Trade, Protectionism, and Industrial Adjustment in Consumer Electronics: Asian Responses to North America 9789814345798

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TRADE, PROTECTIONfSM, AND INDUSTRIAL ADJUSTMENT IN CONSUMER ELECTRONICS

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multifaceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty -two member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic A ten-man Executive Committee oversees day-to-day organizations. operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, co ming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

TRADE, PROTECTIONISM, AND INDUSTRIAL ADJUSTMENT IN CONSUMER ELECTRONICS Asian Responses to North America

Edited by

TAN LOONG-HOE Institute of Southeast Asian Studies

and CHIA SlOW VUE

National University of Singapore

Field Report Series No. 22 ASEAN ECONOMIC RESEARCH UNIT INSTITUTE OF SOUTHEAST ASIAN STUDIES 1989

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of ~outheast Asian Studies.

© 1989 Institute of Southeast Asian Studies The responsibility for facts and opinions expressed in this publication rests exclusively with the authors, and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data Trade, protectionism, and industrial adjustment in consumer electronics: Asian responses to North America I edited by Tan Loong-Hoe and Chia Siow Yue. (Field report series I Institute of Southeast Asian Studies [Singapore] ; no. 22) 1. Electronic industries -- Asia, Southeastern. 2. Electronic industries -- East Asia. 3. Electronic industries -- North America. 4. North America -- Commercial policy. 5. Free trade and protection -- Protection. I. Tan, Loong-Hoe. II. Chia, Siow Yue. III. Institute of Southeast Asian Studies (Singapore). IV. Series. DS 501 1594 no. 22 1989 ISBN 981-3035-26-9 ISSN 0217-7099 Printed in Singapore by Kim Hup Lee Printing Co Pte Ltd

CONTENTS

List of Tables

VI

List of Figures

XI

Contributors

XII

Preface

XIV

Protection for Consumer Electronics in North America and Implications for Southeast and East Asia Mohamed A riff II

Trade, Protectio nism, and Industrial Adjustm e nt: The Case of Malaysia's Consumer Electronics Industry H. Osman-Rani

32

III

North American Trade Protectionism, Industrial Adjustment, and Singapore's Consumer Electronics Industry Tan Loong-Hoe and Linda Low

62

IV

Trade, Protectionism, and Industrial Adjustment : The Case of Hong Kong's Consumer Electronics Industry Tzong-Biau Lin and Chyau Tuan

112

V

Industrial Adjustment to Trade Restraints: The Case of the Korean Consumer Electronics Industry Wan-Soon Kim and Chong-Keun Won

159

LIST OF TABLES

1.1

World-wide Demand for Consumer Electronics Products

1.2

Characteristics of the Asian Electronics Industry

8 13

Appendix l.A Market Access for Electronics Products to the United States, 1986

21

Appendix l.B Tariff Schedules of the United States Annotated (1986) Electronics Products Eligible for the U.S. Generalized System of Preferences

23

Appendix l.C Market Access for Electronics Products to the European Community, 1986

25

Appendix l.D

27

Customs Tariff Schedufes of Japan, 1985

2.1

Growth of Electronic Productions in Malaysia, 1970-83

35

2.2

Exports and Imports of the Export-Oriented Electronics Industry, 1973-82

36

Paid-up Capital and Fixed Asset Structure of Electronics Firms by Size as at End of 1983

37

Ownership of Approved Electronics Projects in Malaysia, 1971-81

38

2.5

Structure of the Malaysian Electronics Industry, 1976-84

40

2.6

Production of Selected Electronics Items in Malaysia, 1981 and 1982

42

Malaysian Export and Import of Electronics Items, 1978, 1981, and 1984

44

2.3 2.4

2. 7

List of Tables vii

2.8 2.9

Malaysian Export of Consumer Electronics Products by Destination, 1978

46

Malaysian Export of Consumer Electronics Products by Destination, 1984

47

2.10 Projected Demand for Major Electronics Products in Malaysia, 1985-95

49

2.11 Projected Supply of Major Electronics Products in Malaysia, 1985-95

50

3.1

Market Access for Singapore's Electronics Products to the United States, the EEC, and Japan

64

3.2

Electronics Markets

66

3.3

Singapore's Exports under the Generalized System of Preferences (GSP) Scheme in 1984

66

Percentage Distribution and Ranking* of Principal Statistics of the Electronics Industry, 1980-84

69

Relative Shares of Various Branches of the Electronics Sector, 1980-84

72

Relative Shares of the Subsectors of the Electronics Industry in Percentage of Total Value Added

73

3.7

Performance of the Consumer Electronics Industry, 1970-84

78

3.8

Singapore's Entry Pattern of Electronics Firms by First Year of Production, Major Source of Capital, and Subsectors, 1967-80

79

Domestic Exports of Consumer Electronics Products, Singapore, 1979-84

81

3.10 Position of North America in Singapore's Domestic Exports of Consumer Electronics Products, 1984

82

3.11 Firm Survey of Singapore's Consumer Electronics Industry: Major Data

86

3.4 3.5 3.6

3.9

viii List of Tables

3.12 Singapore: Census of Consumer Electronics Firms, 1985

87

3.13 Perceptions of Market Performance

88

3.14 Market Destination of Firms, 1984

89

3.15 Firm's Eligibility for Trade Concessions

90

3.16 Views on Existing Protectionist Policies' Effects on Business Activity

91

3.17 Perceived Effects of Recent Recession on Business Activity

93

3.18 Corporate Responses to Trade Protectionism in the · DME Markets

95

3.19 Ways the Singapore Government Can Help Firms/Industries to Effectively Overcome Protectionism from Developed Countries

97

3.20 1986 Budget Provisions of Fiscal Incentives to Promote Investment

102

4.1

Growth of Gross Domestic Product in Hong Kong, 1961-81

115

4.2

Growth of International Trade in Hong Kong, 1961-85

116

4.3

A Profile of the Electronics Industry in Hong Kong, 1960-78

117

4.4

General Conditions of Consumer Electronics• in Hong Kong, 1970-84

118

4.5

Hong Kong's Export Position of Radios, 1979-81

123

4.6

Unit Value Index of Domestic Exports, Selected Commodities

123

4.7

Main Markets for Domestic Exports of Principal Commodities

124

4.8

Relative Performance• of the Major Commodity Groups in Consumer Electronics, Hong Kong, 1977-81

125

Labour Input and Gross Output of Consumer Electronics in Hong Kong by Sector, 1980-83

126

4.9

List of Tables

a

4.10 Consumer Electronics Firms by Ownership, 1983

128

4.11 ISIC 383 in Hong Kong by Size, 1983

130

4.12 Selected Economic Indicators of Consumer Electronics in Hong Kong, 1978-83

132

4.13 Selected Economic Indicators of Consumer Electronics in Hong Kong by Ownership, 1983

134

4.14 Skill Level of Electronics Employees, Selected Years

135

4.15 Total Output (Sales) and Exports of Consumer Electronics in Hong Kong, Selected Years

137

4.16 Production and Export Performance of Foreign Electronics Firms (FEF)

138

4.17 Sales of Electronics Products by Major Markets, by Firms with U.S. and Japanese Interest, 1983

139

4.18 Size Distribution of the Sample by Average Number of Workers Employed

141

4.19 Size Distribution of the Sample by Value of Production

141

4.20 Product Coverage of the Sample

141

4.21 Major Overseas Markets for the Sampled Firms

143

4.22 Actions Taken in Response to Market Changes

143

Appendix 4.A Value of Domestic Exports of Consumer Electronics in Hong Kong by 4-Digit Commodity Groups, 1970-84

148

Appendix 4.B Annual Changing Rates of Domestic Exports of Consumer Electronics in Hong Kong by 4-Digit Commodity Groups, 1970-84

151

Appendix 4.C Relative Position of SITC 4-Digit Commodity Groups as Percentage of Domestic Exports of Sixteen Major Groups in Total

153

Appendix 4.0

155

Cost Structure by Major Industrial Groups, 1973-83

x List of Tables

Appendix 4.E Imports of Selected Electronics Products, Parts, and Components, 1983-84

157

5.1

Production of the Korean Electronics Industry by Type

162

5.2

Exports of Electronics Products by Type

163

5.3

Export of Electronics Goods by Country

164

5.4

Production and Export of Colour TVs

165

5.5

Export of Colour TVs by Country

166

5.6

Import of Electronics Products by Type

168

5.7

Korea's Electronics Products Trade Balance by Country

169

5.8

Production Share by Colour TV Set Makers

170

5.9

Ratio of R&D Expenditures to Total Sales by Industries

171

5.10 Local Conte nt Ratio

173

5.11 Technology Level of Parts and Components

174

5.12 Classification of Respondents

183

5.13 Cost of Foreignness Factors

184

5.14 Ranking of Cost of Foreignness Factors

184

5.15 Results of One-Tailed t-Test

185

5.16 Motivation Factors for Direct Investment in the United States by the Korean Consumer Electronics Industry

186

5.17 Ranking of Motivation Factors by Mean Values

187

UST OF DGURES

1.1

Spread of Non-Tariff Barriers Facing Consumer Electronics Imports, 1973-84

1.2

Estimated Learning Curve Characteristics of the Products of Television Receivers

10

3.1

Growth and Decline of Value Added Various Labour-Intensive Export-Oriented Industries, 1961-84

70

3.2

Domestic Exports of Electronics Products to North America

83

4.1

Relative Positions of Major Consumer Electronics Products in Hong Kong, 1975-84

121

4.2

Involvement of Local Electronics Firms in Various Phases of the Electronics Business

131

5.1

Korean Consumer Electronics: Production Technology

172

7

CONTRIBUTORS

Mohamed Ariff, a specialist in International Economics, is Professor of Analytical Economics in the Faculty of Economics and Administration, University of Malaya, Kuala Lumpur. Wan-Soon Kim is Professor at the College of Business Administration, Korea University, Seoul. Tzong-Biau Lin holds the chair of Economics at the Chinese University of Hong Kong. He is concurrently Head of New Asia College of the University. By training he specialized in econometrics, but his research interest has been extended to economic development of the Asian NICs. He has published some fifty professional papers and several books on various topics ranging from econometric modelling to trade, tourism, and development issues. He is best known for his ERC Econometric Forecasting Model of the Hong Kong Economy, which has become a member of the Project Link since 1979. Linda Low is Senior Lecturer at the Department of Economics and Statistics, National University of Singapore. She was Research Fellow, Economic Research Centre, University of Singapore between 1975 and 1978. H. Osman-Rani is presently Associate Professor of Economics and Director of the Bureau of Research and Consultancy, Universiti Kebangsaan Malaysia, Bangi. He was the Dean of the Faculty of Economics in the same university from 1982 to 1984. He received his Ph.D. from the School of Economics, University of the Philippines in 1977. His research interests and publications are in the fields of industrial development, employment, and poverty. Tan Loong-Hoe obtained his doctorate at Harvard University under the sponsorship of the Harvard-Yenching Program. Presently, he is Senior Fellow at the Institute of Southeast Asian Studies. He has been Co-ordinator of the Institute's ASEAN Economic Research Unit since April 1985.

Contributors xiii

Cbyau Tuan, Ph.D. (1973), the Ohio State University, was Associate Professor

at the National Taiwan University (1973-77) and Associate Research Fellow at the Academia Sinica (1975-77). He has been teaching at the Chinese University of Hong Kong since 1977 and is currently the Chairman of the Departme nt of General Business Management and Personnel Management. He has authored numerous monographs and professional books as well as articles in refereed journals. Chong-Keun Won is a staff member of the International Trade and Business

Department, Hankuk University of Foreign Studies, Dongdaemun-kum ImunDong, Seoul.

PREFACE

The project on "Trade, Protectionism and Industrial Adjustment" , a joint research effort of the Institute of Southeast Asian Studies (ISEAS), Singapore and the North-South Institute (NSI), Ottawa was organized with the following objectives: I.

To generate and disse minate knowledge o n the impact of Developed Market Economy (DME) trade frictions on (a) the industry and trade of Less Developed Countries (LDCs) and DMEs; and (b) the importing DMEs. The project, however, is confined to the developing countries of Southeast and East Asia on the o ne hand and North America o n th e other. a nd to a se lect group of manufacturing indust ries. It is also important that the research studies and their results be of broader or universal interest and utility given the prevalence of protectionism across all DMEs and the preoccupation of most developing countries with market access questions .

2.

To produce analyses and lesso ns whi ch are highly relevant to the concerns of national decisio n-make rs in the countries co ncerned and elsewhere. For instance, at a very broad and strategic level the origins and future direction of DME protectionism is o f concern to developing countries endeavouring to chart their industrial and export development and to manage serious balance of payments and debt servicing problems. The comparative nature of the project allows researchers and decision-makers to assess the merits of various strategic responses to protectionism, particularly within and between the Newly Industrializing Countries (NICs) and the near-NIC group of countries.

3.

To provide insights on important micro-policy issues (complementing the macro-policy ones in [2]) such as the administration of "voluntary" export restraints (VERs) particularly in the allocation of export licences. For instance, within the textile and government industries of the Asia-Pacific countries, these quota regimes have important implications for economic

Preface xv

efficiency, income distribution, and industrial and technological change. 4.

