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Competition
and Conflict in the Flat Panel Display Industry: Case
B (1988-1994) Introduction
While
the Japanese producers commercialized their LCD technology and started
to gain a competitive edge in FPD industry, most of the large US
companies had lost their initiatives and left the FPD industry by 1990.
IBM was the only large company interested in the LCD technology. It sold
its plasma display operation and targeted LCD technology believing that
the liquid crystal technology was the most promising one. Since no US
companies were interested in establishing LCD manufacturing plant, IBM
chose Toshiba as a partner for a joint venture, called Displays
Technology Inc (DTI). The reason for the large US companies’
withdrawal varied, however, the common factors were found in the
insufficiency of investment capital, the declining of experience in
high-volume manufacturing, and the belief that advanced displays and
components were not the central strategy for a finished product company. What
remained was a group of small producers, and out of which, only Optical
Imaging Systems (OIS) produced AM-LCDs. All of them were engaged in low
volume, specialized production, targeting industrial and military
applications. By the time demand for FPDs had increased with the advent
of laptop and note book computers, US computer companies had allied with
the dominant Japanese producers who were providing cheap, high quality
displays in quantity. In order to survive in the competitive FPD market
against well-invested, mass-producing Japanese firms, the US producers
had to ask for help from US computer companies individually and through
two industry groups, the American Electronics Association and the
Computer Systems Policy Project. Initially, the US producers looked for
joint research and development programs, partially funded by the
government and the computer companies. However, US computer companies
were focused on short-term profits, and were depending on the Japanese
producers, who had no reason to support a long run domestic
manufacturing effort. Motivated by short term economic interests, US
computer companies did not show their interests to establish domestic
FPD industry in the long-run. The response by the US computer companies
illustrated that Japanese pricing strategies were suggested the US flat
panel producers from being able to expand their productive capacity,
because investors feared small US firms could never hope to survive in
the market. At the same time, the Department of Defense, notably the
Defense Advanced Research Projects Agency (DAPRA), was concerned the
situation that no domestic producers supplied high-resolution displays
(HD-FPD) for military systems, and decided to fund research on the HD-FPD. In mid 1990, seven display firms were awarded contracts,
including Planar Systems, OIS, Photonics Technology, and Magnascreen.
Planar System, who was then the world market leader in monochrome EL
displays, was awarded a research contract on colour EL displays. OIS was
for further research on AM-LCDs, Photonics was for colour PDPs, and
Magnascreen was for the tiling of small AM-LCDs into large-area
displays. These contractors had a several opportunities to share
concerns and information regarding the US FPD industry at the meeting
convened by DAPRA. In these
meetings, the US producers discussed the threats of the Japanese
dominance with predatory pricing. This discussion led to the petition
against Japan employing a dumping practice. In addition, seven producers
decided to form industry association named the Advanced Display
Manufactures Association (ADMA). The ADMA consisted of following
companies; Planar System, Plasmaco, Cherry Corporation, OIS,
Electro-Plasma, Photonics Technology and Magnascreen.
II.
Antidumping and the ADMA Petition
The
severe situation strengthened the ties between small US producers, and
they felt the only way to respond to the Japanese challenge was to bring
this case as an unfair trade practice to the US trade court. With
support from DAPRA and some government agencies, the ADMA filed an
anti-dumping case with International Trade Court (ITC) and the
Department of Commerce (DOC).
On
July 17, the ADMA filed a petition before the ITC and the DOC and asked
for an investigation into allegations that twelve Japanese producers
were engaging in dumping practices. Dumping is to sell products at
‘less-than-fair value’ in exporting country, and fair value is
defined as a price at which the same product is sold in the exporting
country or to third country, based on a price at factory shipping. Under
the Tariff Act of 1930, the filing of a petition for anti-dumping
required the DOC to conduct an investigation on the dumping sales, and
the ITC to investigate the existence of injury to the US producers by
the dumping. These investigations are carried out simultaneously, and
all investigations are usually completed within 280 days. If
Department of Commerce and the ITC found that dumping has
occurred and the US firms has been materially injured, the law allows
them to levy anti-dumping duties equal to the calculated dumping margin.
