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United States. Congress. House. Committee on Ways.

United States-Japan trade, commercial, and economic relations : hearing before the Subcommittee on Trade of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session, July 13, 1993 online

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Online LibraryUnited States. Congress. House. Committee on WaysUnited States-Japan trade, commercial, and economic relations : hearing before the Subcommittee on Trade of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session, July 13, 1993 → online text (page 16 of 21)
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growth means at least ... an average of 20 percent foreign market share penetration of the
semiconductor market in Japan over the next four quarters." Given that the average foreign
share during 1992 was only 16.7 percent, the U.S. Government must make the Agreement
a top priority of U.S. trade policy in order to ensure that the average foreign share during
1993 is at least 20 percent on average, and that foreign access continues to grow.

A gradual and steady increase in foreign market share beyond 20 percent will not
occur without substantial additional purchasing efforts by Japanese consumers. Although
the increased market share in Japan in 1992 is a significant accomplishment, this does not
imply satisfaction that full access to the Japanese market has been achieved. It has not.
Despite the progress made to date, a substantial gap remains. Semiconductor producers
have a higher market share outside of Japan than they have in Japan for each and every
type of semiconductor product. The "gap analysis" presented in the attached chart (see chart
4) demonstrates that further progress in obtaining greater market access in Japan is possible
to a small degree for some products and to a very large degree for most others. The gap
analysis is presented not as a political statement or as an indictment of Japan, but as an
indicator that progress toward greater market access can be made across a broad spectrum
of products. Foreign producers can and should satisfy more of Japan's semiconductor
demand.



135



To make further progress in increasing foreign market share, foreign products must
be accepted to a greater degree in Japan. Foreign semiconductors must be designed into
the heart of Japanese electronic systems in more cases. Such "big ticket" design wins lead
to interdependence of suppliers and customers. Mutual dependence is the natural result of
an open international trading system and it is the necessary goal of an open international
trade policy.

As continued progress in market access is achieved, the two industries have been
moving from confrontation to cooperation. The two industries can increasingly engage in
joint efforts to work together on activities that result in creating new applications for
semiconductors and new markets so that both industries will benefit simultaneously.
Cooperation on environmental issues would also be beneficial.

Semiconductors have been a bellwether in U.S.-Japan relations. Further success in
this sector would indicate that broader success is possible in the world's most important -
and troubled - trading relationship.



WHY THE SEMICONDUCTOR AGREEMENT WORKS

The 20 percent market share benchmark in 1992 was achieved for a number of
reasons. U.S. government support for the Agreements, U.S. semiconductor industry efforts
to increase their competitiveness, and the industry's continued investment to serving the
Japanese market were aJl critical elements for achieving the 20 percent figure.

First, strong U.S. government support for the Agreement and a willingness to take
action have been indispensable. One example is the trade sanctions imposed by the Reagan
Administration in 1987 because little progress was being made in opening Japan's market.
Once sanctions were imposed, Japan realized that the U.S. government was committed to
seeing the accord enforced. As a consequence, efforts by chip users in Japan increased
significjmtly. Congressional interest has also been vital. In April 1992, the Senate Finance
Committee requested that the Bush Administration review Japan's compliance with the 1991
Agreement. In August 1992, after a two-month U.S. interagency review, the U.S.
government concluded that "since the Agreement came into effect in August 1991, efforts
by the Japanese government and Japanese industry to improve market access for foreign
semiconductor suppliers have not, to date, resulted in sufficient progress."^/ Shortly
thereafter, by the fourth quarter of 1992, foreign semiconductor sales to Japan increased
significantly.

Second, the U.S. semiconductor industry took vigorous and effective steps to boost
its own competitiveness in Japan and elsewhere. U.S. firms improved quality and service,
and undertook initiatives to boost the performance of microelectronics educational programs
in American uruversities through the Semiconductor Research Corporation (SRC). The U.S.
industry also continues to provide $100 million annually to the SEMATECH R&D
government-industry consortium in order to improve the competitive position of American
semiconductor manufacturing technology.

Third, the U.S. semiconductor industry continues to invest extensive resources in
meeting the rigorous demands of Japan's market. From 1986 to 1989, American chip
makers opened more than one new facility in Japan each month to serve the Japanese
market. The number of U.S. company personnel during the same period increased nearly
32 percent, and capital expenditures by U.S. companies in Japan rose a remarkable 169
percent. The U.S. semiconductor industry has launched numerous other initiatives to
expand sales in Japan. For example, since 1986, the SLA Board of Directors has held one
of its quarterly meetings in Tokyo every year. SIA is not aware of any other U.S. trade
association that annually meets outside the United States with the objective of increasing



4/USTR, "Review Reveals Insufficient Progress on U.S.-Japan Semiconductor
Anangement," Press Release, August 4, 1992.