To address vital trade and industry policy questions for the AsiaPacific developing countries by focusing on the related issues of industrial and labour market adjustment in the North American DMEs. The research studies compare how different DME industries have adjusted to import competition, and how effective government policy has been in facilitating (or retarding) industrial and labour market adjustment.

5.

To strengthen and extend the capabilities of the two collaborating institutions -- ISEAS and the NSI -- to undertake, sponsor, and manage research on trade and protectionism issues. This project also provides an opportunity to create a network of experienced and knowledgeable researchers. The training of capable, young researchers is considered to be of particular importance.

The core of the research project is concerned with individual country I industry studies of the impact of protection in these countries/industries. consumer Three industries were chosen for intensive study, namely: electronics, textiles and garments, and vegetable oils. Studies on these industries were undertaken in selected countries as follows: Consumer Electronics: Malaysia, Singapore, Hong Kong, South Korea, and North America Textiles and Garments: Indonesia, Philippines, Singapore, Thailand, Hong Kong, South Korea, and North America Vegetable Oils: Indonesia, Malaysia, Philippines,Thailand, and North America. The country /industry studies in the developing countries assess the impact of DME trade barriers on the level, growth, composition, and destination of developing countries' exports and on industrial development more generally. They analyse the industry and frrm responses to protectionist barriers including the differences between large and small firms, and domestic and international enterprises. National policy responses to protectionist barriers are also examined. Changes in the overall structure of industrial and trade incentives and thus the countries' general development strategy are assessed. The North American studies are similarly structured with the focus

Preface xvi

on the effects of trade restnct10ns on the process of industrial adjustment (often the stated aim of protectionist measures) as measured by, changes in the industry's competitiveness and efficiency. Likewise, these studies examine both the corporate and government adjustment strategies and their interactions. These studies were discussed at an international conference held on 2931 August 1986 in Singapore. This was followed by another conference on 23 October 1986 in Ottawa, as it was deemed desirable to disseminate further the findings and conclusions of this project to another gathering of academics, officials from both the public and private sectors, and journalists. The publication programme consists of four separate volumes of these revised and abridged conference papers. The NSI publishes the studies conducted by North American researchers in one volume, while ISEAS publishes the papers by the Asian researchers in three volumes, including this volume. ISEAS and the NSI received assistance from several institutions in organizing the conferences in Singapore and Ottawa, and in preparing this and other volumes. Both ISEAS and the NSI would like to acknowledge their appreciation of such help. They are grateful to the Inte rn ati o nal Development Research Centre, Canada for the financial support for the project as a whole, as well as the researchers for theii contributions and co-operation in the publication process. Needless to say, both the responsibility a nd credit for the quality and accuracy of statements made rest exclusively with the individual authors. The Editors

I

PROTECTION FOR CONSUMER ELECTRONICS IN NORTH AMERICA AND IMPLICATIONS FOR SOUTHEAST AND EAST ASIA Mohamed Ariff

Introduction

Con umer electronics represents an important subset of the rapidly expanding modern electronics indu try . The industry has become truly international with the transmigration of industry and the mobility of capita l and technology across national boundaries. The industry has been migrating in bits and pieces from its traditional bases in the U nited States, the EEC, and Japan which however remain the main ce ntres of world demand for co nsume r electronics. Structural changes in the American, European, a nd Ja panese electronics ector , brought about by market forces , have led to geogra phica l relocation of the industry so as to preserve their comparative advantage. The history of consumer electronics industry in the East Asian NICs a nd ASEAN countries is thus a story of offshore assembly operations by American, Japanese, and European MNCs. This not to deny, of course, that in some countries, especially Korea and Hong Kong, th e industry has become increasingly indigenous over the years, notwithstanding these countries' continued technological dependence on adva nced co untries. "Electron ics" is often defined broadly to indicate e lectrical goods as we ll , a it has become increasingly difficult to draw clear-cut demarcatio ns betwee n e lectronics and e lectrical products. The e lectron ics industry thus, loose ly defined, may be subdivided roughly into three categories in the Southeast and East Asian context : (i) Consumer electronics (for exa mple, radio and stereo equipment , TVs, VTRs, electronic watches and calculators, TV games, personal computers, e tc.); (ii) Components (for example, semiconductors, capacitors, inductors and transformers, res istors, condensers, etc.) ; and

2 Mohamed Ariff

(iii)

Industrial (for example, communications equipment, medical equipment, etc.) Consumer electronics may be further classified into matured and fad (fashion) products. The main characteristics of the former (for example, radiobroadcast receivers) are their longer life spa n and relatively stable demand. By contrast, fad products (for example, TV games) have a shorter life cycle with an extremely volatile demand . The electronics industry figures prominently in all the Asian NICs (Hong Kong, South Korea, Singapore, and Taiwan) which are often branded as the "Gang of Four" and sometimes referred to as the "second generation" of industrializing countries. Malaysia, Indonesia, the Philippines. and Thailand represent the "third generation" of industrializing nations in the region where the electronics industry has made some impact. In the NICs, the various branches of e lectronics (consu mer, component, and industrial) are fairly well represented and are largely export-oriented . By contrast, in Indonesia, the Philippines, and Thailand, it has been mainly a case of domestic market-oriented consumer e lectronics. Malaysia is sandwiched between these two ext re mes in the se nse that a vigorous export -oriented electronics components industry co-exists with a basically inward-looking consumer electronics subsector. To be sure, this categorization has tended to become increasingly blurred over time, as Indonesia, the Philippines, and Thailand have been ope ning up free trade zones (FTZs) where MNCs assemble and export e lectro nics co mpone nts in a big way, and as Malaysia has been attempting to upgrade its electronics industry from simple assembly operations to more sophisticated manufacturing activities. Export of consumer electronics, like many other export products, are vulnerable not only to external demand fluctuations caused by cyclical movements but also to protectionist policies pursued by major importing countries. The problem of market access usually assumes alarming proportions in times of recession, as importing countries become more protectionist during economic slowdown. The experiences of Southeast and East Asian countries in exporting consumer electronics to developed countries in terms of protection encountered vary widely depending mainly on the products produced. Problems posed by protection in advanced countries are rendered complex by the fact that the severity of protectionist measures vary between countries and that protectionist measures are applied in a discriminatory fashion . The main aim of this paper is to examine the protectionist measures taken by advanced countries, especially the United States and Canada, against imports of consumer electronics and the industry's responses in the Southeast and East Asian countries. The focus is on structural adjustments and other strategies adopted by the consumer electronics industry in the region. In doing so, the paper draws heavily on several country case studies relating to the United States and Canada on the one hand and Hong Kong, South Korea, Malaysia, and Singapore on the other.

Protection for Consumer Electronics in North America 3

In what follows, much of the discussion will centre mainly on the television industry. There are three main reasons for this. Firstly, TVs account for about one-half of all consumer electronics sales in North America. Secondly, much of the protectionist measures in the consumer electronics area are levelled against TVs. And thirdly, television being the only major product that is common to all consumer electronics activities in the countries covered by the studies. TVs act as a common denominator or as the central thread across the entire fabric . All these factors not only justify the focus on TVs but also render the analysis meaningful.

Protection Profile It cannot be denied that electronics, by and large, encounters relatively less protectionist barriers than some other manufacturers of export interest to Southeast and East Asian countries (for example, textiles) . Electronic components, in particular, face very little protectionist obstacles in the developed country markets, although they remain very vulnerable to cyclical ups and downs. Thus. items 807.00 and 806.30 of the Tariff Schedule of the United States (TSUS) provide for duty-free re-entry into the United States of domestically produced components which have been assembled abroad. However, U.S. imports of components manufactured elsewhere are still subject to tariff and non -ta riff measures. Nonetheless. widespread protectionist measures in the electronics sector have been res isted in developed country markets as the industry has become increasingly "i nternationalized" under subcontracting and other intra-firm arra ngem e nts. This notwithstanding. the rapid growth of developed country impo rt s of co nsumer electronics goods from developing countries in the seventies a nd th e eighties has given rise to the emergence of both tariff and n o n - t

Production or Selected Electroaics Items in Malay5ia, 1981 and 1982

1981 Item

Consymer Prodycts TV portable TV non-portable Transistor radio Radio / tape recorders, cassette player Radio/cassette player, car Loudspeakers Gramophone records and pre-recorded tapes Others• lndymjal Products Communication equipment and apparatus Paging system

19M2

No. of Quantity Value Establishments (million) (MS million)

No. of Establishments

7 9 11 9 3 5 n.a n.a

0.05 0.11 3.10 1.43 0.10 0.01 9.36 2.19

38.9 103.5 62.7 108.2 9.2 8.1 21.9

8 10 7 6 3 4 n.a n.a

13 3

15.67 0.65

76.5 25.0

9 3

1.1

Quantity Value (million) (MS million)

0.70 0. 10 2.52 1.11 0.11 0.004 13.93 19.75

49.1 84.2 77.8 81.0 11.6 0.5 9.2 34.9

6.96 0.76

42.1 58.9

TABLE 2.6 (Cont'd) 1981 Quantity No. of Value Establishments (million) (MS million)

Item

CoaJ.RQD~Dtli

1982 No. of Establishments

Value Quantity (million) (M$ million)

&. f~ 9

1,073.1

826.3

6

1,212.9

877.9

Electronic transformer

13

152.7

171.0

12

147.6

91.9

Integrated circuits

22

1,337.6

1,459.2

22

2,133.9

1,646.0

Capacitors/condensors

13

368.5

59.0

12

376.5

54.4

Electronic transistors

8

2,993.8

291.1

10

2,231.5

290.0

Resistors

6

1,016.9

28.1

6

223.7

22.4

Discretes

3 4

154.7

53.8

3

173.9

70.2

21.5

27.7

5

34.3

64.1

5 4

96.2

25.0

7

96.8

32.9

9.6

84.9

3

6.0

70.8

14

81.5

45.7

14

154.3

63.3

n.a

227.5

199.7

n.a

82.1

194.8

Semiconductor

Displays Diodes Modules and arrays Electronic component Others••

Notes: • Radio portable, radio non-portable, radiogram/stereogram, radio/ tape recorders, cartridge players, tape recorders, cassette players, tape decks, microphones, turntables, amplifiers, etc. TV antennae, modulators, remote control sets, X-ray apparatus, telegraph equipment, printed circuit boards, telephones, radio components, relay sets, I.F. transformers, silicon wafers, etc. SOURCE: Statistics Department of Malaysia.

TABLE2.7 Malaysian Export and Import of Electronics Items, 1978, 1981, and 1984 (In M$ million) 1984

1981

1978 Export

Import

Export

Import

Export

Import

0.38

26.01

6.00

115.61

85.66

80.47

13.74

31.24

95.64

73.42

323.38

163.08

8.00

43.81

37.64

168.49

71.17

234.68

Watches and clocks

59.26

46.42

17.09

66.52

17.44

109.56

Total

Major consumer electronics

81.38

147.48

156.37

424.04

497.65

587.79

SOURCE:

Malaysia: External Trade Statistics, 1978, 1981, and 1984.

SITCCode

Item

7611/12

Television receivers

7621/2/8

Radio receivers

7631/8, 7642/3/8

Gramophones, sound recorders, amplifiers, walkie-talkies, etc.

8851/2

The Case of Malaysia's Consumer Electronics Industry 45

the biggest share of the world market. In 1982, it accounted for 35 per cent of the world market for consumer electronics, followed by radios (22.5 per cent) and VfRs/videodisc players (21.6 per cent). By 1987, it is projected that the share of VfRs/videodisc players will increase and that of radios will decline, but the share of colour television is to remain more or less the same. Overall, the share of video products (televisions and VTRs/videodisc players) will increase as the share of audio products (radios, tape recorders/players, and hi-fi equipment) will decrease. In 1977, video products accounted for 51 per cent as against 49 per cent for audio products. But by 1987, the percentage is expected to be correspondingly 65 per cent and 35 per cent. In 1982, 34.5 per cent of the video markets and 27 per cent of the audio markets were in Europe; and 28.9 per cent and 30.6 per cent respectively in the United States. By 1987, Europe is expected to gain about one-third of the video markets and nearly 30 per cent of the audio markets, while the United States would capture slightly less of both markets. A study by the Nomura Resea rch Institute of Japan also indicates that the change in world demand for major consumer electronics between 1980 and 1990 would be positive for colour televisions, VTRs, radio cassettes, and stereo equipment. The st udy also shows that the change in annual demand during 1980-90 period would be highest in communist countries and the developing countries for colour TYs. But the markets for the VTRs and radio cassettes, will still be concentrated in the developed market economies although the markets in the developing countries are to grow quite rapidly. A relatively new-comer in the consumer electronics family is automative electro nics. It has been estimated that electronic content per vehicle in the United States has been increasing from US$25 in 1970 to US$60 in 1975 and US$248 in 1980. This figure is projected to reach US$872 in 1990 and US$1,383 in 1995 (MlDA/UN IDO 1985). The United States and Japan together formed more than US$3 billion markets in the mid-1980s. The most promising items in automative e lect ro ni cs are th e e missio n controls a nd conven1ence. An inspection of Tables 2.8 a nd 2.9 clearly indi ca tes that Malaysia exports most of its consumer electronics to the United States a nd E urope . The main markets in Europe are West Germany a nd the United Kingdom . In 1984, they accounted for 50 per cen t and 20 per ce nt respectively of Mal aysia n exports to Europe. Other major European markets include France, Switzerland, Sweden, the Netherlands, a nd Be lgium . Exports to Canada were practically negligible, that is less than 2 per cent of Mal aysia n exports. The export market share of Europe and the United states has in fact increased by more than double within six years, from 39 per cent in 1978 to 83 per cent in 1984. The share of the United States has increased tremendously from 9 pe r cent of Malaysian exports in 1978 to a hefty 40 per cent in 1984. The share of exports to ASEAN countries (more than 80 per cent of it to Singapore) fell sharply from 16 per cent in 1978 to 8 per ce nt in 1984, although in absolute value it more than doubled within the six-year period. Similarly, the share to

TABLE2.8 Malaysian Export of Consumer Electronics Products by Destination, 1978 (In M$ million) United States

srrc

Products

7611/12

Television receivers

Value

%

Europe Value

-%

ASEAN

Japan Value

%

Value

Others

%

Value

Total

%

Value

%

code

7621/2/8 Radio broadcast receivers Gramophones, 7631/8, 7642/3/8 sound recorders, amplifiers, walkie-talkies, etc.

