]]]]]]]]]]]       CHIPPING AWAY AT THE CHIP MARKET          [[[[[[[[[[[[[[[
                        by Zot Barazzotto                          (1/4/90)
                       (Freeman 45385BARA) 

You might be catching bits of the story now making some press about 
Perkin-Elmer's attempt to sell off a division that makes semiconductor 
manufacturing equipment.  Some are objecting to the sale because it will leave
the U.S. with only about a ten percent share of the semiconductor processing 
equipment market.  Whether the sale to a Japanese company should be allowed is 
not the issue.  The question is why have we gotten into this problem and 
what's the real fix?

The first thing to understand is why you keep hearing about Japan, Inc. buying 
up everything from Rockefeller Center to American high tech companies.  People 
outside the United States take a much longer term view of business decisions 
then Harvard MBAs.  Japanese tend to think in terms of where will the company 
be in ten years.  Harvard MBAs can only think as far as next quarters bottom 
line.  Understanding this vast difference in outlook makes it much easier to 
understand why we keep getting beat in world class business competition.

To understand why long is better than short, look at what Toshiba did in DRAMs 
(Dynamic Random Access Memories - the basic chips for making computers.)  In 
1893 Toshiba mapped out a game plan to become number one in the DRAM 
business.  At that time Toshiba committed a massive quantity of money, 
averaging $500 million per year between 1984 and 1988.  That works out to 
about $2.5 billion over the period, without a significant decrease during the 
1984-86 recession.

Beside the decision to invest in production facilities, Toshiba also committed 
to establishing a great marketing organization and the Research & Development 
(R&D) to back up the operation.  This year they expect to spend over $670 
million on the semiconductor business.  What has this bought them?

In the market rankings of 1983, Toshiba wasn't even in the top ten.  By 1988 
they ranked number one with chip derived revenue of about $4.5 billion.  They 
show no signs of slacking off their efforts to be the biggest and the best.

Now we must ask why a Japanese company will spend billions to become number 
one when all the U.S. semiconductor manufacturers haven't spent in the entire 
period what Toshiba did in one year?  The answer can be partly found in 
cultural differences, but more significantly in how each government looks at 
economic activity from the tax angle.

In America, Congress has decided that it would tax everything rather then let 
individuals enjoy the fruits of their labor.  They espouse the politics of 
envy (especially Democrats) and think that "Tax and Spend" is the formula for 
getting reelected.  Carl Marx would be proud of their act, but it has 
significant negative effects which, due to either the ignorance or complicity 
of the media, are never mentioned.

The negatives include:

    Taxing capital gains (increases in value of assets held for a long time) 
    at the same rate as regular income, kills the incentive to invest for the 
    long term;

    The nondeductibility of corporate dividends means the company must earn 
    twice as much before taxes to pay them;

    The deductibility of interest before taxes makes it good to mortgage the 
    company to the hilt;

    Individual savings account interest is taxed;

    The tax code requires years to write off expenses that should be 
    deductible in the year they are spent - like R&D.

Most foreign governments don't tax long term capital gains or do it at a very 
low rate.  They also have different rules on dividends and they encourage 
savings with lower overall tax rates and the non taxability of interest earned 
on individual savings.  Combine this with a view that it is the individuals 
job it to prepare for their future, and we have the difference.  In hard cash 
this is why the Japanese offer for the P&E division is almost twice as much 
($70 m vs $131 m.)  Now how do we go about fixing it?

The first thing is to send Congress packing, as they have done in Eastern 
Europe with governments that are just ripping off the people.  The new crop 
should get right to work on three things:

    Freeze military spending and reduce all federal subsidies by 10% per year 
    - In 10 years we will have enough left over to pay off the national debt.

    Fix the tax code to make long term investing best - no capital gains tax 
    on assets held over five years; dividends deductible to a company and not 
    taxable to individuals; no taxes on individual interest earnings; 
    accelerate the write-off schedule - same year for R&D and capital 
    equipment, three years on buildings.

    Amend the Constitution to - Limit the terms that can be spent in Congress 
    (12 years max;)  Eliminate pensions for Congress;  Enact a balanced budget 
    amendment with a line item veto clause; and require that all congressional 
    districts contain not only the same number of voters, but be of 
    approximately equal area with the smallest perimeter.

The United States must get back into the game of world class business.  The 
biggest obstacle sits on Capital Hill.  If necessary we should take a lesson 
from East Germany, Poland and Czechoslovakia and use people power.  If 
communists with an army of secret police can be deposed, can't we get rid of 
the Congressional special interest drag on our economy?

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