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The United States and international competition: a five-year prognosis.

The United States And International Competition: A Five-Year Prognosis

Much more than immediate markets is at stake in the international business arena. It's a race for the future, and all Americans are running. If the United States loses its competitive edge, it will mean fewer good jobs, shrinking incomes, and a declining standard of living.

Simply, the United States needs to be more competitive internationally. It has to sell more goods and services abroad to deal with its immense foreign debt. How the trade gap is narrowed is critical to the future. The dollar's fall has helped, but if the United States relies only on continuing devaluation to make its goods more competitive it will eventually become another Britain, exporting cheap labor at the expense of the living standard.

The Japanese have created entirely new systems to increase efficiency. Although the United States has the capability to automate manufacturing, many companies are not going this route to the extent that the Japanese have because of the large capital expenditure requirement. Therefore, large manufacturers in the United States must become more efficient by making their existing systems perform better. The Japanese have realized that to become competitive in the future, you must plan for the future. In too many cases, U.S. industry has not come to the same conclusion. Many U.S. businesses choose to maximize current net income rather than re-invest profits in methods that will increase efficiency.

Businesses in the United States will have difficulty competing in international markets because U.S. corporate strategy does not take full advantage of existing technology, nor does it adequately plan for the long-term future.

Other countries - mainly Japan, Korea and West Germany - saw the huge market potential in the United States, and they succeeded in achieving lower prices and better quality. Their acceptance by U.S. consumers was quick, and American businesses' market shares eroded domestically as well as internationally.

American companies licensed technology to overseas rivals under arrangements that appeared to be lucrative, but which subsequently eroded competitive positions. The technology was transferred at a fraction of the cost it took to develop.

Currently, U.S. industries see foreign markets as an increasingly profitable area due to a weaker dollar as well as favorable exchange rates. The United States and Japanese import/export trade is currently a major consideration when analyzing the prospects for American industries. Imported goods directly or indirectly affect almost every size company and every American. Nearly one-quarter of every dollar that Americans spend goes for imports. Although improved trade balances are expected to alleviate some of the import pressure, product recognition and sales in international markets should be of prime importance in the 1990s.

Losses to other countries in the last three decades have affected textiles, steel, consumer electronics, and automobiles, and similar losses were felt in European countries. Looking at this track record, the most obvious conclusion is that American companies are not capable of effectively defending home turf from foreign invaders.

Constantly changing domestic and foreign economic conditions have forced many U.S. corporations to devise carefully planned short- and long-term growth strategies. However, American companies find it difficult to transform ideas into products that can be sold in world markets. The current shape of American manufacturing operations is partly responsible for this dearth of new product development. The costs of labor and capital have seriously hurt the competitive position of U.S. manufacturing.

The United States can compete in the international market areas where it can produce products, such as machinery, that are difficult to obtain elsewhere. Here the advantage is in the technology and a seemingly never-ending ability to produce bigger and better equipment and parts. However, in an area where U.S. products are equal to that of foreign competition, it is difficult to compete because of higher labor costs.

Americans buy Japanese goods because many are more advanced, better-made, and less expensive. American businesses will remain competitive in the international markets as long as they produce the most advanced, highest-quality goods using the most skilled workers and the most advanced production methods.

Quality control is a mandate. Many U.S. businesses have let quality slip as a by-product of cost-cutting measures. Companies in the United States must survey their customers to determine what types of quality problems exist. Based on the findings, the sources of the problems must be identified and corrective action must be taken.

American industries that depend on labor-intensive, low-skill production cannot compete with international competitors on a cost basis. However, U.S. businesses have, in the past, proven that they can temporarily remain competitive internationally by moving the manufacturing function abroad and lowering their wage base. Japan, South Korea, Taiwan, and China are only a few of the large assortment of countries to which U.S. businesses have shifted their operations, and many countries' industrial stages are ripe for this kind of competition. The preferred alternative, however, is to lower the dependency on labor by utilizing automation and modernization.

Because of high U.S. wages, it is necessary for Americans to compete on a basis other than price. Businesses in the United States have attempted to achieve flexibility through corporate restructuring, boosting productivity, cutting costs, raising product quality, restructuring management and purchasing components and finished products from abroad. These attempts have helped, but there is still a long way to go. By being efficient and innovative and by introducing new technologies, it will be difficult for competition in both the short and long run. The argument has been put forth that while other countries may not be able to produce new technologies, they can copy them much more cheaply. There is some truth to this, but the overriding factor is that by the time the copying is taking place, new innovations are on their way.

Efficiency and innovation cannot be addressed without discussing unions. The power of unions (and their general effect on even non-unionized labor in terms of wages) in the United States has, over a period of many years, become formidable. While other countries do experience labor demands, but it is extremely difficult for American companies to pay higher rates and remain competitive. Also, the persistence of the adversarial relationship between unions and management hinders the establishment of continued cooperative efforts. Labor and industry should organize joint efforts to combat increased competition. Competitors from other countries, by and large, do have to contend with unions and their demands for higher wages, job protectionism, and liberal work rules, but have stronger government ties and cooperative efforts.

Also, U.S. spending on R&D has incrementally decreased, and in the last few years almost half of all U.S. patents were granted to citizens of other countries.

The slowdown in American productivity in general can be traced to several factors:

* The arrival of baby-boomers in the work force, resulting in the end of the post-war productivity surge by flooding the work place with many unskilled, inexperienced workers.

* Reduced capital spending resulting in aged machinery and plants; thus slower production capability.