-

2

0.5

4

1.0

35

9.1

342

89.3

383 .

100

2,929

8.7

25,227

74.8

1,234

3.7

1,471

4.4

2,876

8.5

33,737

100

2,272

28.4

2,447

30.6

1,909

23.9

1,148

14.3

225

2.8

8,001

100

8851/2

Watches and clocks

4,091

6.9

2,469

4.2

3,020

5.1

12,585

21.2

37,095

62.6

59,260

100

Total

Major consumer electronics

9,292

9.2

30,145

29.7

6,167

6.1

15,239

15.0

40,538

40.0

101,381

100

SOURCE: Malaysia: External Trade Stalistics (Export) , 1978.

TABLE 2.9 Malaysian Export of Consumer Electronics Products by Destination, 1984 (In MS million) United States

Europe

Japan

--

SITC code

Products

Value

%

Value

%

7611 / 12

Television receivers

68.713

80.2

11,481

13.4

32

99,438

30.7

183,227

56.7

1,843

32.383

45.5

18,698

263

244

1.4

2,052

200,778

40.3

215,458

--

7621/2/8 Radio broadcast receivers Gramophones, 7631/8, 7642/3/8 sound recorders, amplifiers, walkie-talkies, etc. 8851/2

Watches and clocks

Total

Major consumer electronics

SOURCE: Maltlysia: External Tratk Sratistics (Export), 1984.

Value

%

Value

Total

Others

ASEAN

%

Value

%

Value

%

1,876

2.2

3,561

4.2

85,663

100

0.6

18,209

5.6

20,659

6.4

323,376

100

3,360

4.7

5,122

7.2

11,610

16.3

71,173

100

11.8

134

0.8

14,551

83.4

457

2.6

17,438

100

43.3

5,369

1.1

39,758

8.0

36,287

7.3

497,650

100

48 H. Osman-Rani

the less developed countries dropped over the period . In 1978, the biggest consumer electronics export items to the United States were watches and clocks, accounting for M$4.1 million. Export of TVs was nil, but since then the export structure has changed tremendously. By 1984, the biggest export item was radio receivers which were valued at M$99.4 million ; followed by TV receivers which accounted for M$68.7 million (84 per ce nt were CIVs) . Radio receivers still represent the biggest consumer e lectronics export to Europe. In 1984, their export value was M$183.2 million or 57 per cent of the Malaysian export of radio receivers. Malaysian export of consumer electronics products to Japan has been negligible, worth about M$5.4 million in 1984 as against M$6.0 million in 1978. The biggest export to ASEAN countries shifted from watches and clocks in 1978 to radio receivers in 1984. Supply and Demand Projections of Malaysian Electronics

Th e Industrial Master Plan of Malaysia (IMP) has made supply and demand projections for the electronics industry for the period 1985-95. With regard to de ma nd , th e Malaysian market for electronics products in general will continue to be linked to co nditions in the world electronics markets. This is particularly so for e lectronic components which presently account for four-fifths of dome ·ti c production and about nine-tenths of exports of electronics products. Howeve r, co nsumer and industrial electronics tend to be more dependent on the do mes tic marke t, and this in turn depends highly on the broad pe rfo rmance of the Malaysian economy, particularly on the growth of per capita income for consumer electronics, and gross capital formation in industrial electronics. Tables 2.10 and 2.11 indicate the projections of demand and supply respectively of the three major electronics subsectors -- consumer, industrial, and components -- under the most likely conditions or moderate growth sce nario. Under such conditions, Malaysia's production of consumer and industrial e lectronics is expected to grow at an annual rate of around 18 per cent and 25 per cent respectively in the coming decade. This is much higher th an the e lectronic components subsector which is expected to grow at less th an 10 per cent per annum. As a result, the import of consumer electronics is projected to grow at a lower rate of 7 per cent per a nnum while the export of consumer electronics will increase at the rate of over 20 per cent per annum. The negative trade balance (imports exceeding exports) in consumer and industrial electronics in 1981 is expected to eventually become po itive before 1990 for consumer electronics, and before 1995 for industrial electronics. As for the components subsector, the net export will continue to be positive right th roug h the reference period. Although there is going to be a marked increase in domestic demand for and production of electronics products in the near future, Malaysia's electronics industry will remain generally an export-oriented industry

TABLE2.10 Projected Demand for Ml\ior Electronics Products in Malaysia, 1985-95 (In MS million at 1981 constant prices) 1981 (Actual)

Value

%

1990

1985

Value

1995

%

Value

%

Value

Av. Annual Growth Rate(%) %

1985-90 1990-95

DQm~5ti!;

Consumer

548

13.7

839

17.0

1,425

17.7

2,206

17.6

11.2

9.1

Industrial

378

9.5

501

10.1

1,030

12.8

2,110

16.8

15.5

15.5

Components

3.068

76.8

3,597

72.9

5,590

69.5

8,213

65 .6

9.2

8.0

Total

3,994

100.0

4,937

100.0

8,045

100.0

12,529

100.0

10.3

9.3

Consumer

217

7.6

353

7.1

1,120

13.2

2,815

21.2

26.0

20.2

Industrial

112

3.9

186

3.8

579

6.8

1,881

14.1

25.5

26.0

Components

2,520

88.5

4,400

89. 1

6,770

79.9

8,600

64.7

9.0

5.0

Total

2,849

100.0

4,939

100.0

8,469

100.0

13,296

100.0

11.4

9.4

~

SOURCE: MIDA/ UNIDO 1985.

TABLE2.11 Projected Supply of Major Electronics Products in Malaysia, 1985-95 (In M$ million at 1981 constant prices) 1981 (Actual) Value

-

%

1985 Value

Av. Annual Growth Rate(%)

1995

1990

%

Value

%

Value

%

1985-90 1990-95

Domestic Consumer

471

12.1

744

13.2

1,851

18.4

4,049

24.2

20.0

16.9

Industrial

167

4.3

262

4.7

797

7.9

2,430

14.5

24.9

24.9

Components

3,259

83.6

4,610

82.1

7,415

73.7

10,226

61.2

10.0

6.6

Total

3,897

100.0

5,616

100.0

10,063

100.0

16,705

100.0

12.4

10.7

294

10.0

448

10.5

694

10.7

972

10.7

7.0

7.0

Ex.port Consumer

323

11.0

425

10.0

812

12.6

1,561

17.1

13.9

13.9

Components

2,329

79.0

3,387

79.5

4,945

76.7

6,587

72.2

7.9

5.9

Total

2,946

100.0

4,260

100.0

6,451

100.0

9,120

100.0

8.7

7.2

Industrial

SOURCE: MIDA/UNIDO, 1%5.

The Case of Malaysia 's Consumer Electronics Industry 51

throughout the 1980s and 1990s. By 1995, it is expected that 80 per cent of the domestic production will be exported compared with an estimated 88 per cent in 1985. But in terms of their subsectors, the ratio of export to production in 1995 is expected to be 70 per cent for consumer electronics, 77 per cent for industrial electronics, and 84 per cent for components as against 47 per cent, 71 per cent, and 95 per cent respectively in 1985. On the other hand, the ratio of import to domestic consumption ratio for all electronics is expected to decline from 86 per cent in 1985 to 73 per cent in 1995. All the three subsectors are expected to experience the declining ratio, that is from 53 to 44 per cent for consumer electronics, from 85 to 74 per cent for industrial electronics, and from 94 to 80 per cent for components during the 1985-95 period. In short, consumer electronics as well as industrial electronics are expected to experience the most radi cal change from the present domestic market orientation towards servi ng both domestic and export markets. The import ratio for these subsector is expected to decline due to increased local sourcing. Along with these intra-industry structural changes, the projected cumulative investment required over the decade is estimated at M$6.8 billion in 1981 prices. Of that total, about two-thirds or M$4.5 billion represent net additions to existing capacity and one-third or M$2.3 billion would be the replaceme nt investment. The elect ronics components category is projected to requ ire 55 per cent of the new investment capital, compa red with 26 per cent for consum er electronics and 19 per cent for industrial electronics. The e mployme nt level is also ex pected to increase accordingly from the estimated figure of 85,230 in 1985 to 149,420 in 1995 . The output per worker i envtsaged to increa e at an average rate of 5.4 per cent per annum through 1995, thus pushing output per worker to M$111,800 by 1995 from M$65,890 in 1985 . Based on the experiences of other countries and the rapid technological changes in this industry, capital inte nsity is likely to increase, as automation or robotization increases. Thus, the IMP estimates th at investment per job will increase by almost double from M$49,900 for 1985-90 to M$85,500 for the 1990-95 period . In addition, the value added rati o is expected to increase with intra- and inter-i ndustry linkages growi ng much stronger in future . AI, a general policy directi on, emphasis in the future seems to be placed on the export performance of th e electronics industry, as the domestic market is too small to support an efficie nt electronics industry in Malays ia. While on the one hand, it entails greater efforts to provide appropriate incentives for exports, on the other, it relies on (a) how the importe rs respond to the exports of Malaysian products and (b) how the Malaysia n producers counter respond to the actions taken by the importers. This will be the subject matte r of the next section .

52 H. Osman-Rani

Consumer Electronics: Responses to Protectionism

This section examines the extent of trade restrictions faced by the Malaysian producers of consumer electronics products, and the possible countervailing policies that they would take. Since the information from the secondary data is insufficient to provide us answers to the problems of protectionism, attention is drawn to primary information gathered from a survey. A mailed-questionnaire survey was carried out among electronics companies in Malaysia during the month s of July-Nove mber 1985 . Originally, over 150 questionnaires were mailed to electronics/electrical firms, and after two rounds of reminders, 64 accomplished questionnaires were obtained . Not surprisingly, considering the small proportion of consumer electronics production in Malaysia, only 15 are producing consumer electronics products. Of this, 10 producers export at least one-third of their productions, and the remaining 5 are essentially domestic market-oriented . A cursory inspection of these latter firms indicates that they have never been exportoriented since the beginning of production in the early 1970s. In other words, their domestic market orientation has not been the result of developed country protectionist policies. These companies are characterized by small manual assembly operations due to the limited market. In contrast, the exportoriented companies are generally bigger in size and tend to use more advanced technology, some with computer controlled automatic insertion machines for inserting components onto printed circuit boards. The degree of foreign participation is very high. The survey by mail was supplemented for further clarification by personal interviews which were conducted mainly by phone. The survey results presented in this report should not be assumed as mere "facts" about the impact of protectionism on the export performance of firms in Malaysia. Rather they should be regarded as a set of attitudes and perceptions about the firms expressed by individuals who have major responsibilities for the operations of their own companies. The respondents have been assured of confidentiality by the researcher. It seems that their replies may also reflect the official company views. Characteristics of Surveyed Firms

For the purpose of this study, the results mainly cover those which pertain to the export-oriented consumer electronics establishments. The coverage therefore includes six firms which produce audio consumer items, two firms which produce video consumer products, and the two firms which produce lamps and other related items. Most, if not all, of the firms producing television receivers and radios are assembly operations which involve the insertion of components onto printed circuit boards and testing of assembly products.

The Case of Malaysia's Consumer Electronics Industry 53

Six firms are wholly-owned, of which three are by American, two by the EEC, and one by Japanese investors. The remaining four are joint-ventures which involve minority Malaysian equity capital either with the EEC or Japanese- or Hong Kong-controlled companies. Most of the firms started production in the 1970s. Only one firm started operation before 1970 and another one after 1980. The size of output produced in 1984 also varied from as low as M$0.5 million to as high as M$34 million . The average output was around M$17 million . In terms of employment, the surveyed consumer electronics firm s ranged from from 32 to 1,800. with an average of 640. Interestingly, the number of foreign employees was very small. Of the ten firms taken into consideration, three firms employed six foreigners each, one firm employed only one foreigner, and the rest had no foreign workers. The labour cost accounts for about one-quarter of total cost.

