Last December, the world economy enjoyed an overlooked milestone: the Toshiba Corporation announced it would end its production of so-called DRAM chips, the building blocks of computer memory. As a result, no Japanese companies make computer memory chips today. In fact, Japan’s Asian successor in DRAMs, South Korea, is also in the soup: One of its large DRAM producers, Hynix, is going broke, Samsung, Korea’s DRAM champion, won’t buy it, and when Micron, the U.S. leader, walked away from negotiations, the Korean government told Hynix to, as they’d say in Silicon Valley, “get real.”
Only a decade ago, the DRAM market was supposed to be the province of the Asian juggernaut. This dramatic turnaround should remind us of some lessons about how economies work.
The inroads made by Japanese DRAM producers in the 1980's were the cause celebre of trade policy in that decade. Japanese memory chip producers, such as Toshiba, Fujitsu, NEC, and the other big-name keiretsu conglomerates, were taking market share rapidly from Intel, Motorola, and other U.S. producers. Armed with cheap access to funds, a relatively closed economy, non-existent shareholder rights, and complete vertical integration, the keiretsu could churn out chips and stick them in their end-use products until the cows came home.
The U.S. semiconductor industry yelped, and their complaint resonated with the tenor of the times. Thanks to large federal deficits, the U.S. trade balance had worsened significantly, so a variety of industries, including autos and steel, had complaints. But the chip producers used their technological allure moved to the front of the line. In fact, they became a poster child for a variety of new theories about how economies worked. There were three of them of note. One was that some industries, like memory chips, were “strategic”: DRAMs would be a platform from which the Japanese would capture the market for microprocessors and then the production of computers themselves.
A second and more general point the DRAM “crisis” was said to illustrate was that “manufacturing mattered” – that America needed to have a manufacturing base (including DRAMs) if it wanted to attract the new service economy. You couldn’t design cars you didn’t build and you couldn’t write software for devices you didn’t manufacture.
And a third premise, of course, was the Japanese had found a new system of public-private partnership that was inimical to American capitalism and had to be sealed off at the border.
Armed with these rationales, the semiconductor industry got the Reagan Administration to pressure the Japanese into a “voluntary” restraint agreement on their memory product shipments here. Now, fifteen years later, there isn’t a Japanese memory chip left on planet Earth. What happened?
The first idea was that of vertical integration leading to the demise of the U.S. computer industry through the Trojan Horse of DRAMs. When I Chief Economist of Unisys Corporation, the high-end computer manufacturer, in the late 1980's, I remember being told by the representative of a large, U.S. chip maker that “they (meaning the Japanese) would get memories next, then microprocessors (his company’s forte), then the low-end (meaning desktops), then the high end (meaning my company and other mainframe makers).” (The proponent of this industrial domino theory did not consider that, were I to subscribe to his view, I would be more concerned about his company than the Japanese.)
Of course, he was perfectly, sublimely wrong. Producing a rapidly evolving product such as memory chips turned out to be riding a tiger. Not only was the product a commodity, but every two years or so, a new generation of bigger, denser chips required the Japanese to spend billions on new factories to make them. These big overheads forced the producers to sell all they could for whatever they could get, which flooded the market and kept prices and profits low. When the Japanese bubble burst a decade ago, and companies were suddenly pressed for cash and its antecedent, profitability, they determined they had better things to do than keep losing money, so they quit the business. Two of today’s three largest DRAM producers are Korean. One is American. DRAMs, like automobile components and other examples of undo levels of vertical integration, proved to be not an advantage but an albatross for Japanese companies.
Second, it turned out that globally interconnected markets provided all the strategic linkage our economy needed. Cheap Japanese memories didn’t allow the Japanese information technology industry to rule the world: they allowed the American industry to do so. They allowed U.S. computer companies, unencumbered by the investments needed to stay in chip production, to make computers cheap and ubiquitous. They allowed U.S. software companies to write more powerful, productive and entertaining software, and helped establish the American monopoly in operating systems. They illustrated a new – and, at the same time, the restatement of an old – principle of an interconnected, information-intense world economy: in a world in which you can have access to any resource, product, service, good, input, component, or factor, the key to corporate competitiveness is to determine how best to add value to the assortment.
And a corollary is that manufacturing doesn’t really matter that much. That’s not to denigrate manufacturing, but it is to say that a country doesn’t need to make memory chips to write software, or for that matter, produce things in order to finance or design them. The Internet’s ability to provide costless information anywhere allows manufacturing to go wherever it wants to go. Labor costs count, but increasingly, manufacturing goes where there’s an infrastructure of services to support it – telecommunications, transportation, finance, information processing, and the like. In the Information Age, services matter at least as much as manufacturing does, which is a pressing reason why developing countries need to liberalize service trade and lower the cost of doing business in their locales.
And then, of course, came the demise of Japan as Number One. A variety of forces have led to its decade-long torpor, but the most important was the very lack of openness Japan’s celebrants found enticing. While Japan’s incestuous conglomerates were attempting to dominate the entire computer “stack” through overinvestment and production-at-a-loss, American specialists such as Microsoft, Oracle, Cisco, and Dell were efficiently attacking individual slices of that stack and dominating them: in essence, they took the vertically-integrated “stack” and turned it 90 degrees. The more open American approach – to take what the market offers and find a way to add value to it – has run roughshod over the Japanese public-private partner and plan approach.
Finally, the failure of the economic domino theory that led to semiconductor protection in the 1980's reminds us that protecting domestic industries rarely does anything worthwhile other than save the few jobs that remain in them. One man’s meat is another man’s poison. Cheap foreign steel leads to low-cost domestic cars, construction equipment, and appliances. Cheap foreign textiles lead to low-cost U.S. fashion products. Cheap memories lead to a plethora of new electronic devices and their applications. An open, competitive economy takes what the world offers and turns it into something more valuable. Like the Japanese chips that are no longer there, that’s not something we need protection from.
Comments