These measures are authorized under GATT Article IV. Antidumping duties
are often brought by industries, whose competitiveness is jeopardize by
the foreign competitors. It
is also true in the most cases that the consumers bear the costs of the
duties, so as the downstream industry. Their argument represented the
conflict interests in the upstream industry, the US FPD producers, and
downstream industry, the US computer industry. In
the petition, the ADMA claimed that the Japanese producers intentionally
sold flat panel displays below cost, at prices 10 per cent to 66 per
cent, and gained 90% of the US market share. They also argued that
between 1987 to 1990 they lost $164 million in sales to Japanese
producers because of the Japanese dumping practices, and denounced this
practice as ‘predatory pricing’. Predatory pricing is pricing so far
below the average cost of production as to eliminate competitors, and
thus to secure monopoly or oligopoly rents. (or “systematically
pricing below cost with a view to intimidating and/or eliminating rivals
in an efforts to bring about a market price higher than would otherwise
prevail.)The petitioners cited the interview in the Japan Economic
Journal with Toshiba's vice president, in which he said “We are
prepared to accept red ink for the first five to six years. From the
experience of our semiconductor business, we have learned that one has
to take a long-term perspective.” The petition also focused on the
material injury that Japanese pricing strategies caused many US firms,
including AT&T and IBM, out of the display market.
As
the penalty on this unfair trade practices, the ADMA requested duties
from 71 to 318 per cent to be imposed on the Japanese FPDs, which was
estimated on the basis of ‘constructed value’. Constructed value is
used to calculate the dumping margin when there is not enough domestic
sales to compare. It is the theoretical value to sum up domestic
production costs, general managerial costs and profits. The figure of
the dumping margin based on constructed value usually turns out to be
high, since the dumping margin is drawn by the comparison between the
constructed value and the selling price by foreign firms. This
calculation was applied for Hoshiden, since it exclusively supplied
their AM-LCDs to Apple. In
the petition, the ADMA requested that all types of FPDs, which were
Active-Matrix LCDs, Passive-Matrix LCDs, Electroluminescent (EL)
displays and Gas plasma Displays, should be viewed as one product for
antidumping assessment. The petition did not ask for the imposition of
duties on assembled final products, only on displays and subassemblies. III.
Preliminary Determinations
In
the preliminary determination on February 14, 1991, the Department of
Commerce concluded Japanese producers were selling FPDs at below fair
market value, and recommended the imposition of 'bonds' much lower than
the petitioners asked. The initial margins for Sharp, the leading FPD
manufacture, were 4.6 percent below fair market value. Hoshiden, the
sole FPD supplier for Apple, was charged zero margin. Bonds are employed
as a provisional measure
until the final determination is made, and if the final determination
finds the case negative, then the amounts of bonds the exporters have
paid will be returned. The DOC and the ITC usually recommend modest
estimates of dumping margins in the preliminary determination, so that
the bonds does not affect the exports as mush as the final duties do.
The preliminary determination also found that all types of flat panel
displays should be treated as a single class or kind. The
argument over the petition splitted the three interests groups, the US
FPD producers, the Japanese producers, and the US computer companies.
The US computer companies, IBM, Compaq, Apple and Tandy, whose supply
bases were under attack, joined
with the Japanese producers and rebutted the petition. They argued that
the petition did not hold any legitimacy because there was simply no
FPDs producers who were able to supply mass production. The
representative for Compaq said that “One company made a few LCDs’ of
special kind, known as active matrix LCD, on a customized basis for
military applications at an extremely high cost per display, but this
firm lacked the capability of making any displays on the basis of mass
production methods.” They concluded that there was no injury caused by
commercial imports of Japanese products, since AM-LCDs were not
available in the US, and they would continue to be dependent on the
Japanese companies. They also mentioned that as a result of the
imposition of duties, they would be forced to move production plants of
laptop and note book computers to abroad in order to avoid the tariff.
They claimed that in the highly competitive computer industry, they
would lose their competitive edge against Asian computer companies,
including Japanese, simply because of the increase in costs and prices
of FPDs. They also warned that the imposition of duties could harm the
US welfare by losing the US jobs, as a result of the transfer of
assembly. The
Japanese producers also expressed their surprise with the petition that
there could be no injury without the FPD industry in the US. The
representative of Hitachi said that ,”These petitioners may have
dreams and ambitions, but the best of my knowledge, nothing more.”