General Perfonnance Practically all the export-oriented co nsume r e lectronics firms surveyed have been operating with excess capacity, with an average rate of 70-85 per cent capacity utilization during the period 1980-84. The performance of the firm s in terms of sales or profits in the last five years also varied considerably . Four firms mentioned that their sales/profits had been increasing in the recent years, two firms had been experiencing the opposite, while the other four firms reported no significant changes. While only one firm claimed that it was performing better than its local or foreign counterparts, the rest confirmed that they were not any better off or worse off than the other consumer electron ics producers. In general, there has been an air of uncertainty amongst the consumer electronics producers with regard to their performance in the coming four to five years. This has been largely attributed to the present world economic recession the e nd of which is not in sight yet. Some companies have report ed that they sourced up to over 50 per cent of their raw materials or components locally. Some, however, imported almost all their inputs from overseas. A foreign -owned firm , which deals with the assembly of television, for instance, acquires its raw materials on consignment virtually at no cost to the parent company. But genera lly, the consumer electronics companies tend to acquire more of their input requirements from domestic sources (averaging around 20-25 per cen t) compared with the semiconductor assembly industry which has an average of approximately 10 per cent local content. It therefore reflects greater linkage between consumer electronics and the local industries. The components and parts sourced or made locally include resistors, inductors, transformers, print circuit boards, wires, plastic and metal parts, wooden television cabinets and speakers. More

54 H. Osman-Rani

local sourcing by the consumer electronics sector is anticipated in the future. Consumer electronics also tends to differ markedly from semiconductor components or other components in terms of value added ratio, where value added is measured by value of output produced less the cost of material input. The value added ratio for the consumer electronics manufacturing has been very low, that is around 10-25 per cent, while that of the semiconductor components has been in the region of 30-60 per cent, and in the case of other components, about 20-45 per cent. Responses to Protectionism

The major markets for the consumer electronics products are Europe and the United States. From the small sample of export-oriented consumer electronics industry, it is evident that the American-owned firms tend to export most, if not all, back to the United States. The European-owned firms also tend to behave in the same manner, that is exporting back to their home countries. Thus, Malaysia has been used by these companies as an export platform for their products. Both the Hong Kong and Japanese companies do enjoy trade concessions. Their products qualify for GSP and TSUS 807.00, if they are within certain prescribed regulations. The American companies, either producers of cassettes, TVs, or some lighting products are also able to export back to the United States duty-free. Two European companies have also indicated their ability to export back to Europe without much hindrance, while other European firms did not provide any definite answer on this issue. A more direct question was asked as to whether the existing protectionist policies pursued by major importing countries were affecting the performance of the company. One firm indicated that the business of the company will eventually be affected by these protectionist policies which are spreading now, and feared that the price advantage it has in terms of GSP will be removed. This firm turned out to be an Asian-owned firm which exports 75 per cent of its products to Europe and the remainder mostly to the United States. No other firms which responded to the questionnaire indicated any negative effects of foreign trade restrictions. In fact, one firm bluntly said that blaming protectionism is "very much a red herring to explain inefficiencies in marketing, product quality, etc. A good product recognised worldwide will always find markets". This firm is one which exports all of its products to its home country. Similarly, the companies under study informed that they do not face any problem with the existing Malaysian Government policies with regard to their export activities, except for one firm which complained that it had to pay M$100 exit duty for each truck of goods exported through Singapore. This has cost the company M$80,000 a year as it has daily trucks to Singapore carrying

The Case of Malaysia's Consumer Electronics Industry 55

its export products. On the whole, most firms have enjoyed a host of government incentives. The number of firms (out of ten) indicating the incentives that they have gained are as follows: Tariff protection Non-tariff restriction Free Trade Zones Licensed Manufacturing Warehouses Export Incentives Pioneer Status Investment Tax Credit Labour Utilization Re lief Locational Ince ntive

2 2 6

4 7 2 2 2

Five firms , in fact, have e nj oyed at least three of the above listed incentives, four enjoyed eit her one or two ince ntives, while one firm failed to respond to the question . Firms were also a ked wh at actions they were taking or would be taking in respon e to the rising protectionism in the export markets of the developed market economies in the short as we ll as in the long run. In general, firms believe that the approach has to be multidimensional. In the short-run, the majority prefer to improve productivity, reduce prices, and improve product quality in order to be more co mpetitive internationally. In addition, there are firm which support the idea of market and product diversification. On the other hand, the re are also firms, a lbeit small in number, which prefer to move towards the domest ic market or the ASEAN regional market while some others have suggested a production cut-back. These are firms which are relatively small in size (producing output less than M$10 million a year) . But it does not necessarily mea n that all small firms prefer to be inward-looking. No frrm has indicated the prefe rence for seeking help from the government, thus recognizing that the government could no t provide the short-run solution . Also, no firm wants to move to a new location abroad . ln the long run, the most frequently quoted course of action to be taken to circumvent protectionism abroad is the need to introduce new products and to improve quality and productivity. T hese actions have bee n found necessary to fight protectionism head on, rather than focusing on the do mestic market. The inward-looking approach, therefore, should be regarded as an interim short-term measure during the period when there is still scope for importsubstitution . In the long run, the firms in Malaysia have not advocated cutting down production for export in favour of the domestic market, although two firms indicated the ir prefere nce for the ASEAN market. At least one firm indicated preference for relocation to another country.

56 H. Osman-Rani

A summary of the frequency counts of ways firms would react to protectionism is as follows:

Shon-run Cut down production for export Concentrate on domestic market Go for ASEAN market Improve productivity Introduce new products Diversify export markets Improve product quality Reduce price Move location to another country

2 3 2 5 2 2

Long-run

2 3 5 2

3

4

4

2 1

Although most firms have indicated that they need not seek the help of the government to fight against protectionism, the majority believed that the government could play an important role. According to the survey results, the most important measures that the government should take include dialogues with trade partners (5 counts) and a subsidy to the industry (5 counts). This subsidy or assistance can take various forms such as tax exemptions on export promotion activities and R&D activities, as well as the temporary protection of the local market. The latter measure is specifically preferred by two firms which are inclined towards inward-looking strategies as a solution to the problem of protectionism abroad. In addition, four firms have suggested that the government should take such actions as an exchange rate adjustment while three firms felt that the government should seek international solutions through such institutions as the GATT and UNCTAD. Practically all the export-oriented consumer electronics firms covered by the survey regard the future long-term prospects of this industry as promising. For the future development, a majority of the responding firms plan to continue improving their product design, production technology, and marketing strategy. These are regarded by the firms as a permanent necessity in order to remain competitive in the world market. Some firms intend to introduce new models or new products with better designs like doublecassettes and cheap auto-reverse, car radios and car accessories, and small personal computers. These products would be mainly for the wider market as well as for special application by specific clients. In the area of production technology, some firms have expressed their intention of going for better automation technology. With regard to marketing strategy, many firms agreed that they have to be more aggresive in capturing the market and to sell at lower prices. Market diversification is important. Some of these firms are planning to move away from the traditional markets of the developed economies towards the new markets in the Third World, including China. For example,

The Case of Malaysia 's Consumer Electronics Industry 57

a firm is planning to divert production in the direction of microcomputers which can write Chinese characters. One firm is trying to sell some products locally and to the ASEAN countries, instead of only to Europe. Of course, these actions are not necessarily the result of protectionism, but more a reflection of growing economic uncertainty on a world-wide scale. In sum, while protectionism may not as yet have brought about, to any significant extent, adverse effects on the exports of consumer electronics products in Malaysia, exporters are generally cautious about the future prospects in view of the current world economic slowdown. Protectionism is seen as a part and parcel of the whole international environment. It is in this perspective that outward-looking strategies appear to be the most sensible long-run solution to the problem, as pointed out by most firms. Policy Options and Implications

The Malaysian Government has given a high priority to the development and expansion of an export-oriented electronics industry. The recently released Industrial Master Plan indicates that the electronics industry ought to be designated as a "strategic industry" to be targeted for intensive development over the next decade and beyond . As a consequence, major changes and trends are expected to occur in Malaysia's electronics industry. The industry output in aggregate is rather ambitiously targeted to expand by about three times between 1985 and 1995 . The most dramatic change will be in the intraindustry struct ure . The electronic components which presently dominate the industry structure will be expected to decline in relative importance. Crrespondi ngly, the shares of industrial and consumer electronics are expected to increase. The share of consumer electronics is projected to increase from 12 per cent of total industry output in 1984 (or M$620 million) to nearly 25 per cent (or M$4 .0 billion) in 1995 . In 1984, the ratio of local production to consumption has been estimated to be around 0.81 ; and with the expected higher growth rate of production visa-vis domestic consumption (about 18.5 pe r cent as agai nst 10 per cent per annum in the period 1985-95), the domesti c production of consumer electronics goods will exceed domestic de mand before 1990. The target is that by 1995, the value of production will be almost double that of domestic consumption. Similarly, the import to production ratio is expected to decline from 0.69 in 1984 to 0.37 in 1990 and 0.24 in 1995, while export production ratio is projected to increase from 0.46 to 0.61 and 0.70 correspondingly. It is very likely that Malaysia would be able to develop the consumer electronics industry at a rate such as to achieve self-sufficiency in the near future. Thus, given the limited domestic market, it does appear that export is the most effective way to achieve efficiency, economies of scale, and high growth rate. The other option is to be inward-looking which will invariably be

58 H. Osman-Rani

at the risk of inefficiency, stagnation, and even shrinkage. As a short-term measure, both export-orientation and import-substitution strategies may be able to go hand in hand. But the import-substitution strategy can easily be exhausted within the next few years or so. One problem, which is internal in nature, is that years of tariff protection and subsidization may have bred inefficiency among the consumer electronics producers. Another problem, which is externally-induced, is world economic uncertainty and growing protectionism. The more processed the product, the greater the tendency for the exporters to face protected markets. Consumer electronics products, being finished products, are more likely to be affected by protectionism in the future, if not now. On the optimistic side, Malaysia's share of world trade in consumer electronics manufactures is still rather negligible. In 1984, Malaysia's share of electronic products in the world market was estimated to be 0.05 per cent; and within consumer electronics, the share is certainly less than 0.05 per cent. Hence, Malaysia should still have plenty of room for export expansion if price and quality are right. As a matter of fact, very few countries, if any, could expect to sustain an electronics industry without having to export a portion of its output, that is one solely based on domestic market demand. India is an example of a nation that has had the growth of its electronics sector stunted and production has lagged far behind the domestic requirements simply because of its past inward-looking strategy (Agarwal 1985). Although the demand perspectives in the developed regions of the world may remain uncertain, there is essentially a huge demand potential available in the Third World. This is particularly so in the Gulf region, Latin America, Southeast Asia, and China; and electronic consumer gadgets for the urban elites would seem to be of importance for future market penetration. As it turned out, our study indicates that protectionism has not yet posed a serious threat to the exports of consumer electronics products. Any slack in performance in the recent years is much attributed to the slack in world demand. Nevertheless, it has been recognized by some manufacturers that protectionism is still potentially dangerous to this industry. There may be several reasons why the general protectionist policies pursued by developed market economies has not affected seriously the export performance of the consumer electronics industry in Malaysia. First and foremost, the fact that many internationally reputable consumer electronics companies have chosen Malaysia as a location for their export-oriented investments and reinvestments suggests that Malaysia is internationally competitive. Also, most of the consumer electronics exporters in Malaysia tend to have free access to their ready markets in their home countries and they do enjoy trade concessions (for example, GSP), especially in the United States and the EEC. In addition, most of these firms enjoy various incentives and assistance provided by the Malaysian Government which includes the convenience of the FI'Zs and LMWs, pioneer status, and other tax incentives.

