United States. Congress. Senate. Committee on the.

The Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) online

. (page 43 of 140)
Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 43 of 140)
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5319

Here, for your information, I think it would be useful if I say a f eyv
words about the institutions of the European Community. The Council
of Ministers from the member countries is the body which ultimately
makes decisions on policy. The Commission, of whose staff I am a mem-
ber, makes policy proposals.

The Council resolution of which I have spoken was based on a long-
er communication from the Commission which provides a useful back-
ground to the resolution, document sec. (73-4300) , and I will give you
a copy of this document for the record.

[The document referred to appears as exhibit 2 at the end of ^Ir.
Layton's oral testimony.]

Mr. Layton. I have painted this broad picture of attitudes and pol-
icies in Europe because it seemed a proper framework for discussion of
the structure o f the computer industry and of our common interests in
this field. First, the public interest on both sides of the Atlantic is to
avoid monopoly and any abuse of a dominant position. Without dis-
puting tlie inuiiense contribution IBM has made to data processing, we
all have a connnon interest in insuring that vigorous and viable com-
petitors exist and that they are not hampered by unfair practice?.

One of the more etfective operational chapters of the treaty setting
up the European Economic Community is the rules of competition,
which are enforced by the Commission. Article 86 of the treaty em-
powers the Commission to proceed against a company which ""abuies
a dominant position."' Speaking in a personal capacity — I can't speak
in detail for the department of the Commission which has the task
of enforcing article 86 of the Rome Treaty — it is quite clear that they
have the task of examining very carefully whether IBM does dominate
tliis industry, according to a fair and reasojiable definition of the
market — and tliere is -nnich prima facie evidence in this direction — ■•
and whether there are concrete cases of abuse.

The case being brought by the Department of Justice and the
Telex case have aroused a lively interest in Europe and it is clearly the
duty of the Commission to see whether the abuses alleged in these
cases have parallels in Europe.

I believe there are also real common interests in the wider positive
policy we are developing for data processing in Europe. Europe has
benefited and still benefits from the technology and skills brought
by U.S. data processing companies. We are merely seeking to insure
that, side by side with these, European-based companies also play a
dynamic part.

I believe the time may come when this could have an intei'est for the
United States. The process of concentration in the industry is moving
so fast that the existence of at least one major viable alternative Eu-
ropean source of competition, of new ideas and of systems capability
is in the interest of American users, in my view. May I stress, too. that
the industrial objective of pooling the present aids provided by govern-
ments to the European industry is not a permanent subsidy, but to help
the European industry to become strong enoug^i to s'r.nd oii its own
feet and compete openly in the markets of the world. It is an attempt
to compensate for IBM's head start.

Partnerships between such a European company or companies and
American firms other than IBM should not be excluded; indeed it
would be in many ways desirable. The one reserve widely shared by



5320

Euroi^can governments and industry is that such arrangements should
not lead to the absorption of the European firm.

The development of a European policy on standards also has a uni-
Tersal interest. IBM's leading position in the industry enables it to
set standards for the world. Sometimes these may be good standards,
sometimes they may not. Always, the effect is to put pressure on com-
l^etitors to follow the IBM way and to make it difficult for customers to
change to equipment or software using other standards.

Both users and the industry have an interest in the adoption of im-
partial standards which are the best and which allow all kinds of
companies to develop new products confident that they will not be ren-
dered obsolete by arbitrary changes in standard by one major firm,
and which maximize the opportunities for users to combine together
equipment from different manufacturers and transport software from
one kind of equipment to another. Sometimes the best standards which
.fire then adopted may be IBM standards, sometimes they may not.
:Such standards can only be effectively' enforced by a combined policy
of European public users and buyers. On this side of the Atlantic an
excellent example of such a policy was provided by the U.S. Federal
Government when it established Cobol as a standard, high-level lan-
guage. This is an area in which I could imagine useful possibilities for
collaboration between the Community andthe United States.

To sum up :

Tiooking ahead, what kind of characteristics would I consider de-
sirable for the future structure of the European and world computer
industry? Needless to say, in an industry as dynamic as this, the free
play of competition can and must produce unexpected results.

However, certain things should be said.

(1) Both in Europe and the world those who use the products of
this key industry need to be served by a number of major competitive
and profitable enterprises which have an overall systems capability.
I would like to see European industr}?^ contribute vigorously to at least
one of these enterprises.

(2) The great potential economies of scale in this industry have
helped to engender a striking difference in profitability and overall
strength between IBM, the industry leader, and the smaller companies
in the business. This has been reflected in the steady process of concen-
tration during the last few years.

In an ideal world I would like, in 10 years' time, to see other com-
petitive enterprises in existence as strong and profitable as IBM and
offering a comparable range of services.