Then, they rebutted the calculation of fair value by ADMA saying that
Japanese industrial structure allowed the lower costs and their prices
and this should not be regarded as a dumping practices. In
the argument over the petition by the ADMA, two dispute points were
focused on, which were resulted in the differences of interpretation. First,
the determination of the anti-dumping and the calculation of the
less-than fair value. ADMA claimed that the material injury on the
American FPD industry had existed due to the Japanese pricing strategies
in the early 1980s, when both countries started to commercialize the LCD
technology. Representatives of the ADMA charged that the Japanese
dumping prices resulted in US FPD industry to bear deep losses, and that
“[N]ot only these losses deny firms operating funds and equity needed
for research and development efforts, they discouraged potential
investors and had a chilling effect on the ability of US producers to
finance research and development and operations through debt financing.
The drying up of investment capital could be traced, ADMA said, directly
to Japanese less-than fair value pricing.” The president of Plasmaco
presented his experience in how his firm had attempted to raise funds on
the private capital markets for operating expenses and plant expansions,
but was unsuccessful because investors were concerned about the
possibility that his products would be underpriced by Japanese
competitors. The ADMA emphasized the Japanese competitive price in the
early stage of the industry won away the contracts from American firms
to be able to realize mass production, and denounced this action as
predatory pricing.
On the other hand, the Japanese producers submitted the figures
different from the one by the petitioners. They claimed that their
different organizational structure and long-term profit driven operation
allowed for lower price. Toshiba
representative commented on the US FPD industry severely that “They
[the US producers] had never made the financial, technical, production
and marketing commitment necessary to become established”. Therefore,
he concluded that the figures the ADMA arrived were the results of their
inefficient and different business practices, and should not be regarded
as the fair value. The
same argument was made in the case of the mid-1980s anti-dumping case of
computer memory chips or DRAMs. In the introduction period of the
high-tech products, such as DRAMs and FPDs, where learning-curve and
scales of economies are significant, companies widely employ the
‘forward pricing strategy’. Forward pricing is the strategy to set
the price lower than the costs it takes at introduction stage, as
radical cost down is anticipated in the future. The Japanese companies,
who tend to be long-term oriented and had sufficient capital, are able
to bear the loss at the beginning for the long-term profits. On the
contrary, the US companies are tend to be short-term oriented, and their
business structure is difficult to allow the loss, which in turn, they
are forced to set the price higher than the Japanese. Second
point was the categorization of the FPD. In the petition, ADMA charged
all four kinds of FPDs should be treated as single class or kind. The
ADMA defended their argument based on the criteria, which were the
general physical characteristics, the ultimate use, the expectations of
the ultimate purchaser, the channels of trade and the manner of
advertising and display. They concluded that all FPDs were applied in
the same manner for each criteria. In the preliminary decision, the ITC
accepted the petitioner’s position.
In
response to this decision, the US computer companies and the Japanese
producers argued that each type of FPD should be considered separately.
They debated in the series of testimony that there were substantial
differences in physical characteristics, end-uses, and expectations of
the ultimate purchasers, and similarities in the channels of
distribution. As an example of the physical differences, Toshiba
explained that each FPD technology had unique electrical requirements
that determined power consumption and battery life, which determined
size and weight , with gas plasma and EL FPDs typically being thicker
and heavier than the other two. The varying physical characteristics of
the FPD technologies offer ultimate users distinctly different products
depending on application. LCD is most appropriate in applications where
ambient light conditions are not constant, while gas plasma is used when
picture quality is important. EL FPDs were used when security needs
dictate suppression of radio frequency emissions. In terms of the
ultimate use, LCD is used in laptop computers, while gas plasma and EL
FPDs are used in portable computers, specialized military and medical
instruments and for other uses. All the US computer companies and
Japanese producers in the testimony presented almost the same analysis
on the categorization on the FPDs, and claimed that the petitioner’s
argument did lack the logic, since there was no ADMA members who
produced PM-LCDs. The
US computer industry chose to debate focusing on the technical aspect,
because as a legal case, their
costs, including the lay off of the US worker which could be led by the
antidumping duties on the Japanese producers, would not affect the
ITC’s final decision. The ITC would consider only the costs and injury
on the petitioners, not the costs of the consumer industry in the US.
