Technology: The Big Picture


President Clinton has taken a new approach to industrial planning: "accelerating the development of technologies critical for long-term economic growth" and giving "special attention" to those industries that "are going to explode in the 21st century." For these key industries, suggests Laura D'Andrea Tyson, head of the president's Council of Economic Advisers, the government should evaluate "the likely course" of development of critical technologies; compare those baseline projections with visions of what a prosperous national economy should produce; promote domestic development of those industries; and monitor the activities of foreign governments and companies in those fields.

Such plans have long been used to promote American military interests. But improving the competitive performance of American firms is fundamentally a different task. Commercial success does not depend upon linear projections of foreign tank strength but on such intangible and unmanageable factors as consumer tastes for products that don't yet exist, the erratic pace of technological change, and corporate development strategies that often transcend national borders and government control.

To understand how poorly industrial planning works in this environment, consider the Japanese and European experience with high-definition television—the next generation of consumer television. (See "The Sharper Image," June 1991.) Just as the Clinton administration argues for special treatment of certain high-tech industries, Japan and Europe promoted HDTV in an effort to gain a competitive foothold in a single industry that many believed would generate benefits throughout the economy. And in the United States the debate over HDTV was driven by a fear that this country would lose its competitive edge unless it kept pace with the spending and planning programs of its trading partners. But with HDTV, planning failed and the market triumphed.

Back in 1989, a parade of industry "experts" testified before Congress that the federal government had to wake up and match the efforts of Japan and Europe in HDTV. Because both regions had already set their HDTV standards and were spending millions to commercialize the technology, such industry heavyweights as Zenith and the American Electronics Association argued that without a comparable program the United States would be left behind in the global high-tech race.

"If the US does not choose to re-enter consumer electronics via HDTV," warned AEA, "the country as a whole is likely to continue to experience a declining world market share in automated manufacturing equipment, personal computers and semiconductors. Loss of these markets will contribute to the erosion and eventual loss of a US manufacturing base." To avoid this catastrophe, industry experts called for a "well-coordinated," $1.3-billion HDTV program that included federal grants, loan guarantees, infant-industry nurturing, and guaranteed procurement contracts to promote prototype development and commercialization.

Though the U.S. government rejected the plan, American firms were not left behind. Instead, the United States surpassed Japan as the leading seller of semiconductors last year. And despite Japan's head start and Europe's deep pockets, the U.S. companies now lead in several key areas of HDTV. The United States may be exporting an HDTV standard to its trading partners.

What hurt Japan and Europe was their faith in the power of industrial targeting and coordinated plans. Both decided that HDTV was too important to be left to market forces and substituted the judgment of bureaucrats and industry experts for those of consumers. Since the Bush administration ideologically opposed this type of substitution, in this country rival firms had to fight for position in the HDTV marketplace and for FCC approval of an industry standard. American taxpayers spent less than $200 million to promote HDTV. Taxpayers in Japan and Europe, however, have spent between $1 billion and $2 billion to fund joint industry-government programs for HDTV that have now been abandoned.

In sharp contrast to the American HDTV standards race, which involved a half-dozen different contenders, Japan and Europe each developed a single system (Hi-Vision and HD MAC, respectively) that was then selected as the industry standard. Competition was actively managed in the early stages in Japan by NHK, a quasi-public national television network, and actively discouraged in Europe by a series of mandatory E.C. directives.

Isolated from the pressures of competition, engineers had little incentive to develop potentially superior or commercially viable systems before the standard was selected and imposed on the market. This missed opportunity left both nations vulnerable to shifts in technology that ultimately proved to be fatal for their HDTV plans.

Japan and Europe also learned the hard way about the hazards of trying to both chart "the likely course" and accelerate the commercialization of an emerging industry. With industry assistance, bureaucrats tried to coordinate every aspect of the HDTV transmission chain so that an attractive product would be available to entice consumers into the market. Actions included coordinating R&D through public-private consortia and developing and testing a transmission system, subsidizing purchases of production equipment and program production, getting an HDTV satellite up and running to deliver the programs, getting sets into the stores, and organizing public demonstrations to spark consumer demand.