(3) The rapid development of distributed computing systems is a
hopeful feature of the present industrial structure. It means there
ought to be growing scope for a wide range of enterprises of many
nationalities producing minicomputers, peripherals and terminals,
software and services, and communications equipment.

(4) However, to insure that the full benefits of this development
accrue to the user, public policies need, through standards, unbundling
policies, and other measures, to insure the maximum degree of traiis-
parency in the market so that users can buy optimal systems using the
products of many manufacturers.

In all these matters Europe and the United States have common
interests on which, I hope, one can build constructively in the future.



5321

Senator Hart. Tliank you very much, ]\Ir. Laytou. I share your
feeling that there is a community of interests here. One of the very
first criticisms tliat I ran into several years ago, when I first introduced'
the Industrial Reorganization Act, was that it took an approach that-
seemed to seek to diminish the size of certain lines of American indus-
try, at the very moment the EEC was encouraging the development of
a counter giant.

The effort began in Europe to strengthen its several computer firms.
Now, having run into that at the very start of this effort to develop
legislation, let me ask you more specifically to describe what the EEC
has done. One, do European companies get subsidies? Is there a pref-
erential purchasing policy '. And what other nontarift" barriers does
the community erect ?

Mr. Layton. Thank you !Mr. Chairman.

I'd like to just comment on one little phrase of yours: you said a

"counter giant.*' It looks at the moment moi-e like a "'counter dwarf."'

I think I would like to underline this point, that the help that has

been given to the European industry, so far, has been an attempt ta

insure survival of something.

And before I say a word on your question about what support, what
procurement, I think we should just recall the share of the market and
the scale of the imbalance in the European computer industry.

Now, in terms of installations, at the end of 1972 IBM had about
60 percent. The largest single European company, ICL, a British'
company, had 7 percent : and the Unidata group had about S percent.
So it was 15 percent of the European market for the four largest com-
puter companies.

Another 20 percent was held in terms of installed installations by
four other leading American companies. So what has been done sc
far is to keep something alive, but it has by no means ])ecome a giant,
and we take the view, as to I think the governments wliich have sup-
ported these industries — and some of them are now combining together
into one group, one rather small group in world terms — that their
survival is one more ingredient of useful competition.

What is the help that has been given them, to help them survive ?
Fii-st of all, I have already mentioned subsidies, or rather help in
research and development which is the form which financial help has
taken.

And, frankly, the view taken in Europe is that the U.S. computer
industry has had an innnense stimulus from the major Federal Gov-
ernment ]irograms in defense and space, not just from money but from
demanding systems requirements. That's l>een a wholly valid and justi-
fiable public stimulus which has had a very great fallout into the over-
all capability of the industry.

Senator Hart. If I could interrupt you, better to understand you,
are you saying because the Defense Department and the space program
of this country require computer facilities, and the purchase is made
of those facilities, that that is regarded in Europe as Government-
supported R. & D. ?

]\[r. Layton". No, Government-supported R. & D., to be more spe-
cific for instance the ILLIAC. to take a recent, contemporary develop-
ment, with advanced componentry is supported by Government fund's
in the United States.



5322

And there have been many other examples of advanced technological
de^•elopments supported by Government funds. The development of
the component industry in the United States, ^-hich is an element
within the development of computers, has been immensely stimulated
by the space and defense programs.

And no one is quarreling about this. This is a historical fact. The
research and development has been stimulated in significant measure,
paid for by Federal Government funds.

I gave you that figure from the OECD report on the technological
ga]) in the data processing in the electronic computer industry, which
is an impartial document agreed by all the governments which showed
in that particular year, in the mid-1960's, that spending on R. & D. in
computers of Federal Government money in the United States,
through defense and space, was about $300 million. And that is what
I am referring to : the R. & D. development which capability has then
been used, very naturally, in other fields.

Since this position has been created which has helped to generate
the strength and capability of the American computer industry — of
course it's not the only factor; business leadership, management, inno-
vation, and commercial exploitation skills have played a major part,
too — the defense and space contribution has also been significant.

Given this background, the European governments have felt that
to enable some European industry to survive and develop they have
had to also give some compensatory help in the R. & D. field.

And, frankly, they had seen it as a means of redressing the balance.
In other words, we don't live in a pure, old-fashioned, 19th-century
marl^et economy, where innovation and development just happens by
private people's investment and money ; we live in a world where the
public sector and its funds play a part in most advanced countrias.

And the form in the United States has been through defense and
space. In Europe there has been some money given directly to the
R. & D. budgets of the computer companies.

And this amount in the current 5 years, 1971 to 1975, in Britain,
France, and Germany, which are the three countries where this spend-
ing has been going on, has amounted, roughly, to $450 million. So,
that's the first pohit. It is trae, therefore, there is help given to the
R. & D. budgets of these countries.