136



exports to a single foreign market. In 1988, SIA opened an office in Tokyo, with initial
support from the U.S. Department of Commerce, to coordinate inter-industry contacts,
technical tours, trade seminars, and literature exchanges. The office also provides an
industry level perspective to supplement individual U.S. company communications to the
Japanese government, media, and industry. SIA also has expanded the extensive inter-
industry market access program that it developed with the Electronics Industry Association
of Japan (EIAJ) under the 1986 Agreement.

In short, the semiconductor pact has worked because the semiconductor industry had
a legitimate grievance concerning lack of access to Japan's market; was the market share
leader in all world markets outside of Japan; had strong U.S. govenmient support enforcing
the Agreement and enforcing measurable progress under that Agreement; continued its
efforts to improve competitiveness; won the cooperation of Japanese industry and
government; and benefited from an enforced objective benchmark for measuring success.
All of these factors have been instrumental in doubling the foreign market share in Japan
since 1986.



CONCLUSION

SIA supports the Clinton Administration's approach to trade with Japan. If the
Semiconductor Agreement is used as a model for trade policy, the lesson to draw is that a
complex combination of factors brings success, but success is possible. Both industry and
goverrmient support for the artangement and an objective measure, used as a clear
benchmark, commensurate with competitiveness, are essential. U.S. trade policy must
demand results. It is the hope of SIA that the U.S. government, including this Committee,
will continue to support the 1991 Semiconductor Agreement cmd help ensure continued
success. Continued steady progress in market share, moving beyond a minimum 20 percent
foreign market share average in 1993 will be critical.



137



JAPANESE MARKET

Foreign Share of Japanese Semiconductor Market




"1 — I — i — I — I — I — I — \ — \ — \ — i — i — I r

81 82 83 84 85 86 87 88 89 M 91 92 93 Ql



1 — I — \ — I — I — I — r

73 74 75 76 77 78 79



Source: Scmiconducior lniJusir>' Association. 1993



Foreign Share in Japan




I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

QIQ2Q3Q4QlQ2Q3Q4QlQ2Q3Q4QlQ2Q3Q4QIQ2Q3Q4QlQ2Q3Q4QlQ2Q3Q4QiQ:Q3Q4
1986 1987 1988 1989 1990 1991 1992 1993

Source: iy86-Q2. 1991 ; SIA esiimates consislem
Q3 199110 present: U.S.T.R.



138



U.S. OUTCOMPETES JAPAN IN EVERY OPEN MARKET



■-^^



U.S. MARKET = $18,4 BILLION



JAPANESE FIRMS 2i




JAPANESE FIRMS 3



EUROPEAN rMRKET = $11.5 BILLION



REST OF WORLD (Excluding Japan.
Europe & the US ) =$10 6 BILLION




WORLD MARKET (Including Japan
Market) = $59.9 BILLION







WORLD MARKET (Excluding Japan
Market) = $40.5 BILLION



JAPAN MARKET = $19 4 BILLION



S \TYPESET\C0REL\SEMiCON0 CCH



As Japanese Demand in Individual Products

Grows Over the Next Three Years, U.S. and Other

Foreign Producers Should Have Many Opportunities

to Increase Their Sales to Japanese Users.



PLD-FPCA

SRAM«35nS)

MPU

MCU (>4bil)

DRAM

EB'ROM»Rasli

EPROM

SiJ ASSP

SRAM(>35iiSI

GA-SC-FC

MA5KROM

Indusmal \C

AA)-D/A

TR5(>1W)

OPTO

MPR



Const



TRS(>1W)

CCD

OP AMP

Otiia Diacrctc

MCU (4biiJ

Othd Bipoi^

TTL




PL&FPGA


17%




15%


MPU


13%




12%


DRAM


11%


FFJ=ROM»Hi»h


11%






Sid A.SSP


11%




10%


(iA-.SCFC


10%




10%




9%




7%


TRSOIWI






7%.


