L'Europe Couchante

As pointed out in Chapter 4, European components makers (and governments) failed to appreciate the importance of digital, largescale ICs. During the 1970s, digital ICs, both memory chips and microprocessors, became the essential raw material for data-processing, telecommunications, industrial automation, and military and

consumer electronics. European producers, formerly strong in discrete and analog IC devices, steadily lost market shares. The share of West European firms in world semiconductor markets fell from about 16 percent in 1978 to about 12 percent in 1983; by 1988 it was down to 10 percent, though it rose slightly in 1990 to almost 11 percent.^[2] Europe's performance in ICs, the crucial category of semiconductors, was even more dismal. By 1978 the share of Western Europe in world production of ICs was only 6.7 percent; it declined to 5.8 percent in 1980 and rose slightly to 5.9 percent in 1982.^[3] Even in the European market American companies dominated, as shown in Table 6.1.

In addition growth rates for demand and production of ICs in Europe were well below the rates for the United States and Japan. While demand expanded at 20 percent per year in the United States and 19 percent per year in Japan over the period 1978–82, it grew by only 13 percent per annum in Europe. Production also increased more rapidly in the United States (17 percent annually) and Japan (25 percent annually) than in Europe (12 percent per year) during the same stretch.^[4] Thus, Europe was not benefiting from the microelectronics revolution in the same way that its trade rivals were. One revealing indicator of this discrepancy is the per capita consumption of semiconductors. In 1984 the consumption of semiconductors in the United States had a value of $52 per capita, and in

[2] Jonathan Weber, "U.S. Gains Ground in World Chip Market," Los Angeles Times , 3 January 1991, p. D1.

[3] OECD, Semiconductor Industry , 102.

[4] Ibid., 103.

Japan $61 per capita. The average for all Europe was $14 per capita, with Germany marking the high end at $22 per capita.^[5] Not only was Europe behind, but its competitors were accelerating faster.

The situation was so bad that even by the mid-1970s there was not a single European producer of standard ICs.^[6] Some firms were successful in niche markets, like Ferranti in uncommitted gate arrays. Most European producers built custom or semicustom chips largely for use in their own final products (computers, telecommunications systems, consumer electronics). The IC divisions of the electronics champions were all losing money: In 1980 Siemens had not shown a profit in ICs since 1965 and SGS-Ates never had.^[7] Thomson was a consistent loser through 1984.^[8] Philips showed a profit on ICs only in 1979, with help from the American firm Signetics, which it purchased in 1975. About half of Philips's IC production went to in-house uses. Philips has been the only European IC maker big enough to make the world top ten, and it slipped from fourth place in 1979 to sixth place in 1983.^[9]

The situation in computers was no better. Table 6.2 shows the world's top twenty-five firms in the data-processing industry for 1978, 1983, and 1986. The European computer makers hover near the middle of the top twenty-five, with Siemens and Olivetti moving up and finally cracking the top ten. Broken down by category, the picture is no better. Only one European maker cracked the 1983 top ten in mainframes (Siemens in eighth place), and its two top-of-the-line models had been manufactured under license from Fujitsu since 1978.^[10] ICL sold Fujitsu's Atlas 10 (IBM-compatible) mainframe until 1984, and after that its advanced Series 39 contained forty-three chips developed by Fujitsu under a technology agreement. ICL's microcomputers have been Sun workstations.^[11] In minicomputers only Olivetti cracked the top ten from Europe (in

[5] Michael G. Borrus, Competing for Control , 199.

[6] See Malerba, Semiconductor Business , 119. Standard ICs are commodity ICs sold on the world market as opposed to custom or semicustom chips (sometimes called application-specific integrated circuits, or ASICs).

[7] Ibid., 166, 171.

[8] Guy de Jonquieres and Paul Betts, "The Euphoria Is Over," Financial Times , 7 February 1985, p. 14; Paul Betts, "Thomson Has Another Try," Financial Times , 25 October 1985, p. 18.

[9] Malerba, Semiconductor Business , 164; OECD, Semiconductor Industry , 116.

[10] Pamela Archbold and John Verity, "A Global Industry: The Datamation 100," 38; Laurence P. Solomon, "The Top Foreign Contenders," 81.

