significantly helped develop materials suppliers' technology. U.S. companies, particularly in the manufacturing equipment area, tend to be small fogs with little staying power when it comes to battling in the global marketplace against major, diversified company groups. This has led to serious loss of U.S. manufacturing and technology leadership, espe- cially in parts of the industry concerned with fabrication materials, manu- facturing equipment, dynamic memory, and consumer electronics compo- nents. 3. During the 1960s, the U.S. industry moved much of its labor-intensive manufacturing offshore to take advantage of lower labor costs and to gain access to foreign markets. Other international semiconductor manufactur- ers, particularly the Japanese, did the same but had strong incentives to find economic ways to repatriate manufacturing back into the home country in the 1970s. As a result, the Japanese tackled the problem of low-cost, auto- mated manufacturing in an environment of high labor costs, while U.S. mer- chant manufacturers continued to move more activities to lower cost areas abroad. Virtually all volume assembly of semiconductors is now performed outside the United States, and technical control of those activities has fol- lowed. As offshore manufacturing activities increased, critical engineering and technical support activities followed in order to remain in close proxim- ity to factories and foreign customers. Engineering activities were staffed with foreign nationals, who now represent the core competence in a number of critical technical areas in some major U.S. firms. 4. As the semiconductor industry has matured, the technology has spread across the globe. The process started with U.S. multinational corporation

136 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY trained foreign engineers, spread to U.S. university-educated scientists and engineers returning to their home countries to work in local firms or as semiconductor users, and has achieved critical mass with the establishment of competent semiconductor and solid-state physics engineering programs in universities worldwide. Possession of the technology is no longer unique, and the open, international technical publication and conference system helps sustain the universal understanding of many of the latest developments. In the semiconductor industry, the genie is out of the bottle but, realistically, could never have been confined in the long term. The recent success of major Korean companies at purchasing and adapting the technical know-how with which to start up several semicon- ductor producers demonstrates how freely the technology, materials, and manufacturing equipment flow worldwide. 5. The semiconductor technology continues to evolve rapidly. With each major change, the established patterns of competition in the industry are subject to upset. This vulnerability has been evident at major turning points in semiconductor technology: · Vacuum tubes to discrete transistors · Discrete transistors to integrated circuits · Small Scale Integrated (SSI) circuits and Medium Scale Integrated (MSI) circuits to microprocessors and memories · Standard, high-volume commodity products to application-specific products At each of these technologically driven transitions, new entrants have displaced older, less adaptive companies in the fastest growth segments of the business. Similar dynamic processes have been at work in the materials and manufacturing equipment portions of the semiconductor industry. Technological changes have provided opportunities for new entrants at every level of the business to compete on an equal footing with more estab- lished current leaders. Each of these five forces can be seen at work in other industries as well. However, the rapidity with which they have made major shifts in the international engineering balance is striking in the semiconductor case.

INDUSTRY PROFILES TABLE A-4 Semiconductor Industry Technology Profile 137 Ongoing Technologies and Competencies Emerging Technologies and Competencies 1. Lithographyloptics Foreign leadership, U.S. sources flagging, foreign control of lens supply. 2. Fabrication equipment Japanese control, U.S. lags with some exceptions. 3. Design U.S. lead. 4. Computer-aided desigul Computer-aided manufacturing U.S. lead. U.S. suppliers sell to all comers. 5. General materialslceramics Crystal silicon: 2 German, 4 Japanese films dominate, most U.S. sourcing offshore, U.S. has lost this capability. 6. Manufacturing skills Automated equipment, materials. U.S. lag.  7. Diffusion implant U.S. lead, but sell to all comers. 1. Galium Arsenide Japanese lead, U.S. users turn to Japanese suppliers. 2. Molecular beam epitaxy (MBE)lMetallo-organic oxidative chemical vapor deposition (MOCVD) U.S. lead MBE, Japan lead MOCVD. 3. X-ray lithography Japanese lead. 4. Engineered materials U.S. lead. 5. Electron beam lithography JEOL/Cambr~dge (Japan/UK) lead.