MPR




r,^,,:a^,tC


6%




f.%


(TD


5%




4%




4%




4%




|4%I


TTI


(13%)



139



m



siMicmucjim masm nssucimn

4300 Stevens Creek Boulevard • Suite 271
San Jose • CA 95129 • (408) 246-2711



f AX (408) 246-2830



The Semiconductor Industf7 Association



Since 1977, the Semiconductor Industry Association (SIA) has represented U.S. -based
semiconductor manufacturers - an industry whose worldwide sales exceeded $21 billion in 1991. SIA
member companies comprise 85 percent of U.S. semiconductor production and employ more than
200, OCX) Americans. The association's primary focus is on international trade, specifically unfair trade
practices and increased access for U.S. products in world markets.

SIA activities also include a broad range of industry concerns including: technology policy,
occupational safety and health, environmental issues, industry statistics, government semiconductor
procurement, and related issues affecting U.S. semiconductor competitiveness.

SIA Member Companies



SIA Regular Members



Advanc«<] Miao Devices, Inc.

Ailied SigriaJ Aerospace Company

A/nencan Telephone and Telegraph Company

Analog Devices, inc.

Aimel Corporation

Cherry Corporation

Digital Equipment Corporation

Ford Microelectronics Corporation

General Electric Company

Harris Corporation

Hewlett-Packard Company

Integrated Device Technology, Inc

Intel Corporation

IBM Corporation

InternationaJ Rectifier Corporatjon

Lansdale Semicor>ductor. IrK.

LSI Ijogic Corporation

Micron Technology, IrK,

Motorola

riatKjnaJ Semiconductor Corporation

Northern Telecom Electronic*, inc.

Quality Semtoondudor

Raytheon Company

Rockwell InternatJofiaJ Corporattoo

Texas Instrument* Incorpofated

United Technotogiet Corporation

Unitrode

VLSI TechrKJtogy. kK,

Slog. Inc.



Semiconductor Associate
Members

C-Cube Microsystems. Ir>c
Cirrus Logic, Itk.
Diodes, Inc.
Victronix Technology, Inc

WtiOK. Inc



Manufacturing Associate Members

Allegro Microsystems. Inc
Exar Corporation
Exel Microelectronics, Inc.
Fujitsu Microelectronica
NEC Electronics, kic,
Siemens Corporation
Signetics Corporation
Silicon Systems, kic.
Sony Microelectronics



Corpofate Associate Members



Air Products and Chemicals, Inc.

Bellcore

COMDISCO

Crysteco, Inc

Dewey Ballantirie

Flour Daniel. Ir>c.

Japan Society of Newer Metals

Kawasaki Wafer Technology

Macronix

MEMO

MOS Dectronics Corporation

Osaka Titanium Company (OTC)

Samsung Semiconductor, inc.

SEH America, Inc.

SEMATECH

Semiconductor Research Corporation

Slicon Integrated Systems Corporation

Siltec Corporation

Siltron, Inc

Technecon Analytical

TSMC. USA

Wacker Sittronic Corporation

WaferScale Integration

Ware and Freidenrich



140

Chairman Gibbons. Mr. Morein,

STATEMENT OF JOSEPH A. MOREIN, VICE PRESIDENT, THE
CHUBB CORP., WARRENTON, N.J., ON BEHALF OF AMERICAN
INSURANCE ASSOCIATION

Mr. Morein. Yes, Mr. Chairman.

I am Joseph Morein, vice president of the Chubb Corp., a com-
pany with major interests in international property casualty insur-
ance.

Today I am speaking on behalf of the American Insurance Asso-
ciation which represents more than 250 property casualty insur-
ance companies that write over $60 billion in premiums. My pur-
pose today is to explain how United States and other foreign com-
panies seeking to compete in the Japanese property casualty insur-
ance market are subject to barriers similar to those experienced by
U.S. industrial companies and those in other parts of the service
sector.

Japan is the second largest insurance market in the world. Its
nonlife premiums in 1990 totaled $75 billion, the equivalent of one-
third of the U.S. property casualty market. It is also a highly prof-
itable market, although it is subject to significant catastrophe expo-
sures, such as typhoons and earthquakes.

The Japanese marketplace is dominated by a small number of
very large domestic companies. The top 10 Japanese insurers con-
trol 79 percent of the nonlife market. The U.S. equivalent is 30 per-
cent. Similar figures exist for the concentration of the life insur-
ance market.

These large domestic companies are the major beneficiaries of
the regulatory system and the unwritten rules. These combine with
the keiretsu relationships to create an environment which effec-
tively excludes foreign insurance companies fi-om almost all com-
mercial nonlife coverages.