* Over-expansion of the service sector, where output-per-hour has risen at less than 1/2 percent per year. Each of these factors is partly responsible for a serious reduction in output-per-person.

On a positive note, the United States has started to modernize its industries in order to be more competitive internationally. Companies are automating their manufacturing operations while giving factory workers more control over production. At the same time, they are improving quality.

According to a New York Times article, the United States export products generating the most revenue are aircraft and spacecraft; automobiles and automobile parts; and computers and computer parts. Not surprisingly, this shows that the most successful U.S. businesses are those marketing high-tech products. However, transportation across the ocean adds to an already higher product price for U.S. goods.

The United States can protect its industries by imposing tariffs and import quotas on foreign goods. Many CEOs today feel that the problem is a meddlesome government rather than trade policy.

In any event, American industry must bear the burden of the current situation. Industry has rarely taken a serious look at the long-term; things were looked at in the short-term. Other countries' long-term moves simply outpaced the American short-term orientation. When U.S. businesses were basking in glory, they should have outlined long-term strategies that should have included increasing quality and efficiency and hitting foreign markets more aggressively. Increasing quality and efficiency would cause decreases in price decreases and, therefore, increases in demand. In addition, the current game of catch-up may be delayed by union demands unless productivity increases can take up some of the slack. The unions may see automation as a job loss.

The U.S. businesses that are competing the best with the other countries have already taken major internal measures. They have become much more cost-conscious, selling marginal businesses, closing inefficient plants and reducing personnel. Great strides have been taken in the areas of quality control, product development, marketing, and distribution. Manufacturing techniques are being improved to reduce waste and increase productivity. Positive competition in the international market cannot be accomplished by changing only certain aspects of a firm - it must be a mix of all efforts. A change in corporate structure is often required as well.

Industry in the United States must hit competitors where they live, and create reasonable and aggressive long-term goals and strategies. The U.S. businesses and the government must cooperate more closely. The government should not allow unfair trade practices such as dumping.

American companies need to focus on education, productivity, efficiency, and technology to prevent more erosion in international competitiveness.

Other governments subsidize their industries to promote the growth of their home economies; the United States should do the same in certain industries. American companies must trade competitively despite existing intervention. Unfavorable competition positioning can also exists because of U.S. antitrust laws, taxation, and other legal stipulations.

Some have suggested loosening American's antitrust laws to allow more domestic partnerships. These combined domestic resources could help in the area of international competition and eliminate the need for alliances with overseas businesses and the risk of giving away current competitive advantages such as advanced microprocessor technology.

Legislation is needed that would require the administration to implement and enforce existing trade agreements and respond to unfair trade recommendations from the nonpartisan ITC. Tariffs, import quotas, and subsidies should be maintained to aid industries, and retaliation should be anticipated. Protectionism, of course, is not a final solution. Quotas and tariffs help solve problems only in the short-term. They postpone inevitable long-term adjustments.

In addition, an important step that could be taken to strengthen American competitiveness would be the steady reduction of the federal budget deficit. That would help lower interest rates, and cut the cost of capital, Japan's biggest advantage. An increase in national savings would also help.

Increased American technology is needed to improve our competitive posture. This can be accomplished through increased R&D. Universities, business, and government must work together in scientific and marketing research. Tax incentives are needed to generate new capital investment.

Labor unions must be more accommodating. The work force must strive to compete, and win. Automation should be employed whenever possible, to improve efficiency. Whenever this is not possible, offshore assembly can cut costs. This could also create trading advantages.

If Japan closes its doors, the United States must respond. Since Japan does not expose its own protected industries to U.S. competition, we must do the same. The U.S. must place limits on free trade with all countries that protect their industries from U.S. competition. If action is not taken soon, the trade deficit will grow while U.S. global competitiveness declines.

The U.S. should pay close attention to third-world markets. By capturing them, competitive advantage can be maintained.

In summation, U.S. industries must have the flexibility to respond to competition from outside its borders. The U.S. government must re-assess certain incentives such as the investment tax credit. The tax reform laws must be evaluated. It has become easier - and at times a good business decision - to look to other countries for low-wage manufacturing. American businesses must realize that this is the heart of the competitiveness issue. Businesses in the United States must produce in the United States. Therefore, incentives must be offered; deregulation must be supported to free business from excessive government intervention, and high-tech enterpreneurs must be supported through venture capital.

Several industries were chosen to investigate to examine international competitiveness in the 1990s. These industries include autos, auto rentals, aerospace, computers, banking, investment banking, steel, textiles, semiconductors, health care, chemicals, machinery, machine tools, biotechnology, pharmaceuticals, consumer electronics, and American fast food.


The automobile industry in the past has been slow to anticipate market changes either demographically or by consumer preference. It has been even slower to react to the new highly competitive forces in the international marketplace. Imports account for almost 30 percent of U.S. sales and the Commerce Department predicts that foreign cars will account for 37 percent of domestic sales by 1990. A second wave of import competition will be from new and currently unfamiliar brands built in countries such as Taiwan, Greece, and Spain. Detroit has closed about 47 facilities since 1980.

In the past, U.S. auto companies were short-sighted when it came to the growing need for and interest in small, efficient, low cost cars. It was assumed that Americans would always want big cars, regardless of cost, gas prices or economic conditions. But this assumption turned out to be very wrong, and as the consumer demand for smaller cars continued to flourish, foreign automakers were creeping into the United States to tap the market. Today, automakers from Sweden to Korea are represented in the United States. American sales are down at least incrementally, and competition is fierce.