The Case of Malaysia's Consumer Electronics Industry 59

In general, policies and strategies adopted by the government vis-a-vis the electronics industry are consistent and closely linked to the policies and regulations governing the industrial sector as a whole. The choice of an export-oriented strategy for the electronics industry seems easy to make. Yet it is profoundly more complex and has many ramifications. In terms of trade policy, it requires a minimum of protection of the local industry in order to increase productivity and stimulate efficiency. Equally important is that the range of technologies and products has to be carefully chosen with reasonable prospects that the products will be able to compete in international markets without much export subsidies and without a massive diversion of resources from other sectors of the economy.2 This does not mean that government encouragement is not necessary. For a country like Malaysia it is in fact a must. To develop the consumer electronics industry, Malaysia needs to upgrade its technology at both the product and process levels. The spur to initial technological development is not simply a cost reduction but, more importantly perhaps, an increase in product quality. In other words, there is a need to introduce products of progressively more sophisticated design and engineering. The upgrading of production technology involves using state-of-the-art techniques and the integration of the existing base into upstream and downstream manufacturing. Progressing from assembly and production to actual design and development of products naturally involves an escalation of technological requirements. And, to develop an industry that has the capabilities to advance existing technical knowledge, a solid research and development structure is essential. To start with, Malaysia has to continue relying on foreign partners, especially for the purpose of technology and skill acquisition. This can be done effectively through more joint-ventures between foreign electronics firms and locally-owned firms supported by appropriate incentives and guidelines by the government. 3 The trend towards increasing automation and the spread of protectionism in the developed economies may also be examined from a different dimension; and that is, whether or not it would encourage a reverse flow of foreign investment into the developed economies. There is little doubt that the new technology is labour displacing and represents an optimal choice of technique at developed country factor-price ratios. Given this situation, it is difficult to conceive how the Third World will be able to arrest the likely trend towards " comparative advantage reversal " (Kaplinsky 1984). The spread of protectionism will only make it more attractive for investors to move into the developed countries, thus making it doubly more difficult for a developing country like Malaysia to promote foreign investment in this so-called "high technology" industry. Such an open-door policy is not likely to be effective for two main reasons. First, tax incentives and subsidized overhead costs on their own would not be sufficient to redirect global investment decisions of leading

60 H. Osman-Rani

U.S., Japanese, and Western European electronics firms. Second, the -recent rush of the developed countries themselves, including the United States, the United Kingdom, and Belgium, into the most extreme form of foreign investment promotion (for example, the establishment of Export Processing Zones and Science Parks) indicates that the global race for industrial investment has reached a new stage where even the most powerful NICs might find it increasingly difficult to compete (Ernst 1985). However, given the high degree of internationalization , and in particular the prominent role played by locations in Southeast Asia, a rapid retreat by the industry to less internationalized modes of electronics manufacturing is not easily conceivable, at least in the short run. As noted by Ernst (1985), any change in the current pattern of manufacturing and sourcing would involve substantial costs, whether in terms of closing down existing plants, reshuffling supply and market networks, or in terms of benefits foregone that could be reaped from achieving higher stages of internationalization . The mobility of capital invested during previous rounds of internationalization of electronics manufacturing is also bound to be much lower than originally expected. Thus, Ernst argues that firms are likely to increase rather than decrease their degree of internationalization . From this point of view, automation and industrial redeployment to developing countries may not be regarded as alternatives, but rather as complementary processes with automation increasingly becoming the driving force. Finally, we may also note that the external demand constraints do not seem to be crucial in limiting the exports of a developing economy like Malaysia as long as the markets for its manufactured products remain relatively free of protective barriers. That is one main reason why the developing countries have been insisting that the industrial nations honour past pledges to introduce a freeze on all new trade restrictions, to be followed by gradual elimination of all such measures imposed since the last round of international trade negotiations which ended in 1979.

NOTES 1

The operations of the FTZs are intended to be confined to labourintensive, export-oriented manufacturing. The units can import raw materials, components, and other inputs free of custom duty and other taxes. The government has also introduced in 1975 the LMW system which allows for the manufacturing of goods under bond. The LMWs are like the FTZs in the sense that they are free from tariffs, but they do not have the advantage of subsidized infrastructure.

The Case of Malaysia's Consumer Electronics Industry 61

2

According to the Industrial Master Plan of Malaysia, this should involve the production of a number of key consumer electronics end-products with a view to export as well as domestic consumption, such as CIVs, portable stereo cassette recorders, car stereo/tape decks, microwave ovens, and other electronic systems for automobiles. Generally, the emphasis will be a trend towards higher value added products, as for example, video cassette recorders, videodisc players, digital TVs, and digital disc stereo systems. All this should go along with the production and development of its components sector.

3

Malaysia has recently liberalized its foreign investment rules under the Promotion of Investment Act 1986, which supercedes the Investment Incentives Act of 1968, in an effort to lure more foreign companies to set up here. However, a disturbing problem is not so much the fiscal incentives as the shortage of technicians and engineers. Lack of technical capacity is a serious problem in the light of fast moving electronics technology, especially in the higher-value-added and hightechnology industries as found in the NICs.

REFERENCES Agarwal, S.M. "Electronics in India : Past Strategies and Future Possibilities". World Development 13, no.3 (March 1985). Ernst, D . "Automation and the Worldwide Restructuring of the Electronics Industry: Strategic Implications for Developing Countries". World Development 13, no.3 (1985) . Kaplinsky, R. Automation: The Technology and Society. London: Longmans, 1984.

MIDA. Review of the Electronics Industry and Recommended Policy for the Industry in Malaysia . Kuala Lumpur: MIDA, 1982. MIDA/UNIDO. Medium and Long Term Industrial Master Plan, Malaysia, 1986-1995: Electronics and Electrical Industry, Vol. 2, Part 8. 1985. UNCTAD . Protectionism, Trade Relations and Structural Adjustment. Belgrade, 1983.

III

NORTH AMERICAN TRADE PROTECfiON ISM, INDUSTRIAL ADJUSTMENT, AND SINGAPORE'S CONSUMER ELECTRONICS INDUSTRY* Tan

Loong-H~

and Linda Low

Introduction

The concern over the problem of trade protectionism and its serious impact on Singapore's export growth and industrial development were very recently brought to the fore and reiterated in the 1986 Budget session in Parliament.' The present study appears to be timely in meet ing the need for information and analyses on the nature and extent of the effect of developed countries' trade protectionism on the structure and performance of Singapore's trade and industry. This is necessarily a limited but in-depth case study of the consumer electronics industry, which is actually a subsector of the electronics industry. Also, in terms of the industry's external relations, the main concern is limited to the trade protectionism of North America with third-country comparison given some attention whenever necessary. The first section of this paper presents an outline of the trade protection structure faced by Singapore's consumer electronics industry. It is followed by a historical overview of the evolution of Singapore's electronics industry and an evaluation of the performance of it's consumer e lectronics industry. A microeconomic analysis of the corporate behaviour of the consumer electronics industry's performance in Singapore and also of government adjustment responses to trade protectionism (and to the continuing global recession) is given next. Remarks on the policy implications based on the findings of our empirical research are presented in the final section.

Singapore's Consumer Electronics Industry 63

Outline of Trade Protection Structures in North America

Tariff Protection The nominal rates of tariff protection of industrialized countries which are actually and potentially of significance to Singapore are fairly low for consumer (and other) electronics products as compared to those of some countries in ASEAN (Table 3.1). As for North America, the United States in particular, there has been a slight change in the tariff rates between 1980 and 1986. (The same is also, more or less, true for the EEC and Japan.) The U .S. tariff rate has remained the same at 5 per cent for complete TV sets but increased from 3.9 to 4.1 per cent for tape recorders, record players, etc. between the two years. This is contrary to the expectation that actual tariff rates would fall annu ally in line with the annual tariff cuts from January 1980 as agreed upon by the contracting parties of the GAIT Tokyo Round. However, for radio receivers the tariff rates register a notable decline from 9.9 to 6 per ce nt ad va lorem.

Non- Tariff Barriers There is a dearth of information on non-tariff barriers (NTBs) imposed by developed countries (mainly in the form of quantitative restrictions and technical barriers to trade). Unlike its mai n competitors, South Korea, Taiwan, and Hong Kong, Singapore appears to have been minimally affected by such quantitative restrictions as Orderly Marketing Arrangements (OMAs) and Voluntary Export Restrai nts (VERs). 2 Singapore's exports of colour television sets to the United Kingdom are subject to quota restrictions but not so to North America . Also, the Office of the Secretary, United States Jmernational Trade Commission has provided the following statement: "At present, the Commission has no knowledge of any move in th e United States to restrict imports of consumer electronics products from any country including those from Singapore." 3 However, an "Update on Trade Legislation" (March 1986) supplied by the Group Vice Preside nt of th e Electro nic Industries Association (Washington , D.C.) indica tes th at, fo r instance: 4 (1)

Some bills would impose an import surcharge on all impons including consumer electronics products. In the H ouse, H.R. 3035, would impose a 25 per ce nt import tax, unless certain countries cut their trade su rplus wi th the U.S. by 5 per cen t immediately.

(2)

A bill which would establish a 20 per cent import surcharge on all U.S. imports has been introduced ... H.R. 1139 could be discussed in the context of hearings on trade and tariff measures.

(3)

Legislation by Sen. Danforth (R-MO) designed to expand American opportunities in the telecommunications field won unanimous approval on September 17, 1985, by the Senate Finance Committee. S. 942 would press major trading partners to remove

TABLE 3.1 Market Access fo r Singapore's Electronics Products to the United States, the EEC, and Japan (Minimum a nd maxi mum duties within major product groups, ad valorem in per cent)• Countries Product Group (CCCN)•

85.15

92.11

United States'

EEC

Japan

Malaysia

Philippines

Thailand

1980

1986

1980

1986

1980

1986

1980

1985

1980

1985

1980

1985

Television

5.0

5.0

14.0

14.0

4.0-7.5

5.5-7.5

25-35

30-50

100

50

80-100

50-100

Radio

9.9

6.0

14.0

14.0

4.0-7.5

5.3-7.5

S-4S

20-SO

100

so

S0-60

S0-60

Tape Recorders

3.9

4.1

5.9

S- lO.S

4S

so

70

50

60

60

7.S-9.S S.4-19

• Access to and aggregation of the data contained in this table have been difficult sometimes, and data may partly represent only a good approximation of existing tariffs. • Classification of products according to the Customs Co-operation Council Nomenclature (CCCN). It differs from the Standard International Trade Classification (Revision 2) which is used in other tables. ' An attempt has been made to classify the Tariff Schedule of the United States (TSUS) items in terms of the CCCN. SOURCE: Tables of Appendix A-1.4; Hillebrand et al. (1981), Table 13, p. 39. See original version (April/May 1986).

Singapore 's Consumer Electronics Industry 65

barriers to U.S. telecommunications products and services through negotiation. If barriers are not removed by agreement, the U.S. would lintit foreign access to the American telecommunications market. The bill broadly defines "telecommunications products" to include combination tape-radio players, AM and AM-FM radios, CB radios and telephone answering machines.

These U .S. trade legislations, though not as relevant to Singapore as to other NICs (South Korea and Taiwan) and Japan, might possibly affect Singapore's exports eventually and cannot be dismissed as an irrelevant threat. It is noteworthy that Singapore's exports of electronics goods to the United States is very substantial. Exports of portable tape recorders, radios, telephone equipment, calculators, dictating machines, integrated circuits, PCBs, computer disc drives, television tubes, and other electronic items to the United States amounted to US$2.41 billion, accounting for almost 6 per cent of its total imports of US$40.3 billion . Hence, in terms of market shares of U .S. electronics imports, Singapore ranked fifth among its importers in 1984, losing out to South Korea for the fourth place by a small margin of US$30 million (Table 3.2) . Preferential Access to the North American Market

At least 30 per cent of Singapore's non-oil domestic exports would be adversely affected if donor-countries were to withdraw their GSP programmes from Singapore. Information provided by the Trade Development Board's (TDB) export certification unit summarizes the performance of Singapore's exports under the various GSP schemes in 1984 (Table 3.3). The following points are noteworthy from Table 3.3: 1.

The United States is Singapore's most important GSP market and accounted for 43 per cent of exports under various GSP schemes. However, the U.S. GSP schemes provided much fewer duty-free benefits relative to other countries. For instance, in 1984 only 15 per cent of Singapore's exports to the United States enjoyed GSP benefits, compared to 25 per cent for the EEC and 28 per cent for Canada.

2.

The United States, the EEC, and Japan together accounted for as much as 93 per cent of Singapore's total GSP exports.

In addition, it should be pointed out that: a.

Singapore is ranked seventh among the top twenty beneficiary countries under the U.S. GSP in 1984 and 1985. However, there is still much room as Singapore's share of total U.S. GSP imports is only 5.1 per cent as compared to 24.2 per cent for Taiwan, 12.4 per cent for South Korea, and 9.1 per cent for Hong Kong; 5

66 Tan Loong-Hoe and Linda Low

TABLE 3.2 Electronics Ma rkets (The U nited States exported US$31 .8 billion in electronic products in 1984; imports totalled US$40.3 billion) Top Buyers of U .S. Products C well as to ge t a balanced representatio n of such MN Cs to produce for the world mark et. T hese e fforts began to produce results by the early 1970s with all three branchel> of the e lectro ni cs industry responding positively. Major e lectronics firm s from the Unit ed States included Texas lnstruments, National Semi o nducto r, Hewle tt Packard, Genera l E lectric of the United States, Fairchild, and Apple Co mput er; the pro mine nt Japa nese MN we re A.iwa , Foster, Hitachi , Matsushita, Sanyo, Toshiba, and Victor Company of Japan ; and the E uropea n firm s we re Philips, Sieme ns, Tho mson, and SGS / Ates . Afte r recovery fro m the 1974/75 recession, the inflow of foreign capital responding to government stimul i resumed . This time Japanese firm s led the second surge of overseas investments. As before , these Japanese firms continued to produce in Singapore primarily for the American and E uropean markets. After 1976, American and European MN Cs were large ly re-exporting to their home markets. European firms , however, started to use Singapore

