B-Cognizance

IIITA's E-Magazine

Indian Institute of Information Technology - Allahabad

Casecading

                

Pricing for (No) Profit?

 

U.S. firms pioneered the semiconductor industry but soon found them under; a great deal of pressure from Japanese competitors. American firms felt- that the Japanese market was closed to them while they were undercut at home and elsewhere by Japanese firms' unfair and below the-cost prices Whatever the reason, American firms lost some $500, million over two years. Because of the Japanese firms' dumping of DRAMs (dynamic, random-access memory chips), they gained 78 percent of the U.S. market and, in the process, drove eleven of fourteen U.S. DRAM makers out of business. In the 1 990s, Micron and Texas Instruments are the only two American firms that sill manufacture DRAMs domestically; IBM Corp. primarily manufactures them for internal use.

 

Contending that Japan exported unemployment to the United State by dumping its chips, the United States was successful in forcing Japan to sign a five-year semiconductor trade agreement in 1986. The agreement required Japan to stop selling semiconductors at prices below cost. The historic agreement soon turned sour. The United States accused Japanese manufacturers of continuing to dump their products elsewhere. In third countries such as Singapore, Japanese chips were 'available at low, prices, and those chips found their way to the U.S. market. In its defense, Japan explained that it could not control all but major manufacturers. Also, it could not prevent gray-market dealers and brokers who came to Japan and left with suitcases full of chips. The gray marketers' clients included American consumer-product manufacturers.

 

The violation of the trade agreement led the United States to impose penalties in 19.87 against Japanese products. Tariffs of 100 percent were imposed on a minimum of $135 million and up to $300 million of Japanese goods. The products singled out for sanction included all black-and-white and some color television sets, automobile tape players, blank tape, refrigerators, computers, cash registers, and communications satellites. The U.S. government claimed that there should be no major price increases because the targeted products could be obtained from non-Japanese manufacturers. In reality it was inevitable that consumers had to pay more for Japanese electronics goods.

Japanese electronics companies seemed to face more hurdles than other Japanese companies. In addition to the phenomenal rise in the value of the yen, which made exports difficult, the electronics industry had other problems. Because of the dumping charge£ and subsequent agreement, the Japanese firms had to agree to export products at prices mandated by the U.S. Department of Commerce. The additional penalty duties resulting from the semiconductor violation worsened the situation even more. Initially, Japanese electronics firms did not fare well and exports dropped a record II percent in 1986. Since, then, the strong ones have become leaner and stronger.

 

In the early 1990s, it was South Korean firms' turn to be accused of dumping memory chips in the United States. The U.S. Department of, Commerce ruled that Korean firms were illegally selling semiconductors for a fraction of their manufacturing cost. The number one DRAM-maker in the world, Samsung Electronic Co. was found to be selling its chips at 87 percent below cost (i.e., selling a $10 chip for only $1.30). Goldstar Co., likewise, was selling DRAMs at 52 percent below cost, while Hyundai Electronics Co. had a dumping margin of 6 percent. Not surprisingly, Korean firms' aggressive pricing enabled them to capture 20 percent of the worldwide market for DRAMs.

 

 

Thus, the U.S. government required them to post bonds and face duties ranging from 6 percent to 87 percent. A day after the Commerce Department's preliminary finding, prices for DRAMs surged by as much as 20 percent on the spot market. A month earlier, the European Community also imposed a 10.1 percent duty on Korean imports.

 

 

Questions.

I. Does the U.S. government's action to force up the prices of semiconductors serve a useful purpose?

II. Should semiconductors be considered products or commodities? How does the classification affect the pricing of semiconductors?

III. How should Japanese electronics companies react to quotas and duties? What should be their pricing and other strategies?