Automakers in the United States are moving toward foreign markets to regain some of the market share they lost domestically. The European market, however, has historically avoided American cars because of a poor quality image and poor fuel economy. American cars have also lacked the performance levels sought by European consumers. General Motors has lost $2 billion in Europe since 1980.

Europe is projected to be the fastest-growing market in the 1990s. Protectionism is widespread there (Italy only imports 2,500 units per year; France allows the importation of only 3 percent of its market). The trade and tax barriers in the Common Market will be dissolved by 1992, but some informal barriers will remain. In addition, the fastest-growing markets also have state-owned auto companies - Renault in France and Fiat in Italy. As far as the Eastern European countries are concerned, trade barriers (at least at present) prevent the United States from competing.

The most successful manufacturers build cars with Japanese quality and European style and handling. Advances in technology are that enhance durability, handling, performance, safety, and fuel economy are most desirable.

Worldwide, automakers are finding varied ways to be flexible. For example, Japanese manufacturers emphasize programmable robots that can do several different tasks. At Honda's plant in Sayama, one hour from Tokyo, cars are assembled with steering gear on either the right or left side without upsetting the production flow. In Europe, France's Peugeot is enthusiastic about automatic guided vehicles (AGVs). These electrically powered devises move partially complete work individually from one work station to another, allowing plant managers to design a day's assembly schedule in units of one, rather than blocks of a hundred.

Auto manufacturers are offering fuel-efficient, four-cylinder, front-wheel-drive cars. For example, much of Chrysler's efforts will be concentrated on promoting its mini-vans and jeep models as a lower cost alternative to similar European models. Current sales trends show that Chrysler is not far off the mark in that these vehicles are becoming increasingly popular on the European market.

One of Ford's tactics is to design and produce a generic car that can be customized in local markets according to tastes, etc. Ford's plan involves placing design and engineering teams throughout the world in locations called "centers of excellence." Each center would work on key auto components. One center might engineer common engine parts. Designers in each market would then style the interiors and the passenger compartments according to local tastes. Each car would probably be built on the continent where it will be sold. By doing this, Ford hopes to save money on duplicated efforts and re-tooling. Its engineers would also develop efficiency and continuity rather than being shifted around from job to job. Some of Ford's current lines, such as Taurus and Sable, are designed this way.

Ford's teams of engineers, stylists, and manufacturing representatives have a goal of producing the "best car." Because of team effort, engineers are able to stay focused on project and not be shifted among projects. The "center of excellence" helps Ford react to its markets quickly, save costs, and build better cars.

Ford also focuses on quality. "Quality is Job 1" is not only an advertising campaign, but also a corporate decree. Workers have the authority to stop a production line when quality is compromised. Ford plans to take this strategy into the 1990s and beyond by taking its "centers of excellence" and integrating them worldwide to be better able to compete with businesses from other countries. Ford of Europe Inc. will be the first center to compete internationally.

Other countries continue to open plants in the United States. By 1990, foreign auto manufacturers will produce about 20 percent of the cars sold in the United States.

In order to effectively adapt to internal competition, U.S. auto companies have become extremely dependent upon other countries. The Asian strategy - whereby GM sells small cars made by Japan's Suzuki and Isuzu - is a classic example. In this respect, General Motors and several other U.S. automakers have been reduced to being solely marketing groups. It is clear that U.S. automakers must learn how to manufacture small cars profitably if they are to compete internationally. U.S. automakers must undoubtedly modernize and learn how to effectively use that modernization.

There are joint ventures springing up between U.S. and Japanese companies (GM and Toyota, Ford and Mazda) which will produce foreign-styled cars under American names. If American automakers can establish their new products as having the same quality, efficiency, and low cost as their Japanese counterparts, then the United States should have little difficulty competing successfully abroad.

In addition to cutting their operating expenses, U.S. auto companies are striving to offset the glut of import cars in the United States by owning stock in Japanese car companies. General Motors owns about 34 percent of Isuzu and 5 percent of Suzuki. Ford owns 25 percent of Mazda Motors and will take about half of the 240,000 compact cars a year that will be produced in Michigan by Mazda. Chrysler owns 24 percent of Mitsubishi, and their joint Diamond Star Motor venture will start producing 240,000 cars per year at a plant in Illinois.

American auto companies have sought to enhance their competitive positions by purchasing more parts, components, and supplies from less expensive foreign sources or from non-union suppliers in the United States. They have also reduced the number of basic stages on which car models are assembled and by making acquisitions in areas not involving automobiles.

New developments have been introduced by the Japanese, such as four-wheel steering and anti-lock braking, and these only serve to enhance both the products and the manufacturers in the eyes of the U.S.consumer. American industry must devote more resources to research and development, and its senior management must become more alert to current developments in both products and process technology.

U.S. cars are still 3 1/2 times as likely to need repairs during their lifetime as their Japanese counterparts. In a recent study, 45 percent of new car owners reported problems with U.S. vehicles while only 25 percent of imported car buyers reported problems. This may be linked to the traditionally lower emphasis on quality control by American automakers.

But now, the "Big Three" have embraced the Japanese approach and adopted the goal, unthinkable in Detroit a decade ago, of zero defects. From a marketing standpoint, Chrysler's 70,000 mile warranty shows the consumer that Chrysler has confidence in its product.

