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Did Washington Lose Sight Of The Big Picture?

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In theory, hitting a foreign supplier with antidumping duties is one of the most potent weapons in the U. S. government's trade arsenal. But a Commerce Dept. decision to slap a 62% duty on imports of the latest laptop-computer screens from Japan has sent Silicon Valley into a funk. Now, even the agency is dissatisfied with the outcome. "We're not happy with it," admits Commerce Secretary Robert A. Mosbacher. "But we are constrained to follow the laws as they are written."

No wonder he's unhappy. Since Commerce assessed the penalty on imports of "active matrix" screens, but not on finished laptops that contain the technology, computer makers have been rushing offshore with their laptop production. The protection afforded the display makers is "a completely hollow victory," says Jerry K. Pearlman, chairman of Zenith Electronics Corp., the largest maker of non-LCD computer screens in the U. S.

Toshiba Corp. bailed out first, announcing in September that it would begin importing its most sophisticated laptops from Japan instead of making them in its Irvine (Calif.) plant. Apple Computer Inc. was next, abandoning plans to manufacture its month-old notebook computers in its Fountain (Colo.) factory and opting instead to do the job in Cork, Ireland. And this month, even IBM's normally diplomatic chairman, John F. Akers, blasted the policy in a Tokyo speech and threatened to set up Big Blue's laptop production overseas.

STEAMED. The reaction is so strong because the screens are so important. While active-matrix production is just getting off the ground -- 1990 sales of the screens were just $250 million worldwide -- demand for the displays is expected to top $1 billion in 1994 (chart). The technology offers a dramatic clarity improvement over current LCDs, making high-quality color a reality for tiny products such as notebook computers. Already, active-matrix screens are a critical component in other consumer electronics items, including camcorders. Eventually, they'll be used in everything from medical instruments to high-definition TVs to auto dashboards.

That's one reason Commerce sought to shelter the nascent domestic LCD business. "It's absolutely essential for the U. S. to have some flat-panel display manufacturing," says Ian Ross, chairman of the National Advisory Committee on Semiconductors. And everyone agrees that Japanese LCD makers have been aggressive -- if not predatory -- in active-matrix screen pricing. "All the statute does is ask manufacturers to price their products based on their costs," says Curtis Stevens, chief financial officer of Planar Systems Inc., a screen maker that had asked Commerce to act on the issue. He says Japanese suppliers of the screens are selling them to U. S. customers for less than half of what they cost to make.

The screens are by far the most expensive component in a laptop computer, accounting for up to 50% of the machine's manufacturing cost. That makes the new Commerce duty a stiff one: IBM estimates the penalty could run $600 for every computer manufactured at its Raleigh (N. C.) laptop plant. Avoiding the duty isn't cheap, either. "We just lengthened our pipeline by 12,000 miles," says James M. Burger, Apple's director of government law, of the company's manufacturing move to Ireland. "We just didn't need this."

What really steams computer makers, though, is that the Commerce decision probably comes too late to help the struggling U. S. screen industry. That's because the Japanese are already way ahead. Sharp Corp., the market leader, has spent more than $1 billion on LCD technology and plans to invest $650 million more, mostly in active-matrix screens, during the next four years.

'STARTING FROM ZERO.' While Sharp and other Japanese companies were pumping money into LCD technology, U. S. companies, including General Electric, IBM, and Exxon, were scuttling their display operations. By 1989, most major domestic players had left the field. Now, the largest U. S. maker of active-matrix LCDs, OIS Optical Imaging Systems Inc. in Troy, Mich., doesn't even have the capacity to sell commercially -- most of its screens are sold to the Pentagon.

Bringing U. S. production up to commercial levels is a daunting challenge. Most experts believe a $200 million investment is the minimum needed to set up a commercial manufacturing operation, although others maintain that the cost could be $1 billion. There are other problems. The screens are so difficult to manufacture that some 80% coming off the production line must be junked because of some flaw. Then there's the matter of patents:

The Japanese own most of the production research that's been done in active-matrix technology. "The problem, in the case of the U. S., would be having to shoulder both basic research expenses and capital spending to build a production facility," says Masahiro Kosaka, director of Matsushita Electric Industrial Co.'s display technlogy research lab. "It really would be starting from zero."

For now, most of the U. S. computer industry is clearly unwilling to start from scratch. Although Xerox Corp. is working to produce active-matrix LCDs, IBM's strategy is more common. Instead of setting up LCD development here, Big Blue has put nearly $100 million into a joint development agreement with Toshiba to build screens in Japan. "The reality is that the core of competency in this market is in Japan," says James A. Cannavino, the general manager of IBM's personal computer division. "If the U. S. wanted to be in this market, action should have been taken 10 years ago."

Since he can't rewrite history, Mosbacher is trying to negotiate a settlement with computer makers. Last month, he called the chief executives at Apple, IBM, and others and urged them to refrain from moving production oversees. "When this is finished, I want to be convinced we helped build the screen industry or at least did not push the computer industry offshore," Mosbacher says. So far, though, the computer makers aren't cutting any deals. By Paul Magnusson in Washington, with bureau reports

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