I spent the first 20 years of my career in the research and development laboratories of the RCA Corporation, then one of the leading electronics companies in the world and led, for many years, by a great visionary in David Sarnoff.
In addition to developing color television, RCA Laboratories’ inventions included flat panel displays, lasers of all kinds, solid state imaging devices, CMOS chip technology and communications systems including microwave and optical systems. These innovations helped build industries with close to a trillion dollars of current annual revenues that are the foundations of the digital world.
But few of these electronic infrastructure products are now made in the United States and in none has the US maintained world leadership. For example, the flat panel industry that serves practically all electronic products yields over US$100 billion of annual revenues – from factories in Asia. And 73% of all color television sets are now produced in China. In chips, two world leaders are now in Taiwan and South Korea, respectively, with China rapidly developing its own industry.
There is a sobering lesson here: Industrial competitive advantage is a fragile thing. The US used to lead these industries because they were invented in the US, supported by major corporate resources focused on innovation and also indirectly supported through Federal research and development funding of universities and major corporate laboratories.
In an ideal world, each country leverages its competitive advantage by producing and exporting what it competes best at, in terms of cost and quality, in an open interchange of goods and services. In this ideal world, consumers benefit and businesses can prosper because they operate on a large world market. But this is all happy classroom theory. We are not living in an ideal world of free trade because country leaders game the system through industrial subsidies and legal restrictions that bolster favored industries by limiting competitive imports and promoting their own exports.
Sure, some competitive advantages are based on geography and result in low-cost agricultural or mineral products. But when it comes to electronic products, competitive advantage is totally man-made.
At RCA, the first serious challenge to its leadership was from Japanese electronics companies that began, in the 1970s, a focused campaign to capture the consumer electronics market – then primarily color television receivers. The technology was licensed from RCA, which had a policy of open licensing. Japan had no competitive advantage on entering consumer electronics — except government support, which included blocking television imports and hence kept domestic prices much higher than in the US. In the 1970s, a Japanese television set sold for US$300 in the US and the equivalent of US$500 in Tokyo. In effect, Japanese consumers, by paying high prices, were subsidizing products exported to capture the world market and in particular the US, where no restrictions were placed on imports and distribution channels were readily available.
The Japanese planners’ next target was semiconductor memory chips. Japanese imports hit the US market, with lower prices putting profitability pressure on companies such as Texas Instruments that had invested heavily in manufacturing facilities. The important point is that these imported products were of high quality but lower price – and they did displace US-made products rapidly, creating loss-making domestic plants.
Industrialists were used to seeing low-cost but lower-quality Asian imports. This new competition from quality but cheaper products was of a new kind and much more dangerous.
Competing with such targeted Japanese imports was considered a losing game by most affected business leaders, who did not think that investing heavily in innovation was a long-term answer to remaining competitive. They saw a choice — either exit the markets targeted by Asian entrants or find a lower-cost manufacturing location to compete on price. They believed that lower cost was the answer because US government subsidy or legal protection were not available – as proved by the Zenith Corporation, one of America’s leading television receiver manufacturers, which spent years fighting Japanese importers in the courts on the basis of dumping and ended up losing and being acquired by a South Korean company for its brand name.
RCA’s answer was to reduce production costs by moving its television receiver manufacturing to Mexico and closing its Indianapolis factory. The important result was that the company’s senior business management lost its appetite for consumer electronics investment. When the issue of investing in flat panel displays based on RCA Laboratory inventions came up, the decision was made not to do so and the technology was licensed to the Sharp Corporation in Japan, who invested billions in the liquid crystal manufacturing technology.
The Japanese leadership in memory chips and consumer electronics is gone and no Japanese companies even factor in the smartphone business, the biggest current consumer electronics business. Why?
The Japanese strategy to build its industry followed a script. So what was the Japanese competitive advantage in targeting the consumer electronics business in the 1970s? First, an organized national effort with selected corporations supported by the government and a limit on imports. Second, the availability of capital to finance new plants. And third, a focus on mass production of quality products using then-superior production techniques based on an understanding that international product acceptance was going to depend on a combination of superior quality and low price.
But wait. This is not the end of the story.
This competitive advantage was fleeting and leadership in consumer electronics now lies elsewhere. The Japanese leadership in memory chips and consumer electronics is gone and no Japanese companies even factor in the smartphone business, the biggest current consumer electronics business. Why?
There is a great deal of debate regarding the causes of stalled growth in the Japanese economy. In terms of the electronic businesses that I am familiar with, I would place the major blame on the lagging ability of big Japanese companies to truly innovate. With a domestic market largely shielded from competition, any imperative for product innovation by the big companies favored by government planners was lacking. As a result, investment lagged in radically new products and related technologies. For example, leadership in memory chips moved to Samsung in South Korea (which now has 40% of the world market). Leadership in flat panels also moved to Samsung, with the latest technology, OLEDs, being produced there. Sharp, the early leader in the sector, is not only out of the business but was acquired by a Taiwanese company. Sic transit Gloria mundi.
Governments play a key role in building innovative industries by supporting infrastructure and capital investment as well as funding research and development, but competitive advantage in electronics is not bestowed as a gift by governments or the gods but by business leaders managing innovation and investing capital and human resources in a timely way. The US gave up its leadership because of strategic decisions by many corporate leaders; then it was the turn of the Japanese. Who is next?
Henry Kressel is a noted technologist, inventor (31 US patents) and private equity investor in many successful technology companies at Warburg Pincus. He was elected to the US National Academy of Engineering. Prior to 1983, when he began his investing career, he headed corporate research and development in electronic devices at the RCA Laboratories. He is the author of several books, most recently (with Norman Winarsky) If You Want to Change the World (Harvard Business Press, 2015)