The Japanese need only 80 to 100 hours to make a car; Americans need 150. Americans have not embraced automation as the Japanese have. For example, Japan has approximately four times as many robots in manufacturing operations. One robot can replace six workers on the assembly line, and every dollar spent on a robot saves three dollars in production costs. Thus, the United States' competitors possess a great advantage in the manufacturing process that results in lower production costs. Japanese productivity is also greater than in the United States, stemming from rigid work rules and extensive job assignments in American production plants. Many Japanese businesses have only four job classifications while the U.S. auto workers have over 50. The Japanese can produce cars in less time and at a lower overall cost than U.S. businesses.

American automakers have incorporated many of the Japanese production methods and processes in their newer plants, but they still cannot top the Japanese in high quality and low costs. But capital spending for new production plants does not necessarily make a company more competitive, and Japanese success with high productivity is not a result of only having the latest automation. To the Japanese, working toward efficiency is a continuous process. They have fewer levels of management. Ideas are not changed and distorted as they flow to those on the production line. In addition, the Japanese have a competitive advantage in auto production, because workers in Japan are paid less than their American counterparts. Also, Japanese workers are devoted to both the quality of the product they produce and to their company. As a result of this committment, they tend to produce a better product.

Short-term solutions to foreign competition in the auto industry include import quotas and severe tariffs. However, tariffs and import restrictions are not viable long-term solutions. American automakers have to come up with innovative cars that cannot be acquired elsewhere.

Even if the U.S. businesses were able to out-forecast the international competition, they seem unable to take advantage of quick-changing consumption patterns. This is a result of the philosophy of long production runs and lower per-unit costs. The length of time it takes for American manufacturers to take innovative ideas from blackboard to finished products has also hurt its competitive position. The flexibility needed to deal with unions must also be employed in the product design and manufacturing stages if American car producers are going to continue their move toward a more competitive state.

Cost-cutting measures are needed including the purchasing of cheaper materials from outside suppliers. Chrysler, for example, gets about 58 percent of its parts and components from outside the United States, up from about 50 percent a decade ago. At Chrysler there have also been sharp decreases in the amount of hours it takes to build a single car, down 40 percent to 65 hours. With some unrepresentative exceptions, plant efficiency has also been increased through the building or refurbishing of plants with re-tooling of the latest technology.

In many ways, U.S. auto manufacturers are gaining on foreign competitors. Product quality is improving, foreign prices continue to climb, production costs are becoming more in line with Japanese costs, and management is responding faster. However, foreign manufacturers continue to be strong competitors. In order to continue to regain competitive position, U.S. automakers must make the following changes in their competitive strategy.

The quality of American autos must continue to be improved. This means not only greater attention to quality control, but the development of features which are pleasing and/or convenient for consumers to use. This requires additional commitment to R&D.

On the broader level, and most importantly, U.S. auto manufacturers - indeed, most other industries as well - must make some major modifications in their strategic thinking. As the Japanese have proved, a consumer orientation is often the catalyst for success in the international auto market. The key is to understand what the consumer wants and react quickly with a product that fills that need, thus becoming truly consumer-driven.

Auto Rentals

While the automobile industry may be experiencing serious problems with international competition, the car rental industry has a key advantage in terms of flexibility. Auto rental companies can vary the type of rental to meet the local demand. They can provide cheaper economy models in less affluent areas, sporty models in resort areas, and luxury models in more elite locations. They can offer Peugeots in France and Volvos in Sweden. They can provide American cars to patriotic American travellers in most any country.

If an American name (e.g., Avis) is felt to be a handicap, a subsidiary can be established. Where possible, the service should be provided by local people.


From 1980 to 1985, the United States accounted for 78 percent of all free-world air transport. However, the trend is now turning with Air Bus Industries' starting to gain market share. Air Bus Industries, an aircraft consortium backed by the governments of the United Kingdom, France, West Germany, and Spain, is estimated to contain a total civilian transport market for 8,950 aircraft with more than 100 seats during the next 20 years. This forecast is based on a predicted annual growth of five percent. It is anticipated that the United States airlines will purchase about 60 percent of those aircraft produced.) Clearly, the United States leads in aerospace technology but Air Bus is trying to catch up. Similarly, Japan is also trying to catch up by entering into an agreement with Boeing. While the United States produces about 77 percent of all civil aircraft, competition is mounting from both Air Bus Industries and Japan.

According to Standard and Poor's, as of December 31, 1986, Boeing and McDonnell-Douglas had orders for a total of 660 planes compared to 288 for Air Bus Industries. And many of those U.S. planes were for sale to other countries - for instance, McDonnell-Douglas has 52 firm orders and 40 options for its new 276-seat MD-11 aircraft, and only two of those orders were for a domestic carrier (Federal Express).

Major plane makers including McDonnell-Douglas, Boeing, and Lockheed will continue to bring out new models regularly into the 1990s, but Boeing may have the edge. Boeing delayed introducing its model 7J7 150-seat aircraft to take advantage of a new engine technology expected to become available in the early 1990s. The ultra-high-bypass engine, now under development at General Electric, is a turboprop engine that provides the speed of a conventional jet engine while consuming only half the fuel. If this technology works out as expected, Boeing is best positioned to capitalize on it and maintain U.S. dominance in this industry.

It may even be possible for the United States plane makers to steal some business from the Soviets. The New York Times reports that Poland had grounded its fleet of Soviet built Ilyushin aircraft as uneconomical and unsafe. Along with Hungary, Poland is interested in purchasing new aircraft from the West.