The Japanese Ministry of Finance regulates the insurance busi-
ness through an insurance department which reports to a banking
bureau. The MOF has only limited capacity available to license
new companies or products. It relies heavily on the insurance coun-
cils for advice and on various industry associations for self-regula-
tion. Foreign participation in these groups is limited to observer
status at best. Many decisions are made with no foreign company
input at all.

Product pricing as well as new product introduction is tightly
controlled by the MOF, reinforcing the large domestic companies
dominant position in the insurance market. These procedures have
limited the ability of foreign companies to use product innovation
or price competition to gain market share.

While the approach to product development and pricing applies
to foreign and Japanese companies alike, there are areas in which
foreign companies operate under different rules and market prac-
tices, also to their disadvantage.

An example is earthquake coverage. The net effect is that foreign
companies have a disproportionate share of earthquake risk com-
pared to the amount of business they write, reducing the
attractiveness of the Japanese market to it. We would like to see



141

earthquake treated on equal basis with the same rules and market
practices for all companies in the market.

Informal rules also put foreign companies at a disadvantage. Al-
though there are no explicit prohibitions against foreign acquisition
of a Japanese insurer, there has never been such an acquisition.

The MOF is also responsible for product and company classifica-
tion between life, what they call first division, and nonlife, second
division. Some products, such as personal accident, fall into a third
division. The products within this third division are of particular
importance to foreign insurers. More than 40 percent of foreign in-
surers' nonlife premiums come from this special category.

Overall, foreign companies' share of the Japanese insurance mar-
ket remains at less than 3 percent versus the over 12 percent share
that foreign companies enjoy in the U.S. market.

The AIA believes that elimination of structural and legal impedi-
ments to open competition in the Japanese marketplace will benefit
both consumers and insurers. It would greatly enhance our ability
to compete, especially in the commercial market. We, therefore,
generally welcome the recent recommendations of the Ministry of
Finance's Insurance Council regarding the need to liberalize the
Japanese insurance market. The report followed three years of de-
liberations from which the views of foreign firms were largely ab-
sent.

From a review of the available materials, it appears that the
MOF intends to liberalize the third division as a first priority be-
fore addressing the primary life and nonlife sectors. Such a step
would be contrary to an open market movement because primary
market trading restraints were the factors which effectively forced
foreign companies into the third division. The foreign companies'
small footholds in the third division were hard won, and this area
is more important for them than for the national Japanese compa-
nies.

A decision to deregulate the third area in isolation would thus
constitute unfair treatment of foreign carriers. It may also force
some of these carriers to leave the market. One U.S. insurer has,
in fact, recently left Japan, transferring its operations to an Italian
company. Another has sold a part interest in its operations to a
Japanese life insurer.

We believe that liberalization of the primary nonlife insurance
sector should precede liberalization of the third division. We also
recommend that deregulation address all current constraints, in-
cluding policy form approval and rating liberalization.

Furmer, we suggest that it is important that representatives of
foreign insurers in Japan be allowed a more active role in the var-
ious industry nonlife committees and the rating associations.
Sound mutual benefits will be realized from the input of foreign in-
surers.

We also believe that a timetable for reform is needed if real
progress is to be achieved. This timetable should encompass all the
legislative and financial aspects identified in the Insurance Coun-
cifs report, clarification of the separation of life and nonlife busi-
ness, a more responsive process for new products, and rating sen-
sitivity.



142

We applaud the efforts of this subcommittee, and we would like
to work with you in the future. Thank you for this opportunity to
share the AIA's views on this subject. I would be happy to answer
any questions now or later.

[The prepared statement follows:]



143



TESTIMONY OF JOSEPH A. MOREIM

SUBCOMMITTEE ON TRADE

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

JULY 13, 1993

Mr. Chairman, Members of the Subcommittee, Ladies and
Gentlemen, good morning. My name is Joseph A. Morein, Vice
President of the Chubb Corporation, with major interests in U.S.
and international property-casualty insurance. Today I am speaking
on behalf of the American Insurance Association on United
States-Japan Trade, Commercial, and Economic Relations. The
American Insurance Association represents more than 250
property-casualty insurance companies, which write $60 billion in
premiums. The AIA is headquartered in Washington, DC and has
representatives in every state.

My purpose today is to explain how U.S. and other foreign
companies seeking to compete in the Japanese property-casualty
insurance market are subject to barriers similar to those
experienced by U.S. industrial companies and those in other parts
of the service sector.