IV
Final Determinations and the Industry Response
On
16 July, 1991, the Department of Commerce issued its final determination
that dumping duty should be imposed on AM-LCDs and EL displays. It
concluded that in the case of PDP pricing below fair value was not
founded. It found negative determination on PM-LCD, since there was no
PM-LCD industry in the US. In the final investigation on August 15,
1991, the ITC voted 3 to 1 to impose dumping duties. Dumping duties
ranged from 7.02 percent on imports of EL displays and to 62.67 per cent
on imports of AM-LCD from Japan. Despite the Department of Commerce’s
final determination, the ITC accepted the petitioners’ argument to
categorize all kinds of FPDs as one kind of products. The members of the
ITC review commissions acknowledged the negative after-effects of
imposition of tariff on the US computer companies and the market,
however, they mentioned that to consider the effects on the other
industry was out of their authority. Commissioner Mr. David Rohr, who
supported the duties, said “I have heard flat-panel displays
characterized as the invention that got away, meaning that US firms
failed to turn the technology into a marketable product. There are a few
of these firms still struggling to do just that. And as they are unable
to meet Japanese prices, we have seen evidence of lost sales.” On the
other hand, in her dissenting opinion, Acting Chairman Anne Brunsdale
argued that there was no evidence that US industry has been hurt and
said that “the commission should not be swayed by public perception
about the case. US duping laws should not be used to shelter US
companies from tough foreign competition.” While
conducting the counter measures in an effort to avoid the penalty, IBM,
Apple, Compaq and Tandy filed appeals with the Court of International
Trade (CIT) for a reversal of the decision by the Department of
Commerce. They opposed to the dumping duties claiming that there were no
viable US suppliers of AM-LCDs and, therefore, they were dependent on
Japanese suppliers. They argued that with the limited capacity available
for producing AM-LCDs displays in the US, they would still be forced to
buy from Japanese companies, which would raise their unit costs by about
30 percent. Spokesman for
the Tandy Corp. expressed the feelings of the computer industry noting
that, “By trying to protect a couple of small companies in the US that
manufacture these displays, it’s almost certain that the next
generation of these notebook PCs are going to be built offshore.” Bill
Fasig at international government affairs for Apple argued emphasizing
on the Japanese producers’ competitiveness that, ”Considering that
Japanese engineers can get an undergraduate degree in flat-panel
displays at five universities while American students have no such
options and that American investors won’t wait two or three years for
their profits, waiting and hoping seem pointless. But so does the
anti-dumping duty. Instead, what will really benefit consumers,
manufactures and workers alike are educational and industrial policies
that will let the United States compete before the market is lost.” The
debate was given a surprising twist when the ADMA member firm OIS, which
was the sole producer of AM-LCD’s in the petition, filed a request
with the Department of Commerce to lift the penalties. The company had
concluded that that the penalties had become counterproductive and would
hurt US computer companies. Seven
Japanese manufactures, including Sharp, Toshiba, and Hitachi, also
joined the US computer companies to reverse the penalty. They noted that
while it was true that no Japanese manufactures were making profits on
AM-LCDs, this was due to the enormous capital expenditure required to
start production. They argue that production costs would decline and
profits would follow once the production process was perfected, output
builds, and scale economies were realized. On
March 2, 1993, although CIT ordered the ITC to re-examine the case
saying the ITC’s decision was based on misreading of the law, the ITC
again ruled that Japanese’ AM-LCD products still threatened injury to
the US industry. They
decided to retain punitive duties on AM-LCD, but withdrew antidumping
tariffs on EL displays. An official at Ministry of International Trade
and Industry stated, “The decision is extremely unfair. There could be
no case of dumping damaging the US industry, since there are no
manufactures in the US that make such high-definition screens for
computers.” He even
expressed Japan’s intention to ask the General Agreement on Tariff and
Trade (GATT) to set up a panel on the US’s violation of the
International agreement. In the international trade arena, the restriction on the use of anti-dumping measures have been actively debated. Due to the overuse of anti-dumping measures by several countries, including the US, the voice to require the regulation on this measures had significantly increased in 1980s. In an effort to reduce the use of anti-dumping duty, the 1994 GATT Antidumping Code advanced the previous agreement and contained more regulative sentences. However, in the US, there is consensus among the government and industries that the US still needs to maintain its position to allow anti-dumping code, and this trend will likely to continue Questions
for Discussion
Assess
the ADMA’s argument that Japanese less-than-fair-value pricing
prevented American producers from entering the market. What other
factors could be identified?
In
the context of the case presented, is anti-dumping an effective means to
promote and/or protect domestic manufacturers? What are the overall
implications for the economy? What other means might be available?
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