[11] Kelly, British Computer Industry , 47; Guy de Jonquieres, "Electronics in Europe," Financial Times , 28 March 1984, Survey, p. 1.

seventh place), and in microcomputers Olivetti was again the only European member of the top ten, in ninth place.^[12]

European firms had not been able to challenge IBM's dominance. IBM as of 1975 held over half the computer market in France, Germany, and Italy, and 40 percent of the market in the United Kingdom.^[13] Even in Britain by 1985 IBM mainframes installed outnumbered those of the national champion, ICL, and were selling faster.^[14] Indeed, in 1983 IBM Europe had data-processing revenues more than seven times greater than those of its nearest rival, Bull. And Bull was losing money: It showed losses of FFr 1.35 billion in 1982, FFr 625 million in 1983, and FFr 489 million in 1984.^[15] In 1983, nine of the top fifteen computer makers in Europe were American firms. IBM alone had data-processing revenues greater than those of the next nine largest manufacturers combined. IBM's share was 42 percent, up from 38 percent in 1981. Of the top twenty-five firms operating in Europe in 1983, thirteen were American.^[16] Their combined share of the European market was 81 percent.^[17] All this American dominance had happened despite government subsidies and protected markets for the national champions.

Contrary to the situation in semiconductors and computers, in telecommunications in the early 1980s Europe was not suffering from obvious and longstanding failings. In fact, European telecommunications technology was among the most advanced; the French developed the first fully digital switching system in the mid-1970s. Furthermore, none of the European countries with indigenous telecoms-equipment production showed a trade deficit in the sector, as shown in Table 6.3. The EC countries as a bloc managed a telecommunications-equipment trade surplus with the rest of the world of about $1.7 billion in 1982. In other words, the telecoms sector in the early 1980s did not appear to be crying out for help.

But prying into the statistics shows that the rosy overall picture was deceptive. The strong EC trade surplus was built on exports to Third World countries, especially to members of the Organization

[12] Archbold and Verity, "A Global Industry," 38.

[13] Malerba, Semiconductor Business, 181.

[14] Kelly, British Computer Industry, 15.

[15] Guy de Jonquieres and Paul Betts, "The Euphoria Is Over," Financial Times, 7 February 1985, p. 14; Guy de Jonquieres, "The Harsh Imperatives of Surival," Financial Times, 24 June 1985, Survey, p. 16.

[16] Guy de Jonquieres, "Bull Emerges as Biggest European Computer Maker," Financial Times, 17 August 1984, p. 6.

[17] Malerba, Semiconductor Business, 181.

of Petroleum Exporting Countries (OPEC). In fact, about 80 percent of equipment exports in 1980 (not counting trade within the EC) went to the Third World, as seen in Table 6.4. The EEC trade surplus in telecoms equipment began declining in the early 1980s; 1985 was the third straight year of contraction, with the surplus dropping to 1,247 MECU from 1,533 MECU the year before. In addition the EC registered a growing trade deficit in the sector vis-à-vis the United States and Japan. Its deficit with the United States grew 25 percent in 1985 to 657 MECU, and that with Japan rose by 61 percent to 582 MECU.^[18] These trade deficits with the United States and Japan suggested that Europe was weak in the most advanced sectors of the telecommunications market.^[19]

Certainly Europe has been slower than the United States and Japan in the diffusion of new products and services. This lag is due in part to the traditional role of the PTTs, which have monopolized the provision of networks (except in the United Kingdom), limited the provision of new services (like VANs), and until recently controlled

[18] CEC, Towards a Dynamic European Economy, 158.

[19] Borrus et al., Telecommunications Development, 38.

the kinds of terminal equipment that could be attached to the network. Thus, for example, on-line data services in Europe were worth about $200 million in 1982 as compared with $800 million in the United States. In videotex-type services (interactive on-line data banks), there were more subscribers in the United States than in all the EC. Europe lagged behind the United States in commercial satellites by about ten years; the marketing and promotional budget of just one American business satellite system, Satellite Business Systems, at $200 million, surpassed the entire EC investment in such services.^[20] Facsimile, an advanced document-transmission technology, spread in Europe more slowly than in the United States: While the United States had over 225,000 terminals installed in 1980, Europe could count only 47,400.^[21] All these signs led European telecommunications administrators, suppliers, and their governments to sense a dangerous weakening in Europe's traditional electronics stronghold.