CASE 1

THE RISE AND FALL OF THE JAPANESE SEMICONDUCTOR INDUSTRY,

1970-2001

SYNOPSIS
US enterprises dominated the world semiconductor market from the
1950s until the early 1980s. During the 1980s, however, the market
share of US firms plummeted, falling to 29% by 1990, while the
share held by Japanese producers rose from 24% at the end of the
1970s to 49% by 1990. By the end of the 1980s the US was a net
importer of semiconductors, while 5 of the 10 largest semiconductor
producers were Japanese. By the mid 1990s, however, US firms had
regain global market share (to 42%) while the Japanese share had
dipped to 41%.
Japanese industrial policy had a great deal to do with the success of
Japanese firms. Japan denied direct access to the Japanese market,
and had firms aggressively pursue technology-licensing agreements
from US manufacturers.

While these agreements were financially

attractive for US firms in the short run, they were not these firms
first choice for accessing the Japanese market, and they resulted in
a significant transfer of technology to Japanese firms.
As

result

of

political

pressure

from

US

semiconductor

manufacturers, in 1986 and 1991 the US and Japan signed trade

agreements

that

attempted

to

increase

free

trade

in

semiconductors. While different interest groups and politicians on

both sides of the Pacific clearly have differing opinions on the
appropriateness and effectiveness of these two agreements, the US

manufacturers did improve their worldwide and Japanese market

share during this time period. Of course the increasing strength of
the Yen also contributed to this, and South Korean manufacturers
made significant inroads in addition.

When a global economic

slowdown occurred in 200, Japanese firms were hit hard. The

Japanese cut thousands of jobs and announced an exit from the
DRAM business. Global sales contracted, but American firms
increased their share of the world market.

Question 2 :
Does the rise of Japanese semiconductor companies during
the 1970s and 1980s indicate that government industrial
policy can play an important role in facilitating national
competitiveness in industries targeted by that policy ?
Answer :
The semiconductor industry took birth in 1947 at Bell Telephone laboratories. It was
an US based company and its invention was commercialized in 1950s. Between 1970
and 1980, much of the market was conquered by the Japanese firms and the
underlying factor behind this success can be traced to the policies formed by the
Japanese government.
The Japanese government through the Ministry of International Trade and Industry
(MITI) formed policies those were designed to support the Japanese semiconductor
industry. Such policies can be referred to the infant industry argument by Alexander
Hamilton, where Japanese government attempted to support its domestic firms to gain
competitiveness in the world market. In the 1980s, Japan was seen to be very lucrative
market among the US firms. However, MITI policies required that US firms can only
go for licensing with Japanese firms but cannot do any green-field investment. In this
way, the Japanese firms gained access to the know-how technology of the

semiconductors. It also required that the know-how technology be shared with any
other Japanese firm who wants to enter the industry. As a result and because of
efficiency, Japanese firms got access to the US technology and started to compete
with other US firms. Along with that, competition among Japanese firms itself was
intense that helped to improve the industrys competitiveness. Moreover, tariff and
quota by the government also restricted foreign semiconductors to penetrate the
Japanese market, providing a cousin for the local firms.
Along with that, Japanese yen also depreciated during this years making Japanese
semiconductors more price competitive in the international market. However, it was
the Japanese governments industrial policy that played an important role in
facilitating the national competitiveness of the Japanese semiconductors industry.

Question 3 :
What explains the relative decline of Japanese semiconductor firms since 1988?
Can it be attributed to the 1991 semiconductor pact or to other economic
factors ?
Answer :
The Japanese were so successful in the global semiconductor industry between the
1970s and late 1980s because of the industrial policy of the Japanese government. At
that time the Japanese government has limited the foreign industry to run their
business in Japan. For that reason the foreign industries can not run their business
solely in Japan and there were no foreign competitors in Japan for the semi-conductor
industry. So the share of the Japanese industries (for example NEC, TOSHIBA etc)
was growing very rapidly and they compete head to head with the US firms by the
mid 1970s. By the mid 1980s, the changing fortune of US and Japanese industries has
given birth to the new trade dispute between two countries. By this time, the
agreement they have signed was going to expire. At that time both the countries sit in
a meeting and US shows some obligations regarding this agreement. Their point was
that, there must be a fair trade policy both for the countries. Japan can not sell their
3