You may know that Japan is the second largest insurance market
in the world. Its non-life premiums in 1990 totalled $75 billion,
or the equivalent of approximately one-third of the U.S.
property/casualty market. It is also a highly profitable market.
However, it is svibject to significant catastrophe exposures such as
Typhoon Mirelle in 1991 and Tokyo is located in one of the major
earthquake zones, about which I will have more to say later.

The Japanese marketplace is dominated by a small number of
very large domestic companies. The top ten Japanese insurers
control 79% of the non-life market. (The U.S. equivalent is 30%.)
These large domestic Japanese companies are the major beneficiaries
of the regulatory system, as well as a set of unwritten rules.
These, combined with the "Keiretsu" and/or cross-shareholding
relationships, create an environment which effectively excludes
foreign insurance companies from competing in almost all commercial
non-1 i f e coverages .

The Japanese Ministry of Finance (MOF) regulates the insurance
business through an insurance department which reports to a banking
bureau. The MOF has only limited capacity available to license new
companies or products. It relies heavily on the insurance councils
for advice (i.e. which are dominated by Japanese companies), and on
various industry associations for self- regulation. Foreign
participation in these groups is currently limited to observer



144



status. Many decisions are made with no foreign company input at
all.

Product pricing as well as new product introduction is tightly
controlled by the MOF, thus reinforcing the large domestic
companies dominant position in the insurance market. These
procedures have limited the ability of foreign companies to use
product innovation or price competition as ways to gain market
share.

While the approach to product development and pricing applies
to foreign and Japanese companies alike, there are areas in which
foreign companies operate under different rules and market
practices, once again to their disadvantage. An example is
earthquake coverage. For commercial risks, the Japanese companies
have agreed to restrict their coverage to 15% of value. Foreign
firms do not have this constraint. As a result, market pressures
result in their taking on a disproportionate share of earthquake
risk.

A further inequality in the earthquake area exists in the area
of personal homeowners coverage. Earthquake coverage on the homes
of Japanese citizens has low limits and has access to a reinsurance
pool. Coverages for foreigners living in Japan do not have the
limit constraint and may not be reinsured into the earthquake pool.
Not surprisinqly it is companies like Chubb that end up providing
protection for these expatriates.

The net effect is that foreign companies have a dispro-
portionate share of earthquake risk, reducing the attractiveness of
the Japanese market. We would like to see earthquake treated on an
equal basis, with the same rules and market practices for all
companies in the market.

We would not argue that the U.S. insurance regulatory system
is perfect. It has many shortcomings. However, it does provide a
fairly level playing field for foreign and domestic companies and
we feel that is not the case in Japan.

Informal rules also put foreign companies at a disadvantage.
Although there is no explicit prohibition against foreign
acquisition of a Japanese insurer, however there has never been
one. While we are not necessarily in the market to buy a Japanese
insurer, we would like to have the option, as Japanese companies
have in the United States.

The MOF is also responsible for product and company
classification between life ("first division") and non-life
("second division"). Some products ( e.g. . personal accident,
disability and medical supplements) fall into a "third division."
The products within this "third division" are of particular



145



importance to foreign insurers. More than 40% of foreign insurers'
non-life premiums come from this special category.

Various structural barriers have proven almost insurmountable
to foreign companies. After twenty years of serious efforts,
foreign companies' share of the Japanese insurance market remains
at less than 3%, versus the over 12% share that foreign companies
enjoy in the U.S. market.

AIA believes that the elimination of structural and legal
impediments to open competition in the Japanese marketplace would
be a very positive step that will benefit both consumers and
insurers. It would greatly enhance our ability to compete,
especially in the commercial market. We therefore generally
welcome the recent recommendations of the MOF's Insurance Council
regarding the need to reform and liberalize the Japanese insurance
market. The report followed three years of deliberations which
virtually excluded the views of foreign firms. The MOF is now
preparing to implement the Council's recommendations over the next
three years. Some reforms can be carried out by MOF alone, some
will reguire new legislation by the Diet. However, consistent with
the spirit of openness espoused by the Insurance Council's Report,
AIA respectfully draws official attention to its concerns.

Based on our review of all available materials, it appears
that the MOF intends to liberalize the "third division" as a first


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Online LibraryUnited States. Congress. House. Committee on WaysUnited States-Japan trade, commercial, and economic relations : hearing before the Subcommittee on Trade of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session, July 13, 1993 → online text (page 16 of 21)
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