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Mr. CAMPOBASSO. I am talking about some of the things we have as far as export restrictions, unilateral restrictions, what are normally called trade incentives.
I think Frank can deal with these as well as any of us can, but they are real restrictions.
Some of the other things include, for example, antitrust concerns which do not allow for the forming of teams and joint venturing in some of the activities U.S. industry may wish to pursue.
Let me state that I do not believe the Japanese system is ideal. On the contrary, it is only through the free enterprise system that the lowest price can be assured over the long term. I firmly believe that.
Let me make some specific comments regarding our inability to penetrate the Japanese NTT-controlled telecommunications market.
I think it will expand on some of the comments I found in your report on the same subject:
During the Tokyo round on multilateral trade negotiations, our special trade representative attempted; without success, to bring NTT within the Government Procurement Code. To date, Japan has resisted all attempts to bring NTT under the code.
In order to discuss directly with NTT their technical objections to the Government Procurement Code, EIA Communications Division, at the request of the special trade representative, sent a delegation to Tokyo, including representatives from ITT, Western Electric, Northern Telecom, GT & E, Stromberg-Carlson and Rockwell International.
During the 2-day meeting in Tokyo, NTT alleged six reasons why they have not sought telecommunications equipment from suppliers abroad and why they didn't intend to in the future. I believe they represented a good summary of reasons why U.S. companies have not been successful in penetrating Japan's telecommunications market.
The reasons they (NTT) brought forward were that they depended heavily on negotiated contracts outside; standardization is vital to their telecommunications industry; reliability could not be met without the working of NTT's standardization process; reliability; continuing source of supply; procurement periods and planned production and costs.
I would like to deal with each of those with a very, very brief statement:
NEGOTIATED CONTRACTS NTT does not have its own manufacturing capability and must get its equipment from outside manufacturers. To develop new equipment NTT works with a small number of local suppliers. To that extent, there is competition with local suppliers; however, it does not open bidding to international competition. NTT provides manufacturing input, financing for the new product design effort and the manufacturing of prototype models in limited number by prequalified local suppliers. We have no such benefit here. R. & D. therefore is subsidized in Japan. The relationship of the manufacturer
during the development of new products is very close with the NTT to insure that performance, cost and reliability goals are met. After the product design, close control is maintained over all phases of the manufacturing process, including basic materials, manufacturing, quality inspection, testing, et cetera. NTT works with the manufacturer in all of these areas to insure a successful product. To be sure, manufacturers are only willing to work with NTT at this level because there is a commitment by NTT to subsequent hardware procurement.
In addition, working this close with companies provides NTT with considerable information on cost and proprietary processes. NTT obviously could not work with its manufacturers to develop new products, and then go to a competitive outside spec for procurement of the products.
Since NTT designs the equipment to be used in the network, they want to procure that product and not one that might be functionally equivalent. That is the basic problem.
As far as standardization is concerned, NTT achieves standardization through the process I just described and is based on one equipment design produced by several manufacturers with modules and parts fully interchangeable. With this level of standardization, outside supply would have to be duplicated to the Japanese manufacturing process. This level of standardization is a fundamental NTT policy and essentially rules out outside competition.
Reliability is achieved by an adequate product design which includes close NTT control over basic materials, manufacturing processes. The main point here is that it is not really a matter of reliability, because I think the U.S.-manufactured products are very reliable in the telecommunications industry, or we wouldn't have the fine system we do have.
Mr. JONES. Is the fact that it is in the beginning of the developmental stage, when the standards are written and being formulated, that the American companies are totally excluded from that process, and that is what makes them nonreliable, noncompliant, et cetera?
Mr. CAMPOBASSO. We are not part of the process because we are not invited in at the start. The process closes from the very beginning; it becomes more tightly controlled as you go forward and the product starts to develop. It is a diminishing window which, if it were open at all, would have to be in the beginning or there is no way to get into that process as it is presently structured.
I won't deal with the procurement period. They have a very · short procurement cycle once they have gone through the development, because they already have the supplier picked; he is already fully knowledgeable of what they want; they have worked together. So they have a 6-month window and they say that we could not possibly compete at that point. That is true, not having been in on the early part of it.
PRODUCTION COST This is very important. From the perspective of international trade with Third Countries or other nations; we do meet and compete with the Japanese quite effectively. Rockwell and Western Electric did compete successfully in Saudi Arabia for a $500 million telecommunications system. I think we can meet them competitively in the field, especially when large systems activities are involved.
