The rising sun approaches high noon: outlook for the information industries. William H. Davidson.

Japan continues its fast and furious progress in information technology markets. Japanese firms have staked out market leadership positions in semiconductor and bubble memories, facsimile equipment, large digital switching systems, microwave communications equipment, and dot matrix printers. They hold strong or leading technology positions in areas such as gallium arsenide and super-lattice semiconductors, vertical and optical data storage systems, flat displays, robotics, and supercomputers.

Growth rates among Japanese vendors in many cases exceed the highest hopes and fears of observers on both sides of the Pacific. Japanese exports of computers, peripherals, and components to the United States alone topped $1.5 billion in 1983. That figure represents a growth rate of 250% over the prior year.

Areas of particular strength include disk drives, printers, and components. Japanese producers of floppy disk drives shipped 2.6 million units in 1983--fully ten times the 1981 level. Printer shipments, dominated by dot matrix products, reached 1.9 million units in 1983.

Shipments of RAM memory chips to the U.S. doubled in 1983 to approximately $350 million worth. About ten percent of that total consists of new 256K RAM chips, the cutting edge of semiconductor memory technology. Areas of even greater growth include communications components (400%) and microprocessors (300%).

These successes represent the vanguard of a massive effort to achieve market leadership across the entire range of information technology. Significant investments are being made to strengthen existing footholds and open new ones. Over the past five years, more than half of the research and capital budgets of the six major Japanese suppliers (Fujitsu, Hitachi, Mitsubishi, NEC, Oki, and Toshiba) have been dedicated to semiconductor activities. In the future, additional areas of activity will assume increased emphasis. Some of the major future thrusts are already emerging.

A $110 million joint research project co-sponsored by MITI operates out of Fujitsu's Kawasaki research center. The five companies participating in the project are actively developing fiber optic technology and related optoelectronic devices.

Japanese firms operate at a tremendous disadvantage in one area of information processing. Their language consists of thousands of unique symbols that cannot be readily reduced to digital code. The Pattern Information Processing System processes images as opposed to digital input. Originally intended to permit processing of kanji input, this technology can be applied to character recognition, data input, and word processing applications. A major joint project is developing applications for this technology.

Japan's most ambitious plan involves development of a nationwide Information Network System. This program, managed by Nippon Telephone and Telegraph, calls for investments of more than $120 billion over the next 15 years. Key features of the system include a fiber optic cable network, voice recognition and voice synthesis capability, video displays, and facsimile technology capable of responding to inquiries by voice. A model INS system will be completed in the fall of 1984 in the Tokyo suburb of Mitaka.

The widely publicized Fifth Generation Project marks a major initiative in computer research. The project includes a significant effort in software development, notably in artificial intelligence and expert systems, but the primary thrust lies in developing new computer logic and processing structures. Co-processing development, or the integrated use of multiple processing units, represents the key target in this effort.

The first output from this effort should occur in early 1985 with the introduction of SIM, the sequential inference machine. SIM will fit on an average desk, but pack processing power of 2 MIPS and 20Mb of main memory. It will be the workhorse for development of the new software and co-processing technologies the Japanese believe will take them to a leadership position in the mainstream of information processing.

Closely related to the Fifth Generation Project is yet another national program to develop a new generation of supercomputers. Funding for this project totals about $300 million, compared to $450 million for the Fifth Generation effort. The initial and perhaps primary focus of this project involves the development of next generation electronic devices. Key areas of research include High Electron Mobility Transistors (HEMT), including gallium arsenide, Josephson junction, and super-lattice semiconductors. These devices are to be used in supercomputers based on conventional processing structures, but because these semiconductor technologies are six or more times faster than existing technologies, dramatic increase in speed and power can be achieved.

Japanese vendors are already extremely active in the supercomputer market. Fujitsu's VP-200 operates at 500 mega FLOPS (floating operations per second). Hatachi's S-810 boasts a 630 MFLOPS speed, and NEC has announced its SX-2 for delivery in late 1984 with an advertised processing speed of 1300 MFLOPS.

Japanese software skills and development efforts are frequently underrated. Massive efforts exist to improve their standing in this area. Government efforts are widespread, including very favorable tax treatment of software revenues (75% tax exempt) and several publicly funded development efforts. The Joint Systems Development Corporation, backed by government funding, employs 16,500 software programmers. The new Software Development Agency was formed by MITI in 1982 to further support efforts in this area.

Individual companies are also taking significant steps in this area. Fujitsu devoted half of its 1983 research budget to software development and opened a software development factory employing 1300 programmers next to its Numazu mainframe assembly plant. The primary focus of much of these efforts is on improving and automating the software development function. The focus here is on process technology rather than on new software products. Even in software, Japanese firms are rapidly closing the gap with the rest of the industry.

This growing tide of technologies carries the future hopes of the Japanese information processing industry. With these new techologies, plus the continued embodiment of their traditional strengths in low cost and high quality products, Japanese firms wil seek an expanding, dominant presence in world markets. Given their impressive progress to date, it is not difficult to envision such an outcome. Yet, Japan's strategy in this industry must be executed in a highly competitive environment.

The American information processing industry is far more aware of the Japanese threat and far less arrogant about its potential impact than other industries have been. American firms are acting aggressively to counter Japan's strategies in this arena. More important, perhaps, the emerging role of the U.S. government in this industry indicates a powerful national commitment to retaining leadership in this critical industry.