76 Tan Loong-Hoe and Linda Low

also as their production base for Southeast and East Asian regional markets. Since the early 1980s, both the international and domestic economic environment have changed . For the electronics industry in particular, it has become intensively competitive with R&D becoming more and more crucial for industry leadership. Singapore's full employment and rising labour costs (due to deliberate government policy to attain more efficient utilization of expensively-trained labour which in turn would increase value added and productivity) took their toll on the consumer electronics industry. In terms of R&D, the 1981/82 and 1984/85 national surveys, conducted by the Science Council, found very little being done. 2A In 1984/85, Singapore's research scientists numbered 20 per 10,000 population in contrast to 66 in the United States, 33 in Taiwan, and 22 in South Korea . In 1981/82 it spent 0.3 per cent of GNP (S$81.0 million) on R&D which was half of what Taiwan and South Korea spent. This improved to 0.6 per cent (S$214.3 million ) in 1984/85 and is projected to rise to 1 per cent of GNP by 1988. Such low levels of R&D activities, which can affect the future growth of the electronics industry as factor intensity changes (th at is, the shift from labour to technology and capital), may be attributed to a number of factors. Firstly, despite its impressive quantitative dimension a nd active government efforts to achieve technology and sophistication , industrial growth in Singapore in the 1970s remained based large ly on tradition a l factors like locational advantage and cheap labour, rather th a n o n the skills or brainpower o f its labour. Another inhibiting factor is th e MN Cs' preference to base their R&D at their headquarters, as Singapore lacks a large domestic market to support viable market-oriented R&D activities. Further, R&D activities are sensitive to economies of scale which require a resea rch environment for conducive and collective effort and creativity. Besides being deficient in R&D activities, Singapore's growing high labour and other operating costs are also forcing the consumer electronics firms to automate or relocate. The recession has further driven firms to retrench. General Electric, for instance, has retrenched workers and relocated its labour-intensive operations to Mal ays ia as part of the world-wide restructuring of its consumer electronic business. Such scaling down has also led to the closure in October 1985 of its Advanced Technology Centre, because of insufficient demand for its services. This R&D centre was one of the first integrated centres set up by a MNC in 1983. There has also been a change in the investment strategies of developed industrial countries where a combination of factors has shifted relatively larger shares of capital from these countries into other advanced nations rather than developing countries. More Japanese investment for instance is going into the United States and Europe 25 under the threat of protectionism which dictates market investment in the these countries. With the advent of microelectronics, the importance of the wage factor has also diminished . Further, there is the offer of tax incentives by advanced countries. All these do not augur well for the consumer electronics branch in Singapore which has to, on one hand, compete with low-

Singapore 's Consumer Electronics Industry 77

cost neighbouring countries and on the other, contend with more advanced countries for higher-technology and capital-intensive production . To counter the microelectronics revolution which further erodes what little advantage is left for the labour-intensive operations, the consumer electronics industry must automate and mechanize even further. 26 Singapore may still have comparative advantage emanating from its infrastructural, locational, and other manpowe r investme nts. Further, to sustain the consumer electronics industry in the face of so many adverse factors , existing firms must seek greater vertical integration a nd intra-firm trade to prove their importance in their respective MNCs' network of operatio ns.

Evaluation of the Perfonnance of Singapore's Consumer Electronics Industry. Over the period 1970 to 1984, th e co nsumer e lectronics industry e njoyed three boom pe riods. In term s of value added. three peaks (each one higher tha n th e previous one) we re experie nced in 1974. 1980. a nd 1984 as shown in Table 3.7. T able 3.8 shows th e e nt ry pa tt e rn of elect ro n ics firm s for the period 1967 to 1980. For consume r e lectro ni cs firms . the pio neer is from E urope, although over the whole period th e domina nce o f Japa nese co nsum e r e lectronics firms Following the 1974 /75 recessio n, several electronics firms is obvious . retre nched their workers.17 Since 1975 . the components b ra nch has surpassed the consumer electronics branch in te rms of e mploy me nt . value added, and direct exports. In 1984, employme nt in the consumer e lectro nics bra nch was about one -third that in the compone nts bra nch ; it s o utput , va lue add ed , a nd ex ports were all at around 40 per ce nt of the co mpo ne nt 's branc h. Cons um e r electronics is the most labo ur -inte nsive of all the three branches, as its va lu e added per worker and output per worker we re th e lowest while its remu ne ration to output ratio was the highest. 211 However, capita l expe nditure in the co nsumer electronics branch was o nly one-fifth th at o f th e co mpo ne nt s branch . While the electro ni cs industry co ntributed about o ne- third of employment expansion in th e manufactu rin g sector between 1968 a nd 1979, the consumer e lectron ics branch, in part icul ar , has also co ntribut ed significantly to high er fe male labour participation ra te .2'1 In 1979 most of th e jo bs created we re for unsk illed or semi-skilled female prod ucti o n ope rat o rs wh o acco unted for 80 per cent of total e mployme nt in the e lectro nics industry co mpa red to 53 per cent of the total manufacturing wo rk -force . The e lectro nics industry has created jobs which did mo re to increase th e female la bour participation rate than to reduce the significantly male une mployment problem of the 1960s. In 1983, female production worke rs co nstituted 85 .6 pe r ce nt of such workers while all female workers formed 77 .5 pe r cent. Such fe ma le inte nsity of employment has not changed very mu ch over time. Although the electronics industry was the largest manufacturing industry in terms of value added in 1984, it is still not strongly linked up with loca llyowned supporting firms . As for the consumer e lectronics branch, Table 3.8 shows that over the period 1967 to 1980 loca l Singaporean consumer

TABLE 3.7 Performance of the Consumer Electronics Industry 1970-84

EstabIishments

Workers

Output

35

11251

212.8

Capital Expenditure

Direct Exports

Value Added per Worker

99.1

179.6

Output per Worker

Capital Expenditure per Worker

Value Added to Output

--

%

S$

S$'000

S$'000

No.

1970

Value Added

32.1

8.8

18.9

2.9

46.6

22.6

1.3

46.5

1.8

32.6

1972

53

27270

616.8

286.7

590.9

35.2

10.5

1974

81

46247

1603.6

523.5

1456.3

83.3

14.5

34.7

1976

26

43718

1987.9

637 .7

1840.3

78.7

14.6

45.5

1.8

32.1

16.7

52.8

2.6

31.7

55.8

178.7

8.5

31.2

1978

34

53440

2821.9

893.3

2506.7

140.2

1980

58

29906

5344.0

1668.8

4508.4

255 .5

1982

62

22433

5297.6

1484.4

4559.2

326.4

66.2

236.1

14.5

28.0

148.0

492.2

33.6

30.1

22.3

26.2

19.1

54

1984

19716

9703.3

2917.5

8228.5

662.6

31.4

27.3

31.4

24.1

Annual Ave. ) Growth Rate) 3.1 (1970-84)

(%)

4.1

) )

SOURCE: Singapore, Department of Statistics, Census of Industrial Production, various years.

Singapore 's Consumer Electronics Industry 79

TABLE3.8 Singapore's Entry Pattern of Electronics Firms by First Year of Production, Major Source of Capital, and Subsectors, 1967-80 Countries/ Subsectors Region

U.S.A.

Japan

Europe

1967

1975

1980

No.

Total

3

4

12 7 9

3

8

35

Components Consumer el. Industrial el.

3 2

4 9 1

34 26 2

Total

5

14

62

Components Consumer el. Industrial el.

2

2 2

7 8 3

Total

3

4

18

5 4

8 12

1

4

10

23

2

13 10 8

2

3

31

13

55"

185•

Components Consumer el. Industrial el.

2

Total

4

1

Singapore Co mponents Co nsumer el Industrial el.

2

Total Others

1970

3

Components Consumer el. Industrial el. Total

Total

1

8

3

• including 16 companies unidentified by first yea r of production and major source of capital. Note : Effort to update the above table was not fruitful. (Communications with EDB 23January and 17 February 1986). SOURCE: EDB (obtained from Hillebrand et al. 1981).

80 Tan Loong-Hoe and Linda Low

electronics firms have formed 19.0 per cent of all such firms entering the industry. Many American and Japanese MNCs still buy large proportions of locally-made inputs from their foreign-owned subsidiaries. In some cases, foreign subcontractors (who are supplying components to their parent companies) have followed them into Singapore to continue the same symbiosis. 10 This practice is especially prevalent among Japanese MNCsY Some inputs which are bought locally may even be imported from abroad by the dealers and agents of their foreign manufacturers . The problems of being not competitive in price, range , quality, and delivery dates of locally-owned supporting firms are well known and the EDB, SISIR. and other agencies are dispensing financial support and technical assistance to upgrade these firms . Compared with other electronics industries in the Asian countries, the stage of development of the electronics industry in Singapore is characterized as an export base for consumer electronics appliances. Singapore's production for most consumer electronics products puts it between Korea and Hong Kong 32 while its demand share is the smallest given its small domestic base. Since 1981 the manufacture of components and industrial electronics has become increasingly important. Table 3.9 shows that the North Ame rican market co mprising the United States and Canada is the most important des tin ation fo r Singapore's consumer electronic products. It accounted for _14.8 per ce nt of total domestic exports of consumer electronics products in 1979. which fell subsequently until 1983 when the trend was reversed to reach 42 .8 per cent in 1984. The EEC was the second largest market, but its share dropped from 32.1 per cent in 1979 to only 19.7 per cent in 1984 (except for a recovery in 1982) . Table 3.10 shows that the North American market was the leader for eight consumer electronics products, namely: 7622 7628 7631 7638

2. 3. 4.

SITC SITC SITC SITC

5. 6.

SITC 7643 SITC 7648

7.

SITC 7658

1.

Portable radios. radio cassette recorders Other radios, broadcast receivers; Electric gramophones, record players; Video recorders, tape recorders cassette type, tape recorders; Walkie-talkies, transmitters; Radio telephones or telegraphic receivers, radio navigational air radar and remote control apparatus, television cameras; and Electric water heaters, immersion heaters, hair driers, steam irons, irons, rice cookers, kettles, ovens, toasters, other electro domestic appliances.

Figure 3.2 shows the trend of domestic products for eight consumer electronics products to North America over the period 1979 to 1984 which have values ranging from S$341.5 million for portable radios and radio cassette recorders to S$0.8 million for radio broadcast receivers for motor vehicles. The latter

TABLE 3.9

Domestic Exports or Consumer Electronics Products, Singapore, 1979-84

Country / Region of Destination

SSm

u.s. ) Canada ) Japan ASEAN Rest of Asia EEC Middle East Others Total

%

508.4 59.6 85 .8 120.6 469.0 112.1 103.5

34.8 4.1 5.9 8.3 32.1 7.7 7.1

1459.0

100.0

%

SSm

SSm

%

SSm

1984

1983

1982

1981

1980

1979

%

SSm

%

SSm •

31.8 2.9 3.0 10.5 27.4 6.6 17.8

805.0 55 .8 85 .9 263.8 704.2 211.2 539.7

30.2 2. 1 3.2 9.9 26.4 7.9 20.3

644.2 64.8 66.7 2 12.8 669.2 134.1 365.6

29.9 3.0 3. 1 9.9 31.0 6.2 16.9

838.2 60.6 67.3 207.9 668.1 138.1 317.8

36.5 2.6 2.9 9.1 29.1 6.0 13.8

495.0 46.4 27.2 81.6 228.3 54.3 222.8

2191.3 100.0

2665.6

100.0

2157.4

100.0

2298.0

100.0

1155.6

696.8 62.9 66.6 229.1 601.2 143.7 391.0

• Average rate of exchange in 1984 was US$1 = S$2.1331 SOURCE: Singapore, Department of Statistics, Singapore Imports and Exports, 1984.

Annual Average Growth 1979-84

%

%

42.8 4.0 2.4 7.1 19. 7 4. 7 19.3

15.7 10.7 -7.5 7.6 0.8 0.7 35.6

100.0

11.1

82 Tan Loong-Hoe and Linda Low

TABLE3.10 Position of North America in Singapore's Domestic Exports of Consumer Electronics Products, 1984

SITC

7611 7612 7621 7622 7628 7631 7638 7642 7643 7748 7754 7757 7758

7763 7781 8851 8852

Value (S$m)

%of Total

2 5 4 1 1 1 1

91.8 2.5 0.9 367.7 79.1 0.4 120.1

24.0 9.0 51.2 67.9 100.0 69.9

2

6.2

31.1

1 1

4.7 1.5

13.4 71.4

6

0.5

2.7

l

297.3

80.0

1

86.1

32.3

5 6

10.2 0.5

7.4 0.6

2

11.7

19.4

North American Rank Colour television receivers Monochrome television receivers Radios for motor vehicles Portable radios Other radios Gramophones, record players Video recorders, tape recorders, cassette recorders Microphones, loudspeakers, amplifiers Walkie-talkies, transmitters Radio telephones Shavers, hair clippers Vacuum cleaners, floor polishers, oven hoods, fans, food grinders, mixers, juice extractors Water heaters, hair driers, irons, electric blankets, rice cookers, kettles, ovens, toasters, coffee makers Photocells, diodes, transistors, other semiconductor devices Primary cells and batteries Wrist watches, clocks with watch movements Clocks and parts

SOURCE: As in Table 3.9.

neg.

Singapore's Consumer Electronics Industry 83

FIGURE3.2 Domestic Exports of Electronics Products to North America

SS million

SITC 7622 radios SITC 7758

300

electro domestic appli ances

1

1I

200

I

/

100

/

/

/

/

/

/

"' Y

"'/ "'

/

/

/

/

/

I

I

I

I

I

I

I

SITC 7638 video recorders

/

'

" - - - -- SITC 7611 CTVs ~-- SITC 7763 photocells . SITC 7628 / /

'

/

-·-.-:-.-.....-......,.#. .:-· .•.