Let me give you the view from the EIA technical team that went in. All I have given you so far is the Japanese view. The team could find no commercial basis for not opening NTT purchases to international vendors. NTT's operating procedures of developing all products for use by NTT is based on national policy and is not a technical necessity. Technology is used as a vehicle to justify the policy. By the way, it gives them good funding for developing technology. In this country we need to develop a stimulus for encouraging technological development.
After all, U.S. companies are quite successful in competing with Japan in third country markets. These companies have not encountered technical problems that NTT claims do exist in an open market. At present, you know, in this country we have many competing products on the Bell System. I don't think you can tell one product from the other if you make a phone call from coast to coast.
At present, the Japanese have the best of both worlds. The domestic market is closed to foreign competition, thereby giving Japanese firms a strong base on which to export to the U.S. market that is completely open. Not only is the Japanese market closed but it is also predicated on a 5-year production cycle, and maybe in some cases longer than that. We don't have such guarantees.
The Japanese therefore are truly subsidized, especially on the basis of R. & D. funding which allows Japanese firms to price their products lower than the U.S. firms in our market. This is the thing that is beginning to erode the U.S. market position.
There is another case which I would like to mention briefly, which surprised me. We recently lost a small bid at Somerset Telephone up in Maine. It was on a price basis. I don't mind losing if I can't meet the price head to head in spite of the fact that they are funding R. & D.
Then I found that the financing was provided by REA for the Japanese product. I don't understand why they are not financing their own from overseas. Why should a U.S. agency be financing foreign competitors in this country?
In the telecommunications industry today there are only five major microwave suppliers. There are many smaller suppliers but the five I refer to are Western Electric, GTE-Lenkurt, Raytheon, Rockwell-Collins, and Fairnon. I do not believe that continued unrestricted penetration of the U.S. market by Japanese companies using subsidized pricing policies is in the long-term national security or competitive interests of the United States.
I am not saying that we must close our borders. As I said earlier, I do believe in free enterprise, but I believe in fair markets. It has to be bilateral. I continue to believe, as I mentioned, that an open market, free enterprise system is the only way to assure over the long term a high quality product at the lowest possible price.
If our domestic market share is eroded and Japanese companies are able to entrench themselves in the U.S. market because of policies both in the United States and Japan, long-term adverse consequences can be anticipated, in such areas as pricing, employment, and technological development. U.S. policy should not contribute to the ease with which the Japanese penetrate our market.
I had a note here regarding the REA-financed program which I have mentioned already. Now, I wonder if it is known by the committee that you cannot build a total microwave system in this country from U.S. suppliers? There are many things that have disappeared from the U.S. scene. For example traveling wave tubes (TWT's), certain semiconductors, field effect transistors (FETS), are examples of things we have to buy offshore. I think that this situation will get a lot worse as the U.S. market share for domestic suppliers erodes. We are now sourcing many components offshore because they are not available from U.S. industry.
By the year ending 1980, the Office of Trade Representative must decide whether to strike some sort of compromise with Japan which will either include or exclude them from the Government procurement code. Even if NTT were to be included in the Government procurement code, I fear there may be other barriers imposed by the Japanese unless there is truly a desire for an open and bilateral trade market. Specifications can be brought in, many things can be brought in; the intent has to be there, honestly and truly, throughout.
Efforts of the electronic industries, such as the EIA-sponsored visit to Japan, in addition to other efforts with the USTR to open the NTT market today has met with little or no success, to my knowledge. I think the dialog thus far has not had an appreciable impact on procurement practices in Japan.
A year ago, when the subject came up at the hearings on the MTN package, the then Special Trade Representative Strauss rejected NTT's offer, which excluded telecommunications equipment, saying that NTT must open up or the U.S. market will close; but we will have reprocity one way or the other.
Representative Jones on your committee had suggested introducing a reciprocity measure to the provisions of the "Communications Act” bill. I personally support these efforts at reciprocity. I strongly believe in free trade, rather than no trade, but it cannot be a one-way street.
I will conclude by saying that I strongly endorse and advocate quick House action on 7436, the Export Trading Company Act of 1980.
Unlike the Senate's bill, S. 2718, which excludes the DISC provision rather than including it, it is my belief that export trading companies will not be formed if this incentive is not accorded them.