At first, coordinated R&D and government planning appeared to pay off, as Japan registered a series of technical triumphs. Japan was the first to transmit HDTV signals (1979), the first to have its HDTV standard accepted by industry (1985), the first to market HDTV receivers (1990), and the first to offer HDTV programming in prime time (1991), which the president of Matsushita Electric Industrial Company hailed as "a curtain raiser for the Hi-Vision era."

HDTV proponents in Europe were also quick to boast about their technical accomplishments. The European Association of Consumer Electronic Manufacturers claimed that with its MAC system Europe had a five-year lead on its foreign HDTV rivals and was on the verge of having the world's finest television system. Unfortunately, European taxpayers soon discovered that commercial success requires much more than a working prototype.

The industrial planners in Japan and Europe underestimated the complexity of the high-tech food chain and overestimated their ability to coordinate producers and to play the role of consumers. In Europe, for example, equipment manufacturers complained they were unable to provide consumers with MAC receivers because the chip industry was too slow in developing the components. In Japan, HDTV sets were available but consumers were not. Only eight hours of HDTV programs air each day and sets sell for between $8,000 and $10,000.

Once cheap, lightweight, large flat-panel screens arrive, consumer interest could pick up dramatically. But flat-panel displays and manufacturing technologies have advanced at a disappointingly slow pace. Meanwhile, to the exasperation of engineers and bureaucrats, consumers seem to be more interested in receiving a broad choice of quality programs than high definition.

Japan and Europe were also surprised by the pace of technological advance in HDTV transmission technologies. Rather than tackle the problem of squeezing the HDTV signal into the narrow band needed for over-the-air delivery, both tried to rush to the marketplace by relying on satellite delivery and the analog-based technology of conventional television.

Digital transmission promises to resolve the signal-compression problem and thereby reach more households using terrestrial delivery. It also permits TVs to become computerized information and entertainment centers. Most industry experts dismissed digital transmission as a distant possibility that posed no threat to analog-based HDTV systems. They were wrong.

Driven by the competitive pressures of the American marketplace, General Instrument shocked the experts and changed the rules of the game in 1990 when it presented its digital HDTV system for FCC testing. Since then, investors and policy makers worldwide have been forced to confront the prospect of digital HDTV becoming available at the same time as analog-based systems.

As a result of these unforeseen market and technology developments, Japan's head start in HDTV provided at best a hollow victory to industrial planners. The analog system that Japan spent 20 years developing has been a commercial failure. Early this year, only 10,000 sets had been sold; industry and government experts had predicted that consumers would have bought more than 1.3 million sets. Manufacturers have defected from the Hi-Vision system and dramatically scaled back their mass-market dreams. Japanese manufacturers are in the unexpected position of scrambling to catch up to the United States in digital transmission and processing technologies.

The European experience with HDTV was even worse. Heavy subsidies succeeded only in producing an unpopular system that became obsolete before it was fully implemented. E.C. officials finally conceded commercial and regulatory defeat this spring when they abandoned their seven-year-old MAC HDTV system.

Unfortunately, there's little indication that Washington has learned anything from HDTV. A background report on HDTV in progress for the private Council on Competitiveness is expected to suggest, for instance, that more (not less) coordination and planning will let the United States avoid the mistakes made abroad in HDTV.

Under Bush, the United States gained in HDTV from a "just say no" stance toward industrial policy. Under Clinton, the approach appears to be, "let's take a look." The new administration apparently hopes that by requiring consultations between private businesses and federal agencies, only the best plans for strategic industries will be supported with public funds.

The industrial-policy advocates still don't get it: Government planners can't keep up with a high-tech marketplace. In HDTV, the case of even well-coordinated plans made in the early 1980s with the best information available failed. What the United States accomplished in the arms race with industrial planning has little in common with what is possible in the commercial rivalry with its trading partners.

The HDTV experience shows that pushing competition over collaboration can advance technologies beyond the limits industry experts consider possible. Adopting this home-grown model should work for whatever industries are deemed worthy of "special attention." It could also provide a needed dose of humility for Washington's aspiring industrial planners.

Cynthia Beltz is a technology policy analyst at the American Enterprise Institute and author of High Tech Maneuvers: Industrial Policy Lessons of HDTV (AEI Press).