•••••.

SITC 8852 · clocks for vehicles · •• SITC 7621

. ~.•····

········

~----.------.------.-----~------~~

1979 SOURCE:

1980

1981

1982

1983

1984

Singapore, Department of Statistics, Singapore Imports and Exports, various years

84 Tan Loong-Hoe and Linda Low

product group saw the most dramatic decline from S$48.4 million in 1983 to S$0.8 million· in 1984. In general, most products took a dip in 1982 followed by recovery and growth in 1983 and 1984. The exceptions were radio broadcast receivers for motor vehicles, photocells, diodes, transistors, other semiconductor devices, and television receivers.

Summary and Conclusions The consumer electronics industry took its roots in Singapore, ahead of the other two electronics branches. By the late 1970s, Singapore had exhausted its comparative advantage of being a labour-surplus country. Despite the officially promoted significant rationalization in the electronics industry as a whole, the consumer electronics branch is still unlikely to rival the industrial electronics and electronic components branches. In fact, some of the more labour-intensive and simpler assembly operations of MNCs have been relocated to neighbouring countries. There is still scope for the consumer electronics branch to go into higher value added and more sophisticated end-products. Much will depend on improvement in world trade and protectionistic trends. The North American Market comprising the United States and Canada is the largest market for Singapore's consumer electronics products, followed by the EEC. The government thus has a larger role in making conditions as stable and predictable as possible. In this respect, the government has made very active representations to the U.S. Congress and other channels of economic diplomacy. Its lobbying for continued U.S. GSP appears quite successful as its case is being strengthened by its agreement to give more protection to intellectual property rights. Structural Change and Adjustment The first part of this section provides some background on the main characteristics of the surveyed firms focusing on market orientation, market performance, and sourcing of intermediate inputs, which contribute to the understanding of the export-orientation of the consumer electronics industry in Singapore. Hence, based on the findings of the survey of firms, the relative importance of market access to North America compared to other regions/ countries is spelled out. Also discussed are the impacts of two important influences of the external or global economic environment: trade protectionism and continuing recession. The second part of this section deals with the analysis of corporate adjustment responses mainly to trade protectionism at a more general level. 33 This is followed by highlights of very recent government adjustment responses to the external environment in which trade protectionism is identified as a serious and growing problem.

Singapore 's Consumer Electronics Industry 85

Main Chatacteristics of Surveyed Firms A summary profile of the main characteristics of the firms interviewed is presented in Table 3.11. 34 It is evident that Japanese capital is overwhelmingly important to Singapore's consumer electronics industry. In terms of the number of firms in the census of the consumer electronics industry for 1985, 15 out of the total 27 firms are wholly-owned subsidiaries (13 firms) and jointventures (2 firms) of Japanese MNCs (Table 3.12). Firm Size, Product Lines, and Age of Firms. As regards the firm size, measured in terms of the amount of annual turnover and employment, the two European and American firms, on average, are significantly bigger than the eight Japanese subsidiaries; but they are not as big compared to the two Japanese joint-ventures. (Table 3.11 ). In terms of product lines, the majority of the firms produces a mix of products; however, nine firms produce audio products and five firms manufacture TV sets and / or subassemblies. Four firms produce other consumer products, like electronic thermometers or electro-digital scales. As to the age/year of estab lishment of the surveyed firms, half of them were established in 1975 or earlier while the other half started operation in 1976 or later. Market Orientation . With the exception of a single local firm, which produced as much as half of its output for the domestic market, virtually all the other firms export 95 to 100 per cent of their total products (Table 3.11). Market Performance. Reflecting on the market performance of their firms in the past five years, only two respondents frankly reported that business was bad for them. Both are relatively smaller firms, one a Japanese subsidiary, another a local firm . Viewing the next five years, one respondent expected business would not improve very much while the other "cannot decide". As for the remaining 86 per cent (or twelve firms), the responses are more favourable in terms of past achievements rather than future business expectations. Indeed, 71 per cent (ten firms) have been successful in the ir operations despite much ado about persisti ng recession and risi ng protectionism; three firms reported "very good" market performance. However, in viewing the future , most of the Japanese respondents "cannot decide". The respo ndents from the two American and European firms were more confident in asserting thei r expectations that the future would be "very good" or "satisfactory" for their market performance (Table 3.13). North America is the largest foreign market for the surveyed firms accounting for slightly more than half of the total sales. The second largest market, taking approximately 30 per cent of the total exports, is the EEC. In contrast, Japan is so insignificant a market that the amount of output retained for domestic consumption or that which goes to the ASEAN market is much

TABLE3.11 Firm Survey of Singapore's Consumer Electronics Industry: Major Data Product Mix

Radios, radio cassettes, clock radios, hi-fi tuners, tape recorders Colour TVs, radio cassette players, cassette tape recorders Monochrome & colour TV subassemblies Radio cassette recorders, hi-fi amplifiers, cassette decks Stereo cassette recorders, cassette decks, radios Car radios, stereo tape players Car cassette radios Electronic wall clocks Irons, electro-digital scales, housewares Colour TVs, radios & radio cassette recorders Portable radios, clock radios, radio cassettes, amplifiers Colour TVs, car audio equipment, computer monitors Colour TVs Electronic: games, thermometers, blood pressure meters Notes:

• 1985

Ownership Status

Issued & Paid-up Capital (S$ million)

Year of Establishment

Employment (1984)

Export Turnover (1984) (%)

Japan

2.50

1977

173

1,200

90

Japan

16.40

1972

180

1,200

98

Japan

4.65

1979

120"

8oo·

100

1978

48

500

100

95

600

95

Japan Japan

7.00

1974

Japan Japan Japan American European

3.00 0.1 2.00 3.76 5.90

1978 1982 1976 1971 1975

46.8 9.31 7.00 125 210

600 56 104 1,200 1,800

100 100 95 99 98

JointVenture JointVenture Local Local

9.5

1972

148

1,000

98

6.0

1973

133"

900

95

9.00 1.00

1976 1973

99 700

50 100

+ Local minority ownership of equity (J apanese majority ownersllip).

SOURCE: Data from Survey of Firms.

Annual Turnover (1984) (S$ million)

7.69 67"

TABLE 3.12 Singapore: Census of Consumer Electronics Finns, 1985

AIWA

16.

Black and Decker

2

Asahi

17

General Electric (GE) Consumer Electronics

3

Hitachi 18.

4

JVC (Victor Company of Japan)

G .E. Television and Appliance

5

Matsushita

6

Nikko

7 8 9

Omdics Daiei Orion Rhythm San yo• Shintom Shirasuna• Takara Trio-Kenwood United Electronic Engi neering (UEE)'

10 II

12 13 14 15

a Joint -venture. with Japanese ownership. b ManufaCi uring o peration ceased. c Joint -vent ure witb mino rity ownership hy H ong Kong

in vest or~ ; 111

LOCAL

EUROPE

UNITED STATES

~

19.

20.

European Standard Electronics (ESE) (Subsidiary of Thomson-Brandt) Philips

21.

Caltron•

22.

Conion•

23.

Daihatsu

24.

Eastronics

25 .

Luxor

26.

Panatek
of d!.IDg down •>perat1on

SOURCE: Singapore Eleelronic Manufacturers D1n:Ciory JQ85 and Interview Wltb Econom•c

Oe~ lopme nl

Board ( Head 5. Electnca l/ Eiectromc_t

Remarks

0.2175

0.8284

Accepted

1.0934

0.2774

Accepted

0.3823

0.7032

Accepted

2.6507

0.0096

Rejected

2.0673

0.0418

Rejected

2.1600

0.0337

Rejected

1.1398

0.2577

Accepted

0.2847

0.7778

Accepted

1.6362

0.1056

Accepted

0.5440

0.5879

Accepted

Table 5.16 presents a listing of 15 factors that are theorized to motivate Korean TV set makers to undertake direct investment in the United States. As in the former case in which 85 respondents were questioned to rate their cost factors associated with the direct investment in the United States, the 15 predictor variables were ranked by the size of mean value ratings. Results are shown in Table 5.17. A number of implications can be deduced from the results contained in Tables 5.16 and 5.17 for Korea's direct investment in the United States. To begin with, the specific monopolistic advantages factor (B6) is not found to be very important. Korea's technology level is not comparable to that of Japanese or the U .S. firms . Korean manufacturers licensed their key technology from the United States or Japan and their R&D expenditures have been too low, compared with those of the U .S. firms . The electronics parts and components industries are not yet vertically integrated. Furthermore, their brand names are not well known in the U .S. market. Neither do they control the marketing channels and promotion instruments. Nevertheless, they have to face the big burden of the costs of foreignness. How then could they hope to compete

TABLE 5.16 Motivation Factors for Direct Investment in the United States by the Korean Consumer Electronics Industry Overall Factor

Avoidance of trade barriers such as quota and tariffs (B1) Growth of firm through internationalization (B2) Oligopolistic competition among domestic firms (B3) Strength of international competitive power over the overseas producers (B4) Acquisition of advanced technology (B5) Exploitation of firm -specific monopolistic advantages such as technology and marketing ability (B6) Outstanding management capability and lower management cost than those of U.S. firms (B7) Effective R&D (B8) Cheap labour-intensive parts & components supplied by the headquarters at home (B9) lncentives offered by the U.S. Government (B10) Exploitation of the marketing capability of the already-existing overseas marketing subsidiaries (BI 1) Building an entry base within the third market (B12) Advantage of fund raising through IRB (Industrial Revenue Bond) (B13) Close relationships with U.S. consumers (B14) Image build-up in the domestic market through successful overseas operations (B15)

Insiders

Outsiders

Mean Value

Rank

Mean Value

Rank

Mean Value

Rank

4.80 4.47 4.35 3.11 3.12 3.38

1 2 3 11 10 9

4.74 4.74 4.55 3.05 2.76 3.37

1 1 3 10 13 9

4.96 3.74 3.83 3.26 4.09 3.39

5 4 12 2 10

3.40

8

3.48

8

3.17

13

2.87 4.16

14 4

2.63 4.27

15 4

3.52 3.87

7 3

2.74 3.92

15 5

2.76 4.08

13 5

2.70 3.48

15 8

2.99 2.94 3.59 3.91

12 13 7 6

2.85 3.00 3.63 4.03

12

3.35 2.78 3.48 3.57

14 8 6

11

7 6

1

11

TABLE5.17 Ranking or MotiYation Factors by Mean Values

Rank

Motivation Factors

Mean Value

1

Avoidance of trade barriers such as quota and tariffs (B 1 )

4.80

2

Growth of firm through internationalization (B2)

4.47

3

Oligopolistic competition among domestic flrms (B3)

4.35

4

Cheap labour-intensive parts & components supplied by the headquarters at home (84)

4.16

5

Exploitation of the marketing capabiJjty of the already-existing overseas marketing subsidiaries (811)

3.92

6

Image build-up in the domestic market through successful overseas operations (815)

3.91

7

Close relationships with the U .S. consumers {814)

3.59

8

Outstanding management capability and lower management cost than those of U.S. firms (87)

3.40

9

Exploitation of firm-specific monopolistic advantages such as technology and marketing ability (86)

3.38

10

Acquisition of advanced technology (85)

3.12

11

Strength of international competitive power over the overseas producers (84)

3.11

12

Building an entry base within the third market (812)

2.99

13

Advantage of fund raising through IRB (Industrial Revenue Board) (813)

2.94

14

Effective R&D (88)

2.87

15

Incentives offered by the U .S. Government (810)

2.74

188 Wan-Soon Kim arui Chong-Keun Won

against the U.S. or Japanese crv makers in the U.S. market? Basically, the Hymer-Kindleberger theory of monopolistic advantages is not conclusive in this case. Given the lack of specific monopolistic advantages, the only alternative foreign-investing firms can accept, in order to compensate the costs of foreignness even in part, is to minimize management cost and maximize production efficiency. Following are some major factors that seem to have motivated Korea's direct investment in the United States. First of all, it is the tendency for th!! existence of tariff barriers to stimulate direct foreign investment in protectionist countries. The current trade and investment policy of the United States is to exclude foreign products from the domestic market and to encourage capital inflows to the United States for the balance of payment reasons. Faced with higher trade barriers in the U.S. market, Korean cosumer electronics manufacturers have found that they could overcome these trade barriers by setting up branch factories in the United States so that they can protect their existing export market shares (Bl). This is basically a defensive foreign direct investment strategy, quite distinctive from the pattern of foreign direct investment undertaken by industrial countries. As a defensive stance Korean manufacturers have entered the U.S. market without any specific monopolistic advantages, which can be generally found in the usual foreign investment activities of advanced countries and in existing direct investment theories. In sum, the contribution made by the avoidance of trade barriers factor ranks as the first in the survey. But, we should also note that the trade barriers in the U .S. erected against Korean crv sets have not been overriding conditions for the internationalization of Korean electronic firms . They may have accelerated the decision to undertake offshore investment activities. The oligopolistic competition between Gold Star and Samsung is another motive for foreign direct investment (B3). While Samsung was a forerunner of the foreign direct investment in Europe, Gold Star led Korean's overseas investment in the United States in 1982. Samsung followed the leader, Gold Star, in 1984 in its foreign investment in the United Srates. These firms generally aim at maket share expansion and firm growth through internationalization efforts (82). Internalization gain is an important motive for the foreign direcr investment by Korean cons umer electronics makers in the United States (B9). Approximately 50 ro 60 per cent of labour- intensive parts and components are supplied by the parent companies, which can manufacture them far more chea ply th an their U .S. counterparts. CPT, chassis, and some other important labour-intensive parts and components are being supplied by the headquarters. But such items as frame and large-sized (25-inch) CPTs are locally purchased, because their costs, including transportation, are higher than local sourcing by 40 to 50 per cent. Witho ut these internalization gains Korea's foreign direct inves tment would not have been possible. Besides, accumula tion of the experience of internalizing the foreign market should be counted as internalization gain. Both Gold Star and Samsung have a considerable history