To take advantage of this opportunity in the financially weak Eastern Bloc, U.S. businesses will have to offer attractive financing deals. But this is one of the strengths of these businesses. They have been successfully selling new aircraft to third-world countries by offering some generous financing terms.

The U.S. can remain the leader in the aerospace industry if companies increase R&D expenditures. American manufacturers must continue to make capital investments in property, plant, and equipment as Air Bus Industries is doing. We can't have outdated manufacturing equipment while the competition uses newer, more advanced equipment. We must take a long range view instead of looking at the short-term and consider what potential customers in other countries actually want. We should also pursue free-trade agreements whereby two countries agree to trade freely and, in turn, share technology.

The U.S. aerospace industry can compete successfully into the 1990s. The key factors for success are offering superior products, continually bringing out new products which take advantage of newer technology, and providing superior support. Another key factor, particularly when marketing to Third World countries, is offering low-cost financing.


While Japan has caught up with the United States in computer hardware engineering, it lags in computer software. Hardware makers have reduced profit margins to a range of 5-15 percent. In contrast, pretax profit margins on software are holding in the 15-25 percent range. Companies like IBM are putting more emphasis on software. For example, although IBM has cut staff, significant numbers of employees have been added to software development.

IBM's aggressive legal stance over software copyrights has helped keep Japanese competitors off-balance. In a recent copyright issue, IBM accused Fujitsu of copying operating-system software. Arbitrators gave Fujitsu tightly controlled access to IBM's software and IBM was given the right to monitor Fujitsu's software for violations of the agreement.

The main reason the Japanese need to tap American brain power is to make up for an inherent weakness in basic research and creativity.

Japanese tend to purchase patents rather than develop their own technology, which necessitates substantial investment. They buy the patent, perfect it, and re-invest the money in another patent. For example, in 1986, according to the Commerce Department, Japanese companies paid $697 million to U.S. companies in license fees and royalties.

While the Japanese culture stifles individualism, the United States is a country of free-thinkers and risk-takers. Instead of merely improving current methods, the United States searches for totally new approaches. The Japanese perceive themselves as users, not producers, of computer software. This cultural difference appears to be the fundamental reason for the United States' dominance in software.

In looking at the communications aspect of networking computers, the United States remains competitive in the world market. The networking of computers encompasses new technology that has not had the chance to be licensed and copied by world competitors. Coupling communications and artificial Intelligence requires an infrastructure most competitors simply do not have. Large defense spending is a factor favoring American businesses.

However, aggressive competitors such as Japan will change to competitors as soon as technology becomes available.

There are several joint ventures between the United States and Japan for the development of value-added networks such as the cases with General Telephone and Electronics and CompuServe, indicating that the United States still holds a competitive edge in communications and software.

Instead of implementing developments, U.S. technology is often licensed out or simply copied by competitors.

Stricter patent laws and harsher penalties for industrial piracy are on the increase. Because there is evidence that free copying discourages investments by companies to develop new products and technologies, new antitrust policies lean toward protecting inventions. As U.S. businesses implement new technologies into their own manufacturing processes, it will regain a competitive edge in certain industries. However, 1990 will probably be too soon for many industries to recapture their past market position.

For the U.S. computer industry, the key to a strong future market may not be so much in the development of new devices but rather in the development of new products and processes from current discoveries. Concentrating on improving current technology and giving the consumer more computing capability for less money should be of prime importance.


U.S. banks are having great difficulty being competitive in international markets. First, we are no longer competitive in the labor market. Banking is service-oriented and requires a large amount of client contact. American wages are higher than those of most other countries. The average American workweek is made up of five eight-hour days. In Japan (which, according to the recent Fortune magazine list, has eight of the top ten banks in the world), the average workweek is six twelve-hour days.

Banks in the United States are not competitive because of the negative impact of government regulations. American laws are restrictive for banks expanding into new areas. They can't enter into securities areas without becoming a mutual company or an investment banker. This adversarial governmental relationship is quite different from that of foreign banks whose governments encourage expansion and offer support to the banking industry. For example, the Japanese government has created a third party corporation to purchase a sizeable number of bad loans from their banks. American banks, without such help and wary of new ventures, have left other internationals at an advantage. American banks are going through major economic corrections due to several factors - the devaluation of the dollar, significant loan losses in such South American countries as Brazil, and in Third World nations. It will be difficult for banks to predict whether their laons will remain profitable if it is too difficult to predict the future value of the U.S. dollar relative to the value of the dollar of the borrowing country.

The volatility of the stock market may cause banks to be more cautious in regard to domestic loans because a bear market will result in defaults.

In the current state of the world, banks are experiencing problems. However, in the long-run this could change if domestic and international markets become more stable.

Investment Banking

Investment banking in the United States can compete in the international market because of logistics and because of the expertise it has developed from its past dominance of the markett. Companies such as Morgan Stanley have already proved that they can effectively compete in the Japanese government bond market and the Tokyo stock market. But there has been increasing competition. Japanese brokers have come from nowhere to become major players in New York financial markets. Today, four of the largest Japanese brokerage businesses account for 20 percent of long-term U.S. government bond trading. The Japanese are now moving into stocks and other areas such as mergers and acquisitions. Their strategy is to gain market share in a way not unlike the Japanese automobile and electronic industries did the same thing - through high volumes and low markups. Their high-volume sales approach is paying off in market share. They have risen on the top of the Eurobond market of leading underwriters, recently overshadowing U.S. and European banking giants. The world markets are focused on Japanese markets because what moves Japanese investors often sets the tone for other world markets.