Now, the second question, a very important one. is what degree, if
any, of preference or procurement help is given to help the Euro-
pean companies? And it is true that just as in the United States there
is a Buy-American Act and a certain amount of support to Amreican
industry in public buying, so this is true in some of the European
Community countries? And particularly those which have had an in-
digenous industry they are seeking to support, sucli as Britain and
France for instance.

Xow, this preference, or encouragement, to the local national indus-
try has not gone so far as excluding American companies.

Competitive products have been bought in many fields. In some
countries there is no preference at all. But it has helped the local
companies to enlarge their relative share of the public marlvct in cer-
tain of the European countries.

Xow, all this was, if you like, national policy in single, independent
European states. The resolution of the Council of ^Ministers which I



5323

referred to, of June 25, foresees the developmejit of a policy in the
European Community. It's not too easy to predict the future of the
European Community, even if I could speak officially. I couldn't
predict exactly what's going to happen, because the European Com-
munity is a continual process of negotiation between the member gov-
ernments. So the implementation of this policv Avill be open to every-
one and will require a growing consensus, but I could foresee certain
characteristics that might be likely.

The resolution talks, for instance, about trying to make economies
in the public expenditures side by joint applications work. There are
many applications of data processing from air, sea, and rail traffic
control to environmental monitoring, customs systems, wliere there
is a common interest, and so there will be a common requirement.
Tliere may be a development in the Community of common require-
ments and developments.

Second, there is talk in the resolution of giving a Community ori-
entation to standards policies, and also procurement policies. And you
will certainly want to know what this means.

Xow, here, as I said, I cannot exactly predict the future. But I can
make some helpful remarks, I hope. First of all, the Rome Treaty says
tliat all companies Avhicli manufacture in Europe are counted as Eu-
ropean countries; and, therefore, have basically, ultimately, the right
to have access to the different markets in the Community.

Second, the real-life siluation in the Communit}- is that adjust-
ments, over a period of time, to an opening of the market are what
normally takes place.

And I would imagine tliat tlie member governments will wish
any adjustment to a more open-market situation within the Commu-
nity to take place gradually. This has been a common experience.

Third, I would like to comment that in the past, in some mem-
ber states, where there has been impartial evaluation of equipment,
particularly hardware that has been bought, it has resulted in IBM's
getting a smaller market share.

I think it's interesting to compare this with the experience in the
U.S. Government procurement where the non-IBM companies, in
some fields, have acquired a larger market share than in the pri-
vate sector.

So one doesn't necessarily have to be a protectionist to pursue a
l^olicy which may lead to a better balance, competitively.

I would also add that all the European governments, whether they
have an indigenous computer industry or not based in their coun-
tries. exi)ress a strong wish to have available to them more than one
major supplier in the computer business. And I think tl^ev would
wish their procurement policies to help to insure that. They do not
wish to be at the mercy of a siiigle supplier.

So that is another factor they will take into account. I'm sure
they will take into account when and whether computer companies, be
they American or European owned, are manufacturing in areas
which are of regional importance.

So. in other words, any develo}:)ing comnnmity procurement policy,
or orientation of procurement policy, will weigh out a number of
factors, of which tlie desire (o have competition, the needs of regional
development, will all ])lay some part, side by side with the desire to
buy the best equipment and to have in being a \ariety of competitors.



5324

I can't give you a more definite answer because this policy doesn't
exist yet in detail. But those are all elements which will contribute
to it.

One final element, you may ask, "Well, what about imports from
outside?" That is perhaps what people are most concerned with
when they talk about nontariff barriers. And, here again, I can't
speak in advance for what will come out of the worldwide trade
negotiations, but speaking personally it must be clear to all the part-
ner that in an industry like the computer industry there will be an
interest on both sides of the Atlantic in removing barriers ; the Buy-
American Act as well as any European preferences or restrictions,
which would obviously be considered together.

Senator Hart. You mentioned a buy-American policy earlier in your
comments. I have the impression that there is no prohibition against
the purchase by our Govermnent of a product manufactured outside
of this country.

Mr. Layton. As I understand it, there is still in the defense field a
basic 50-percent preference. It doesn't exclude foreign equipment, and
in nondefense fields there is still also— I think the figure is 14 percent,
or in that area, of the preferential increase that's used when applying
purchase from abroad. But I am sure that other witnesses here can
help. I am the least well-informed of the many witnesses you will hear
to give you the details on this question.

Senator Hart. I am sure it is a lot safer for the purchasing agent
to make a decision to buy at home than abroad. I just don't know what
the statutory limitation is.

Mr. Nash"?

Mr. Nash. Mr. Layton, you indicated earlier that the four largest
European companies in 1072 held about 15 percent of the computer-
installed base in Europe. Can you give us the dimension or size of those
companies, roughly, in terms of assets or revenues so we can see how
large a company, or companies, we are dealing with ?