The Case of the Korean Consumer Electronics Industry 189

of export performances. They opened their marketing subsidiaries in the United States in 1978. Their export and marketing experiences in the U.S. market, which may generally be regarded as a market internalization experience, is a very good compensating factor that could help reduce the costs of foreignness. Concluding Remarks Essentially, an attempt has been made to provide an answer to the problem of what have been the major adjustment efforts of the Korean consumer electronics industry when faced with higher trade barriers. Some broad policy implications can be deduced as follows. According to the product life cycle model, Korea would have a comparative advantage in low-priced, standard crv products. At the same time, advanced countries or the early starters should have shifted from the mature to the new products. But such a rational and mutually advantageous division of labour has not taken place among the major crv makers. Given the level of technology and availability of skilled workers along with labour and physical capital, the Korean Government should not have encouraged the private sector, through massive R&D funds, to move into particularly hightechnology electronics products which are beyond the current technical capability of business and which are not warranted by the norm of international comparative advantage. Japanese firms, holding fiercely to the autarkic pattern in this crv industry, have attempted to give a new lease of life to standard crv sets through process mechanization and product diversification. Similarly, the United States restricted its markets to the latecomers by resorting to quantitative trade controls. In other words, Korea, Japan, and the United States all have not played a positive role in paving the way for restructuring the consumer electronics industry according to a changing pattern of comparative advantage. Can we look for a more reasonable pattern of industrial specialization and trade in the future than has emerged in Korea's economic relationships with the United States, Japan, Canada, and other developing countries? Are there some constructive, effective, and mutually beneficial solutions to the problems of the market glut of consumer electronics products in general and the crv industry in particular? Several conclusions could emerge from the previous discussions that have significant implications for future industrial and trade policies of the countries concerned. Firstly, due to rising labour and land costs at home, and competition from new export-oriented electronics industries in the developing countries of ASEAN, Korea is now confronted with the loss of comparative advantage in the production of small-size radios and B/W TV sets. Instead of trying to regain the loss of comparative advantage in these simple, labour-intensive products through the development of innovative processes and designs, Korea

190 Wan-Soon Kim anil Chong-Keun Won

must opt to leave the field to the latecomers or she has to face head-on trade confrontation. Similarly, knowing that its recent industrial restructuring difficulties have essentially stemmed from excessive investment and duplication of similar projects in those industries which are dubious in terms of international price competitiveness and availability of domestic skill and technology base, Korean policy-makers should promote investment in those industries where Korea has some apparent advantage over its competitors. Next, by relying largely on the U.S. market, it is likely that Korea will create trade frictions with the United States and, in fact, the U.S. Government has erected non-tariff barriers against Korean CfV sets. Although Korean TV manufacturers have overcome these trade restrictions partly by setting up branch factories in the United States, it is vital that Korea should substantiaiJy diversify the market for CfV sets. As trade frictions become serious and intensified, Korea's manufacturing investments in the United States may expand from consumer electronics to other fields, but their growth is likely to be limited without capacity to generate highly innovative technologies. At present, Korean direct investment in the United States is not as large as that of Japan and therefore cannot have any significant impact on the U.S. economy. Furthermore, in the case of Gold Star, its direct investment was initially induced by technology promotion and employment generating measures pursued by the State of Alabama, which supported Gold Star's American operation through issuance of industrial revenue bonds amounting to US$10 million. But neither should Korean investors rule out the possibility that the United States could ask for locally sourced parts and components representing more than 50 per cent of the total value added. In other words, the United States could impose restrictions on origin of parts and components in Korean subsidiaries' products. Nor is the sudden rush of exports from Korea to a single country likely to remain unrestrained, as happened to Korean exporters in the United States and Canada. Entering into the 1980s, the United States has taken restrictive trade actions. As applied to imports of CfV sets from Korea, U.S. protectionism became much more inefficient and inequitable under the so-called OMA. As argued before, while Korea was quite vulnerable to quantitative import restricting measures, Japan, being in a strong bargaining position, was able to negotiate with the United States over higher import quotas. Furthermore, with sufficient financial resources, Japanese manufacturers set up a number of large assembly plants in the United States-- the branches of Japanese multinationals in order to counter its protectionist moves. Furthermore, with the support of huge profits from their high technology products and efficient distribution networks, Japan could easily encroach into the Korean market share in the United States by charging predatory prices for basic TV models in which Korean sellers specialize. In fact, Japanese sales of CfV sets -- both imports and domestic shipment -- as a share of the U .S. supplies have increased,

The Case of the Korean Consumer Electronics Industry I 91

contrary to the protective aims of the OMA. This inequitable tendency certainly goes against the notion of comparative advantage. The United States should play a much more positive role as a key export market for the latecomers, and its protective trade measures should not reduce the effectiveness of tariff negotiatoins in moving towards trade liberalization. Finally, in working out ways and means to solve some of the long-standing economic problems and the issues of competition and co-operation in the CIV industry which have at times strained the relations between Korea and Japan, much responsibility rests on the Japanese. Being an initially labour-intensive and maturing product, it would have been appropriate for Japan to leave behind CIV sets and shifted completely to other high-technology electronics products such as video-tape recorders, mini computers, videodisc and digital audio discplayers, and the like. On the contrary, Japanese manufacturers have rejuvenated the CIV industry as one part of a research-intensive complex of activities in which they have been able to swing the balance of comparative advantage in their favour. 26 The result has been that by shifting the technology-intensive and quality CIV sets to themselves, Japanese makers have reduced drastically the areas of labourintensive portions that the NICs could start on. Referring to trade in CIVs between Korea and Japan, Japan's virtual self-sufficiency in CIV set demand has been pointed out. It has been also argued that unless and until Japan is ready to relax its autarkic position as an exporting country only, Korean television makers would find it virtually impossible to penetrate into the Japanese markets. As a result, it has been concluded that, by and large, the home and U .S. export markets would remain for Korea's standard CIV sets. Therefore, if a low level of intra-industry specialization is an obstacle to a mutually beneficial interdependence between Korea and Japan, access to more advanced technologies may be an answer. In this respect, if Japan could not help Korean TV makers upgrade their production processes by providing them with needed technologies, probably two of the NICs, Korea and Taiwan, will have much chance of climbing high on the technological ladder through close technical co-operation. Taiwan has the most abundant supply of engineers and technicians; whereas Korea, having the bigger domestic market of the two, could invest much in R&D and marketing research -- the driving force behind product and component development. One step further, as has already been suggested, in response to aggressive penetration of U.S. markets by Japanese manufacturers, American consumer electronics makers could move their production to Korea, providing infusions of capital and technology. In other words, the United States, Korea, and Taiwan can compete with each other in similar lines of merchandise, so that a mutually advantageous division of labour could be developed in terms of different components, models, and functions.

192 Wan-Soon Kim and Chong-Keun Won NOTES 1.

At that time three big home appliance makers -- Gold Star Co., Ltd., Samsung Electronics Co., Ltd. and Taehan Electronic Co., Ltd. -jointly licensed technology. Taehan sold the electronics part of its company to the Daewoo Business Group, Daewoo Electronics Co., Ltd., in 1982. Currently the three big consumer electronics makers are Gold Star, Samsung, and Daewoo.

2.

By transmission system CIVs are divided into three: NTSC, PAL (Phase Alternative by Line), and SECAM (Sequential Couleure a Memorie).

3.

The consistent export expansion into the United States market can be explained in three ways. First, the market demand in the United States was ever growing. Secondly, due to the U.S. lowered tariff rates, the U.S. tariff on TVs has been lowered to a mere 5 per cent since 1972. In comparison, the Japanese tariff rate has been 7.5 per cent since 1971. Lastly, the Orderly Marketing Arrangement (OMA), a voluntary export restraint measure, was lifted in July 1982.

4.

Harvard Business School, Gold Star Co., Ltd., Reference #0-385-264, p. 23.

5.

Glenn P. Jenkins and Gary D. Sawchuk, "The Canadian Television Preliminary Report, 1986.

Industry'',

6.

In the cases of Japan and the United States, R&D expenditures are electronics.

strictly for

7.

Economic Planning Board, Cu"ent Status of Technology Imports into Korea (in Korean), December 1980, and Youngil Urn, U.S. Imports from Korea during the 1980's (Seoul: Korea International Economic Institute, 1979), p. 71.

8.

Korea Development Institute, Fifth Five-Year Plan (Seoul: Korea Development Institute, 1980), p. 269.

9.

Jack Baranson, Technology and the Multinationals (Lexington, Mass.: D.C. Heath and Company, 1978), p. 99.

10.

Delbert A Snider, Introduction to International Economics Richard D. Irwin, Co., 1979), pp. 223-30.

11.

Ibid., p. 231.

12.

Louis Turner and Neil McMullen, The Newly Industrializing Adjustment (London: Allen and Unwin, 1982), p. 56.

13.

While tariff measures are preferable to quotas under the GATT, the U.S. negotiators were uncomfortable with the contradiction of being asked to negotiate a tariff increase out of one side of their mouth while espousing tariff liberalization from the other. The politically expedient solution for the U.S. negotiators was a bilateral Orderly Marketing Arrangement (OMA).

14.

Turner and McMullen, op. cit., p. 56 and Snider, op. cit., p. 231.

(Homewood, Illinois:

Countries: Trade and

The Case of the Korean Consumer Electronics Industry 193

15.

Snider, op. cit., pp. 241-42.

16.

Hyu.ndai Business Group, the largest business conglomerate in Korea, aggressively entered the electronics industry in 1983. Hyundai announced that it would concentrate on the production of industrial electronics.

17.

OEM stands for Original Equipment Manufactuies. Tbis is an agreement in which own products are sold in foreign brands.

18.

F.R. Root, International Trade and Investment, 5th ed. (Cincinnati, Ohio: SouthWestern Publishing Co., 1984), p. 455.

19.

S.H. Robock, and K. Simmonds, International Business and Multinational Enterprises (Homewood, Ulinois: Richard D. Irwin, Inc., 1983), p. 41.

20.

Ibid., p. 42.

21.

Root, op. cit., p. 104.

22.

Robock, and Simmonds, op. cit., p. 45.

23.

Ibid., p. 47.

24.

F.T. Knickerbocker, Oligopolistic Reaction and Multinational Enterprise (Boston: Harvard University Press, 1979).

25.

Business Week , 30 December 1985/6 January 1986, p. 51.

26.

Turner and McMullen, op. cit., p. 48.

REFERENCES

Baranson, Jack. Technology and the Multinationals . Lexington, Mass: D.C. Heath and Company, 1978. Economic Planning Board. Cu"ent Status of Technology Imports into Korea (in Korean). Electronics Industry Association, December 1930. Harvard Business School. Gold Star Co., Ltd. Reference #0-385-264 Jenkins, Glenn P. and Gary D. Sawchuk. "The Canadian Television Industry''. Preliminary Report, 1986. Knickerbocker, F.T. Oligopolistic Reaction and the Multinational Enterprise. Boston: Harvard University Press, 1973. Korea Development Institute. Fifth Five-Year Plan. Seoul : Korea Development Institute, 1980.

194 Wan-Soon Kim and Chong-Keun Won Lim, Youngi l. U.S. Imports from Korea during th e 1980's. Economics Institute, 1979.

Seoul: Korea International

Robock, S.H. and K. Simmonds. International Business and Multinational Enterprises . Homewod, Illinois: Richard D. Irwin, Inc., 1983. Root, F.R. International Trade and Investment. 5th ed. Cincinnati, Ohio: South-Western Publishing Co., 1984. Snider, Delbert A Introduction to International Economics. Homewood, Illinois: Richard D. Irwin Co., 1979. Turn'!r, Louis. "Consumer Electronics: The Colour Television Case". In The Newly Industrializing Countries: Trade and Adjustment. ed ited by L. Turner and N. Macmillan. London: George Allen & Unwin, 1982. Turner, Louis and Neil McMullen, eds. The Newly Industrializing Countries: Trade and Adjustment. London: Allen & Unwin, 1982.

THE EDITORS Tan Loong-Hoe is Senior Fellow at the Institute of Southeast Asian Studies . He is also Co-ordinator of the Institute's ASEAN Economic Research Unit. Chia Siow Yue is Associate Professor of Economics, National University of Singapore. She is also consultant to the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the Asian Development Bank (ADB), and a co-ordinator of several research projects dealing with trade and industrialization.