While business from other countries have hired personnel from U.S. businesses, they have had to pay Wall Street-style salary and bonus packages that are often at least twice as much to what Japanese traders earn. Several Japanese businesses are beginning to offer employees short-term contracts instead of the traditional lifetime employment plans. Personnel expenses now consume half the revenue in major Japanese businesses. This amount is normal for U.S. businesses but double that of Japanese companies.

Since these events are taking place in the United States, foreign investment bankers will need to compete for brokers and traders jus like U.S. businesses. This is clearly a different situation that in the 1970s and 1980s when foreign manufacturers enjoyed significantly lower labor costs, and could offer lower prices.

The future will see more foreign participants in the security firm oligopoly. United States invesment bankers will no longer dominate, but they will be able to effectively compete.


The U.S. steel industry could not compete with imports in the early 1980s because of a combination of high wages, a strong dollar, and aging, inefficient factories. This caused a $12 billion loss in the industry from 1982 to 1986. In contrast, the largest U.S. steel companies posted about one billion dollars of earnings in 1987. The weaker dollar has been a major factor in the steel industry's turnaround. The industry is now running at 82 percent capacity, which is the highest rate in years, and orders are still outpacing supplies. The supply-demand ratio could cause a three percent increase in prices. Since 1982, U.S. producers have cut capacity by 27 percent and the work force by 44 percent Combined with nearly $8 billion invested in more efficient equipment, this has made U.S. steelmakers among the world's most productive. The amount of labor needed to produce a ton of steel has dropped by 36 percent since 1982, cutting major producers' costs by 28 percent The weaker doller, on the other hand, has increased Japanese cost by 17 percent. On top of all this, the quallity of U.S. steel has improved. Ford's rejection rate of U.S. steel, for example, has dropped from ten percent in the early 1980s to a current one percent. This is better than the three percent rejection rate of European steel, but still not up to par with Japan's 0.5 percent rate. Further, government-imposed voluntary import restraints had the positive effect of slashing 1987 imports by one million tons.

As long as plant investment continues, and the dollar doesn't rebound dramatically, the steel industry should be competitive in the 1990s. However, the overall demand for steel is decreasing by two percent rate per year because of alternate materials like aluminum and plastics, and labor unrest exists. USX suffered a six-month stoppage in 1988, and on the eve of LTV's Chapter 11 restructing in July, 1986, unions refused to change wasteful work rules.

Another problem is over-capacity. Several industry experts figure that up to 23 percent of raw steel capacity must be eliminated, and finishing capacity should be cut by 25 percent.

Much of the world's steel production is government-owned or subsidized. Because the main goal of some other governments is employment, foreign businesses will continue operating regardless of whether they cover their short-term costs. American businesses operate without the assistance of tax-incentives, long-term, low-interest loans, reorganization schemes, or the waiving of environmental requirements.

American steel facilities were built many years ago near the Great Lakes because industrial users were located in the same region. Today, however, industrial users are located worldwide. Japanese production is largely situated at deep-water ports putting U.S. steel makers at a cost disadvantage.

Regardless of where the competition is from, there is general agreement that there will have to be major new investments and restructuring of the U.S. steel industry if it is to bring its costs down to those of imported steel.


The U.S. textile industry is at a competitive disadvantage to foreign competition and the trend is not likely to turn around. By the end of the decade it is projected that over 80 percent of the apparel market will be made up of imported goods, and industry leaders believe a legislative solution is needed for survival. However, this would be a short-run solution, and the chances of protectionist legislation is doubtful.

There are several reasons why U.S. textile pruducers can't compete. First, foreign countries have cheap labor. Second, foreign companies (particularly Japanese) have superior factory operations and management. But the U.S. textile industry has made strides in the last several years, and new techniques, in many instances learned from the Japanese, are now leading to lower inventories, improved lead times, and better quality.

Most businesses have been slow to adopt to new technology. In 1985 and 1986, capital spending actually decreased in the industry, by 7.8 percent and 6.1 percent respectively. On the bright side, there has been productivity growth in manufacturing which has averaged about 4 percent per year, and labor costs are now increasing by less than the inflation rate.


The semiconductor industry has been ranked among the most promising of all domestic industries. Long-term growth rates are projected at 15-20 percent with the integrated circuit market expected to reach $42.2 billion in 1990.

One positive step for the U.S. semiconductor industry was the signing of a trade agreement with Japan in July 1986. The purpose of this agreement was to allow for a less competitive marketplace and better pricing in the United States.

Despite this positive outlook, problems remain that tend to dampen the industry outlook. Chief among these is overcapacity and imports. Even with the expectation of a strong rebound over the next few years, and accounting for some obsolescence, an overcapacity problem still exists.

Today, the United States industry is fragmented and full of small young businesses that find it tough to survive. Meanwhile, Japanese semiconductor makers went in the opposite direction. By pooling capital and joining with equipment manufacturers, companies formed into large, integrated operations. As a result, the Japanese now have 47 percent of the semiconductor market. This strong base has many implications for the United States, including possible defense problems. The possibility exists that some day the Pentagon won't be able to buy from American companies the chips it needs for weapons.