semiconductors less than their production cost and US must had to have 20% share of
the Japanese semiconductor companies as well. So after many arguments both the
countries came to the agreement by 1986 and there will be fair market value for the
semiconductors. So from that time, US has captured the shares of the Japanese
companies and the Japanese semiconductor firms started to decline since 1988.
The foreign shares of the Japanese semiconductor market reached 20 percent in the
fourth quarter of 1992. Though it felt back, but still they recover it and they have
pushed their shares to 19.4 percent. By 1994 they gained a record 23.7 percent market
share. Many of the analysts thought that it was because of the agreement pact. But the
thing is Japanese YEN has strengthened by about 40 percent against the US dollar
since 1991. As the YEN goes high, the terms of semiconductor market has swung
sharply toward foreign producers who now had a distinct cost advantage over the
Japanese rivals. The foreign firms such as Intel, Motorola did really well in 1994 and
1995. Even some Korean firms like Samsung, they didnt even produce DRAMs in
1988, also captured 12.7 percent of the world DRAM market share in 1994. So the
YEN did all the works. Investment decisions by Japanese firms (although perhaps
affected by the trade disputes) imply that the Japanese firms are perhaps finding other
investment opportunities to pursue and consciously have allowed their market share to
decline. So at that time Japanese shares had cut in half and the consumers were
switching to low cost producers to market leader Samsung and Micron Technology.
US firms have entered the Japanese market and they got to know the market, the
customers and they have set their marketing strategies. Japanese firms didnt have any
innovative ideas and they only stick to the DRAMS and even many firms from
Taiwan entered the market and captured their shares.
The relative decline in the Japanese semiconductor industry can be attributed to the
1991 semiconductor pact. Lets talk about the 1970s to 1980s, at that time no foreign
firms can enter the Japanese industry and the domestic firms can enjoy the profits and
they will lead the world semiconductor market. But after the fair market agreement in
1991, US has started to enter Japan and they started to capture the Japanese market
and from 1996-2000, US had captured 30 percent of the Japanese firms. Its all due to
the agreement on the fair market value of the semiconductors. Many analysts
criticized on the agreement and it helped the US firms to boom a lot.
4

CASE 2

CATERPILLAR INC.
SYNOPSIS
This case focuses on the bumpy ride that Caterpillar Tractor has experienced in
international markets over the past twenty years. Caterpillar Inc. (Cat) is the world's
largest manufacturer of heavy earthmoving equipment. In 1980, Caterpillar was
widely considered one of the premier manufacturing and exporting companies in the
U.S. In 1981, 57 percent of its sales were outside the U.S. Unfortunately, the next
three years were disastrous. As a result of emerging competition from Komatsu (a
Japanese heavy equipment manufacturer), a sharp rise in the dollar against other
currencies, and the Third World debt crisis, Cat found itself losing market share and
profitability. The biggest problem was the unprecedented rise in the value of the
dollar. In the period of 1980 to 1987, the dollar rose an average of 87 percent against
major currencies. The strong dollar substantially increased the dollar price of Cat's
machines, which made them unattractive to overseas buyers. Cat scrambled to
respond to this challenge by cutting costs and investing in flexible manufacturing
technologies to increase quality. The company also lobbied hard to decrease the value
of the dollar against other currencies. Fortunately for Cat, things began to take a
change for the better in early 1985. The U.S. government met with representatives of
Japan, Germany, France, and Great Britain at the Plaza Hotel in New York. The
resulting "Plaza Accord" put forces in motion that eventually brought the value of the
dollar back to its 1980 level. The retreat of the dollar enabled Cat to regain
momentum in global markets. Today, the company is competitive again, and has
regained market share from Komatsu.