Mr. Laytoist. Well, you are dealing with four different kinds of
companies. Four different companies and four different kinds of
companies.

ICL— International Computers Ltd. — which had 7 percent of the
installed base and a market share roughly comparable at that time, is a
computer company. It's not part of a conglomerate. There are large
shareholders outside, but it is an independent computer company re-
lying on the cash flow coming from the computer business.

And its order of turnover is in the range of $150 million. I can get
you the exact figures.

Mr. N^fSii. Well, mayloe it would be best to just supply them for the
record.

Mr. Lattox. Yes, I can give the detailed figures on that.

[The information referred to appears as exhibit 3 at the end of
Mr. Layton's oral testimony.]

Mr. Laytox. CII is also essentially a computer company, although
it also has large shareholders, and its turnover is rather smaller. They
are growing fast.

The other two companies, Siemens and Phillips, are different types
of companies. They are computer businesses. They are, of course, a
small part of very large conglomerate electrical companies. If you



5325

like, the analogies are much more with GE and RCA. And the analo-
gies between ICL and ClI are much more with companies like CDC.
ICL is very much a computer company with computer peoi)le in it.

Now, the Unidata group has been formed by a combination of the
computer businesses of Phillips. CII and Siemens together; so that,
despite the different natures of the parent they have found it able to
create a joint enterprise.

Now, I believe that one may draw a rather limited moral from the
different natures of these companies. We saw that GE and RCA, despite
their size, were not able to compensate the disadvantages of the size
of their computer operation by pouring in capital from other parts of
the company.

And 1 think the same is strategically true for Phillips and Siemens^
that the decisive thing will be the size and strength and effectiveness
of the joint computer operation, which today is still relatively small ;
in fact Unidata is still something like half the size, or a little less than
half the size, of the computer operations of leading U.S. companies
like Honeywell and Univac, non-IBM companies.

]\Ir. Nash. From what you say I think it is clear as to the reasons
for the European governments pushing for the formation of Unidata.

Let me ask you if you are able to prognosticate a bit for us as ta
your judgment as to what the emphasis would have been on forming-
Unidata if instead of having one company controlling 60 ])ercent of
the European market we had that share dispersed into multiplicities
of smaller companies, even assuming that they' Avere U.S. companies
like CDC, Honeywell, Sperry, et cetera.

What would the pressures l3e under those circumstances ?

Mr. Layton. I believe the pressures would be less. I tried, frankly,
to describe two motivations of support for the European-based in-
dustry. To be frank, there are two.

One is the fear of the dominant firm and the other is the feeling-
that there should be some part of the industry which is controlled in
Europe.

But, there's no doubt about it that the piessures from the factors of
dominant firm have given an extra bite to this policy; and it is an
interesting fact that this is the first sector of industry in which the
Council of Ministers of the European Community has passed a con-
scious political resolution seeking such a policy. And this resolution
specifically talks of the imbalance in the structure of the world com-
puter industry in its preamble.

Therefore, I have little doubt that the strength of the European
reaction would have been less if there were not this dominant position.
And the opportunities for European companies to be viably in the
business, without subsidy, would have been greater. I think that is,.
perhaps, the decisive point.

Mr. Nash. It would be helpful for the record if you could elaborate
a little bit about how IBM conducts itself in Europe and, specifically,,
what you see the concerns and fears of the European governments to-
be.

Mr. Lattox. Well, now, I will do my best to give a fair and balanced
view of IBM in Europe. I've no doubt that they would like to say a lot
themselves that perhaps they didn't yesterday. I'm sure the complete
picture needs to be filled in by them and tlieir competitors as welL

40-927 — 75 32



5326

But I'll try and give a picture of how IB^I seems, to some of us who
have been concerned with the computer industry for some years.

First of all. IBM is clearly tlie leading- company in the industry,
with 60 percent of the installed capacity and an integrated, Europe-
wide operation. That's to say, it has companies in most of the major
European countries, specializing in the development and production
of one or more products which are then sold throughout Europe by its
Europe- wide sales and service operation.

And by this continental operation, it has achieved very important
economies of scale which have not been achieved, in my judgment,
though the evidence is very hard to come by, by any other companies.

So that's the first fact : It has achieved important economies of scale
by the size of its grip on the market and by its policy of specialization
and rationalization througliout Europe.

Xow, those are in many ways positive points for IBM : that it's con-
ducting a highly economical and efficient operation in the manufactur-
ing field.

Why is there concern? Now, first of all. I mentioned earlier to you
the paragraphs in the treaty, article 86 of the Rome Treaty, which
outlaws abuse of a dominant position. And I think I should once more
clarify mj own position on this : I'm not speaking for the formal
official policy; I'm speaking personally. And clearly, any cases of
abuse to justify" the bringing of a proceeding against IB^NI would have
to be proved in detail, just as cases are being fought and have to l)e



Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 43 of 140)