In order to maintain a competitive position internationally, the industry needs funding in R&D and capital spending. One way in which this problem is being addressed is through the use of strategic alliances - agreements under which companies contribute manpower and money to generate a product. An example of this is the agreement between IBM and INTEL. These companies agreed to swap computer chip designs and to cooperate in developing customized chips for use in IBM products. IBM will supply INTEL with a library of IBM's most important chip designs, as well as a computer-aided design system and special production techniques previously used by IBM for its own chips. In return, Intel is giving IBM the right to incorporate specific design of Intel's micropocessors and other silicon devices into customized versions of IBM's own chips.

The U.S. government is expected to continue with R&D tax credits, which will encourage investment in this area.

Continuing technological advances in the domestic industry are expected to allow U.S. companies to regain initiative against the Japanese. There are other possible areas to propagate future industry growth. Among these are the expanding use of electronics by the automotive industry, smart credit cards, and electronic toys.

Automobiles are one of the most promising groth areas for the semiconductor industry. Because of the drive to meet stringent pollution control requirements through the use of electronics in cars, the semiconductor content in American-made cars is expected to nearly triple to $1.9 billion in 1990.

Another area that has potential for chip market growth in the 1990s is semiconductors in "smart" credit cards. Companies such as Master-Card are currently testing consumer acceptance for these cards. The response has been favorable. French banks recently signed an order for 16 million smart cards. In addition, Visa, MasterCard's rival, is developing a "supersmart" card with a display, keyboard, and battery packed into the same space as today's magnetic strip card and able to function without a terminal. Such a device could keep track of bank balances automatically.

This product's potential for market growth worldwide is predicted to run as high as $4 billion by 1990.

Electronic toys could also provide room for the semiconductor industry to grow. Following the success of Worlds of Wonder's Teddy Ruxpin talking bear in the 1986 Christmas season, a large number of new and more advanced electronic toys have been produced. Together with the possible revival of video games (there is no question about the popularity of Nintrendo games in the 89 season), talking dolls, and laser guns, sales of semiconductor-based toys are predicted to exceed in $1 billion mark worldwide by 1990.

Application specific integrated circuits (ASICs), designed to fit customer's specific needs, have become the fastest-growing areas of the integrated circuit (IC) industry. Worldwide sales of ASICs are predicted to grow to $8.6 billion in 1990 - compound annual rate of approximately 30 percent.

Probably the most difficutl part of reaching a trade agreement wih Japan would be to implement the increase in American share of the Japanese market to greater than 20 percent. About 20 percent of Japanese demand for semiconductors is from consumer electronics manufacture. However, American companies have limited consumer electronic IC lines. Furthermore, the American semiconductor industry is involved in various manufacturing agreements with Japanese business and this will limit the ability to market American products to the Japanese.

A continued depreciation of the dollar should increase U.S. competitiveness abroad. Competition should increase among European, South Korean, Japanese, and U.S. procedures. The key to U.S. survival is continued product innovation and federal trade legislation. Product life cycles and prices will continue to decline, and U.S. companies must therefore adopt aggressive strategies in product development, product diversification, and manufacturing capabilities in order to survive. In the future, the United States must regulate international trade to prevent such phenomena as "dumping." The U.S. government must encourage further technological advances, such as superconductivity, through grants or tax credits.

Health Care

The health care industry cannot compete internationally as a result of American philosophies and ideals regarding individual rights.

It is difficult for an American company to introduce new medical technology, whether it be drugs, prosthetics, or surgical techniques, without significant testing before FDA approval. Even if the item is used in Europe, it must be re-tested to meet U.S. standards.

Even without FDA testing requirements, it would be necessary for a company to significantly test anyway to minimize legal exposure (e.g., A.H. Robbins' case with the Dalkon shield). Americans feel they have a right to use and recoup damages when they perceive they have been wronged or harmed by a company. A resulting near-paranoia among companies has created the need for tremendous testing before medical technology is used with humans on an experimental basis. As a result of lawsuit mania, some lives are not veing saved. Costs of production are also being increased so that once produced, the item may no longer be competitive. For example, patients are going to France for experimental treatments for cancer. America has the potential to find cures for diseases and other life-threatening conditions before another country, but its own philosophy is hampering its ability. This is not to say that new items be thrown out into the market, as consumers do have a right to a reasonable degree of protection. There should, however, be some upper limit on liability for the company if reasonable amounts of testing have been done or minimal liability when a products is presented as experimental.

In countries with socialized medicine, there are government regulations limiting the cost of medical treatment, thus limiting the amount of money a company can receive for its products, regardless of the costs incurred. In lesser-developed nations, health care expenditure are not usually considered a top priority and thus there is little funding to meet the tremendous expense of American-made health care.


The chemical industry is bouncing back after a period of write-offs for plant closings and other consolidation moves. Profits in industrial chemicals are up. One explanation for improved industry conditions is the phase-out of product lines that had tried to, but could no longer effectively compete with imports. Companies are shedding inefficient manufacturing operations and concentrating resources on strong operating areas. After selling or shutting down down an assortment of businesses in 1986, Monsanto is now focusing on higher-margin chemicals. The strategy currently being used by such companies as Monsanto is to be active in areas in which it can be a market leader. A new breed of better-performing, more cost-efficient companies is putting the chemical industry back on the road to profitability and successful international competition.


The U.S. makes diverse products for all types of machinery, and has more available than any other country. We can quickly supply foreign companies with what they want, and the quality of the material is generally excellent. Since many machines used overseas were made in the United States, we are able to supply parts to these machines quicker and more accurately than other countries can. Since we are constantly producing parts, our lead times are short.

Many foreign countries experience nationwide shutdowns. For example, Italy closes for a good part of August for re-servicing industrial equipment.