One thing that helped Caterpillar during the bleakest days of the early 1980s was a
decision by the International Monetary Fund (IMF). In response to the Third World
debt crisis, the IMF stepped in and provided loans to Third World countries that were
heavily in debt. This action by the IMF helped restore the financial integrity of many
of these countries, which has put them in a position to be Cat customers again today.
Question-2:
If u were the CEO of Caterpillar, what actions would you take now to make sure
that there is no repeat of the early 1980s experience ?
Answers:
If I were the CEO of the Caterpillar I would like to take several measures to make
sure that there will be no repeat of the early 1980s experience.
The measure are stated below1. First of all, I would try to increase the increase the superior labor productivity.
2. I would again try to increase the extensive deal network and excellent after
sales service and support functions.
3. I would try to monitor more closely than ever before that what is happening in
the foreign exchange market worldwide. The rationale behind this statement is
that dollar instability was the major issue during the 1980 that forced
Caterpillar to stay behind Komatsu for some short period of time. But later,
after so many initiatives we regained our lost position.
4. I would try to maintain a intimate relationship with government of USA so
that if any unexpected things happen, we can persuade other government high
officials to stabilize the situation and turn the situation in favor of us.
5. I would try to focus more on macro-economic condition of the other countries
so that we can anticipate how much effect it might create if something bad
happens in the world economy.

6. I would explore more on untapped market where we can earn substantial profit
and I would try to keep away from risky ventures.
7. I would try to keep our machines price down and try to increase the market
share in the world as much as possible.
8. And lastly I would be seeking more investors to invest in plant and make our
equipment available in every corner of the world.

Question -3
What potential impact can the actions of the IMF and World Bank have on
Caterpillars business? Is there anything Cat can do to influence the actions of
the IMF and World Bank ?
Answer:
IMF's stated goal was to stabilize exchange rates and assist the reconstruction of the
worlds international payment system. Normally, countries contributed money to a
pool from which countries with payment imbalances could borrow funds on a
temporary basis. Through this activity and others, the IMF worked to improve the
economies of its member countries which is also seen in the Cater Pillars case.
The action that was taken by IMF and World Bank was not in favor of Caterpillars
business. One of the major factors that triggered the problem was Third world debt
crisis which occurred in 1982. In the early 1970s the nations of OPEC countries
quadrupled the price of oil, which ultimately resulted massive flow of funds into these
nations. As a result, in the face of liquidity crisis, commercial banks around the world
had to borrow money from the OPEC countries and lent it to the government of many
to finance massive construction projects which eventually led to a global boom in
demand for heavy earthmoving equipment. Although initially Caterpillar benefitted
from the development but, by this time bank lent too much money in risky ventures,
which in turn threatened to suspend debt payments.

Finally, International Monetary Fund stepped in to stabilize the situations by

arranging new loans to indebted countries, on condition that they adopt deflationary
monetary macroeconomic policies. The situation again went out of favor of CAT by
not getting any more orders from the dealers and all of those orders transferred to the
lowest bidder, KOMATSU. As a result of these unanticipated situations, Caterpillar
fell into deep trouble by late 1982. The company responded quickly and between
1982 and 1995 by cutting cost of more than 20 percent. This was achieved by a 40
percent reduction in the workforce, the closure of nine plants and a $1.8 billion
investment in flexible manufacturing technologies designed to boost quality and lower
cost. As we mentioned above the impact was leading to destroy the CAT business.
Being a third largest US exporter, Cat could take scenario changing measure which
they ultimately did when they pressed the government to lower the value of the dollar
on foreign exchange markets. By 1984, CAT was a leading voice among US exporters
trying to get the Reagan administration to intervene in the foreign exchange market.
Things began to go Caterpillars way in early 1985 prompted by CAT and other
representatives of the US government who met with the representatives of Japan,
Germany, France and Great Britain at Plaza hotel in New York. In the resulting
communiqu which is also known as the Plaza Accord- the five government
acknowledged that the dollar was overvalued and pledged to take actions that would
drive down its price on the foreign exchange market. Later on, the central bank of
each country intervened in the foreign exchange market by selling dollars and buying
other currencies. In the mean time, the dollar fell and Caterpillar took the advantage
of holding foreign currencies in early 1985, using the strong dollar to purchase them
and when the dollar fell, the company was able to convert these currencies back into
dollar for healthy which was worth $32 million dollar without foreign exchange gains
of $89 million dollar.
Eventually, Komatsu had to increase the cost by 18 percent whereas Caterpillar was
able to hold its price increase to only 3 percent. It was Caterpillars actions which led
them to back in business and regained some of it lost market share.
In brief, impact on Caterpillar-

Cutting
Cost by 20
percent

40
percent
reduction
in
workforc

Closure of
plants

$1.8 billion
dollar
investment
to boost