In conclusion, I think Japan presently has a $3.5-$4 billion trade surplus in electronics with the United States and if we cannot achieve reciprocity-and I mean full and complete reciprocitythen the statements of Ambassador Strauss and members of this committee to close U.S. markets should not be a hollow threat. I would rather see the trade open. I would rather see it full and fair, so that we can trade openly. But if we can't, we cannot have a oneway street, in my mind.
[The prepared statement follows:]
STATEMENT OF Tom A. CAMPOBASSO My name is Tom Campobasso and I am vice president for international and Government relations of Rockwell International's electronics operations. I also serve as chairman of the board of governors of the Electronics Industries Association (EIA).
I would like to thank subcommittee Chairman Vanik and the other members for providing me the opportunity to appear at this hearing and express some views on problems in U.S./Japan trade, especially regarding telecommunications.
First, I would like to state that I am a strong advocate of free trade and an open, reciprocal market system. I extend my congratulations to the subcommittee for its work toward that end and encourage continued examination of an increased dialogue regarding the issues raised in the subcommittee's report on U.S./Japan trade to further promote reciprocity in trade between our two countries.
I would like to open my comments by giving some reasons why I believe Japan has been so successful in penetrating the U.S. telecommunications market while U.S. industry has not enjoyed equal success in Japan. To begin, there are fundamental differences in management philosophies between U.S. and Japanese industry. Because U.S. industry serves the largest domestic market in the world, we have generally treated international markets as strictly incremental to our domestic base. Foreign firms, on the other hand, have been forced to export for their survival and, therefore, have been much more aggressive and flexible in pursuing international markets. The differences also are a function of the market systems and government philosophies in the two countries. The free enterprise system in the U.S. and laws in our country foster competition placing certain pressures on companies to show more immediate results in order to generate, on the open market, needed capital for continued R&D financing, stock appreciation, and overall growth. The Japanese system, on the other hand, de-emphasizes short-term returns in favor of establishing a longer term market position. This is only possible, however, because the Japanese government is so deeply involved in planning the national market requirements and then providing R&D funding and other financing at concessionary rates. There probably is no better example of this than NTT. When NTT requires equipment or systems, it contracts with a half-dozen Japanese firms to develop R&D programs. As the process draws to a close, one or two firms are selected for long-term production contracts (usually five years or more). With such assured production, Japanese manufacturers can price and sell marginally into the export market from a secure and protected base. Over the past three years, for example, Rockwell estimates that we have lost to NEC approximately 32 million dollars in sales in the U.S. The overwhelming reason for this has been the low price NEC has been able to offer.
In Japan, the public/private sector relationship is a partnership. Joint government/industry planning is the norm and favored sectors receive liberal benefits. This relationship is strengthened by generous investment guarantees and concessionary financing for overseas ventures. Also, Japanese industry does not have to contend with many of the restrictive regulations imposed on U.S. firms. In contrast to this is the private/public sector relationship in the U.S. which generally has been and continues to be more adversarial in nature. Our tax laws offer few incentives for trade. Rigid anti-trust concerns have made U.S. industry reluctant to pursue programs jointly: Export financing is limited and the EximBank constantly has problems in obtaining congressional support.
Before continuing, let me state that I do not believe that the Japanese system is ideal. On the contrary, it is only through the free enterprise system that the best product at the lowest price can be assured over the long term.
At this point, let me make some specific comments regarding our inability to penetrate Japan's, NTT controlled telecommunications market. My comments will expand on the observations made by the subcommittee in its September 5, 1980 report on U.S./Japan trade.
During the Tokyo round of the MTN, the Special Trade Representative (STR) attempted, without success, to bring NTT within the government procurement code. To date, Japan has resisted all attempts to bring NTT under the code.
In order to discuss directly with NTT their technical objections to the government procurement code, EIA's communications division (at the request of the STR) sent a delegation to Tokyo. The delegation included representatives from ITT, Western Electric, Northern Telecom, GTE, Stromberg-Carlson and Rockwell International.
During the two day meeting in Tokyo, NTT alleged six reasons why they have never sought telecommunications equipment from suppliers abroad and why they do not intend to in the future. I believe they represent a good summary of the reasons why U.S. companies have not been successful in penetrating Japan's telecommunications markets.