The only real competition is with communist countries. Labor in these countries is inexpensive, resulting in low prices, but U.S. quality is superior.

Machine Tools

Overseas manufacturers, particularly the Japanese, are selling more sophisticated, more expensive, and flexible manufacturing systems to U.S. buyers. The industry has suffered in recent years from intense competition abroad, weak prices, and flat orders. Japan is currently the world leader, and the United States imports about 45 percent of its machine tools. The United States' share of world machine tool exports has plunged from 23 percent in 1964 to about four percent today.

The machine tool industry is asking for trade relief on national security grounds. The argument is that in the event of a war of major proportions, a dependency on foreign supplies would be disastrous to the U.S. effort.


Significant research in the area of life sciences is being conducted at universities, institutions, and labs in the United States. The United States currently spends in excess 10 billion dollars a year on biotechnology. This is more than all other countries combined. The United States has to continue this policy of investing billions in research and development, because other countries are beginning to make their presence felt in the field. Japan is competing by tapping American resources. From 1980 to 1983, Japan entered into 188 collective agreements with American biotechnology businesses to purchase the knowledge necessary to expand their industry.

European countries are far behind the United States, but many foreign companies are now beginning to budget millions for research. Thus, it is crucial for the United States government and private industry alike to continue spending billions for R&D. This is necessary if the United States is to continue as a world leader.

The educational system in the United States encourages the kind of creative thinking that is vital for scientific breakthroughs. In competitive terms, a problem exists in that over 50 percent of students receiving doctorates in math and science are from outside the United States. At the National Institute of Health, over 300 Japanese researchers are in residence, and most are receiving U.S.-paid fellowships. In effect, the United States government is assisting the competition. To continue being number one in biotechnology, the United States should take steps to assure a sufficient supply of technical students for the future. It should significantly fund educational programs in the area. Finally, more fellowships and scholarships have to be availabe to Americans.


Success in pharmaceuticals require a huge commitment to research and development. Developing a drug in the laboratory and taking it through the consumer stage can often take years and require tens of millions of dollars. To complicate this situation, only half of all drugs under research ever get approved by the FDA. In light of these problems, it is necessary for successful drug manufacturers to have a constant flow of new products in the pipeline to replace the ones that may not make it to the marketplace.

American manufacturers currently have the upper hand in the international pharmaceutical arena. There are several advantages that U.S. businesses have over their foreign counterparts. Foremost among these is the vast amount of resources held by American companies. Because R&D plays such a central role, large amounts of capital are needed. Other resources such as scientific, legal, and skilled manufacturing personnel are also necessary to take the drug through the development and approval processes. In addition, U.S. manufacturers currently enjoy a level of technological expertise far superior to that of most foreign businesses.

The nature of the Japanese market also contributes to the competitive dominance of the United States. Because the Japanese pharmaceutical market is highly fragmented - with over 2,000 small businesses - economies of scale are rarely realized.

There are strategies available to U.S. businesses which can be used to compete effectively in world markets. The first is collaboration with foreign drug companies. Collaboration can take the forms of licensing agreements or joint ventures. These strategies allow businesses to pool their resources and may speed the approval process. In addition, businesses with limited research budgets can buy into products they could not develop on their own. However, cooperative ventures have several drawbacks. Licensing a product usually requires a large fee, and the profit from joint ventures must be split.

A second strategy is to independently enter foreign markets. With this approach, the American company develops the drug and then seeks approval independently in a foreign country. The drug may be manufactured domestically or abroad, depending on plant locations and legal considerations. Merck is an excellent example of a firm using this approach. In Japan, Merck has undertaken a strategy of acquiring small Japanese manufacturers, and is currently the tenth largest drug company in Japan.

While Merck has experienced impressive growth using this strategy, the approach is not without disadvantages. All capital is provided by one company, and if the market is one in which the firm has limited experience, this strategy can involve substantial risk.

It is R&D that fuels survival in pharmaceuticals, not necessarily manufacturing efficiency (an area where the Japanese have traditionally excelled).

Consumer Electronics

Japanese electronics producers are more cost-efficient than their Anerican counterparts because of their automated factories and lower-paid work force. Instead of increasing their efficiency in this country, many U.S. companies have moved their production facilities overseas, where salaries are lower. Thus, even consumer electronics that bear the name of American manufacturers are not being produced here.

Fast Food

American fast-food companies can compete with international companies operating here as well as within any country that has a demographic profile suitable to fast food. Some countries are not suitable for the fast food concept because of cultural or economic conditions.

Fast food is basically a "people business." A successful company must understand the customer. Who are they? What do they like or dislike? An understanding is necessary of the customer's culture, perspective, and tastes. The customer must receive what he or she wants in a fast, friendly manner. For example, McDonald's and Kentucky Fried Chicken have been successful in establishing a foothold in mainland China.

A company should employ local people and attempt to become part of the community.

The economic supremacy of the United States appears to be a passing phase. Its time is up unless thinking is re-oriented and new goals are set. The United States' objective at this time should be to achieve new and enduring economic growth in a marketplace that is global in scale and fiercely competitive. The United States must compete internationally to survive. If present trends continue, the Unied States may fall to second class rank among the leading industrial nations by the early 1990s. Can Americans perform and maintain the performance necessary to keep that from happening?
COPYRIGHT 1989 Institute of Industrial Engineers, Inc. (IIE)
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Akel, Anthony M.; Siegel, Joel G.
Publication:Industrial Management
Date:Nov 1, 1989
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