The competitive response of U.S. industry includes efforts to adopt some of the techniques that have made Japanese firms successful. Efforts to reduce inventory, improve quality, and lower costs are widespread. Results are already apparent. A major producer of peripherals reports that in 1983 they increased output by 30%, cut inventory by 35%, and reduced manpower by 25% while increasing quality. These benefits were achieved through adoption of techniques that require minimal capital investment.

Investment is occurring in manufacturing, however. Factory automation programs are widespread. IBM Corporation invested more than $11 billion in plant and equipment between 1979 and 1984. Digital Equipment Corporation invested more than $3 billion. Unprecedented amounts are being invested throughout the industry. These efforts attempt to achieve cost reduction benefits that will make U.S. products competitive with Japanese offerings.

While attempting to neutralize Japanese advantages in cost and quality, U.S. firms are pressing their advantage in the area of technological leadership. Massive efforts are under way to generate new technologies. IBM invested more than $13 billion in research and development between 1979 and 1984. Other major suppliers exhibits a similar heightened emphasis on R and D.

In addition to traditional corporate research efforts, several other sources of technology are receiving increased emphasis. Between 1975 and 1979, approximately $2 billion was invested in venture capital activities in the United States. Between 1979 and 1984, more than $10 billion flowed into new ventures.

The information processing industry received the largest share of these funds. The returns from these from these investments can already be seen in firms such as Apple, Convergent Technologies, Daisy Systems, Sun Systems, VLSI Technologies, and many others. These firms represent only the advance guard of an emerging army of aggressive contenders. Little-known and unpublicized ventures are today developing radical technologies and products that will revolutionize segments of the information processing industry.

Defense Department support also represents an area of increased activity. DOD funds finance the $450 million Very High Speed Integrated Circuit (VHSIC) Project, which is developing the next generation of semiconductor technology. The ICAM project, also funded by the DOD, is designed to developed new manufacturing technologies. DARPA, the DOD research arm, has budgeted $500 million over five years for supercomputer research. In February 1984, the DOD announced a $100 million Gallium Arsenide research and development project, citing dependency on Japanese suppliers. These and other efforts will greatly strengthen U.S. technology.

Perhaps even more important, the DOD budget calls for an increase in procurement of electronic components and systems from $4.8 billion in 1983 to $13,2 billion in 1987. Many leading American firms, such as Texas Instruments, already derive half or more of their revenues from federal purchases.

Joint research efforts also promise to be major contributors to American technological reservoirs. The Microelectronics and Computer Technologies Center in Austin plans to spend $50 to $100 million annually on research. The Semiconductor Industry Association research consortium has announced plans to invest more than $100 million in semiconductor research. Researchers at Los Alamos, Lawrence Livermore Laboratories, and Stanford Research Institute are cooperating in a supercomputer research effort. In addition to these formal projects, literally hundreds of informal cooperative efforts are under way throughout the industry.

The American industry is taking the steps necessary to compete with Japan in terms of cost, quality, and technology. While significant, these efforts in themselves cannot ofset the Japanese industry's tremendous advantage of dedicated public support. The Japanese government promotes and protects its information processing industry with single-minded zeal.

Yet, recent actions by U.S. gobernment agencies indicate that Japan's competitive edge in terms of public support may be shrinking. In the last several years, agencies of the U.S. government have helped achieve increased access to Japanese markets for U.S. suppliers. The Nippon Telephone procurement market, formerly reserved almost solely for the six major Japanese vendors, is now open to U.S. suppliers. Five American producers manufacture and sell

se                            miconductors in Japan.

The U.S. Justice Department filed suit against Japan's six major firms in 1982, charging them with predatory pricing in the semiconductor memory market. The Commerce Department negotiated a voluntary import quota on Japanese semiconductors in 1982 and has actively pursued anti-dumping suits involving Japanese suppliers in the communications equipment market. The Federal Bureau of Investigation played an active role in investigating complaints of industrial espionage in the computer industry. All signs indicate an increasingly active, positive role by government agencies in support of the U.S. information processing industry.

Japan's resolve and America's resources both will be tested in the on-going rivalry for leadership in information technology. For the first time, an American industry and government acting in a prepared and positive fashion will line up against the fine-tuned Japanese industrial machine. It promises to be a very interesting race. While the outcome is very much in doubt, several predications can be made with virtual certainty.

In every industry the Japanese have entered, prices have declined, quality standards have improved, waste and inefficiency have been eliminated, and responsiveness to user needs has increased. The U.S. information processing industry exhibits a very positive track record in these areas already, but it will be no exception. The on-going, intensifying rivalry in this industry will generate a growing stream of better and cheaper technologies. Consumers will benefit, although technological and vendor risks will increase.

In every industry the Japanese have entered, existing firms have been acquired, refocused, or eliminated, and workers and managers have suffered under more demanding job conditions and unemployment. This industry will not be an exception. Pressure on industry participants is increasing dramatically. These pressures will be felt in the form of price, margin, and cash flow reductions, rising capital requirements for automation and research, and shortened product life cycles.

There will be casualties as the race for leadership in information technology unfolds. For the immediate U.S. and Japanese participants, it will be a demanding exercise. Grinding competition promises to be a pervasive feature of life in this industry for the foreseeable future.

The results of the competition hold important implications not just for the immediate participants and those close to the industry in other capacities. The information technology sector holds the key to world industrial and economic leadership. The outcome of this race will determine the balance of economic power for the foreseeable future. with stakes of this magnitude and determined competitors from both the U.S. and Japan, this unfolding drama promises to hold center stage in world affairs for many years to come.