/ ' I export potential study N* export potential study THE MARKET FOR SEMICONDUCTOR IN WEST GERMANY AND ITALY UNITED STATES DEPARTMENT OF COMMERCE Luther H. Hodges, Secretary Franklin D. Roosevelt, Jr., Under Secretary Jack N. Behrman, Assistant Secretary for Domestic and International Business Thomas G. Wyman, Deputy Assistant Secretary for Domestic and International Business BUSINESS & DEFENSE SERVICES ADMINISTRATION George Donat, Administrator 1964 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C., 20402 - Price 15 cents FOREWORD This report is designed to assist U.S. manufacturers of semi- conductor devices to sell their products in West Germany and Italy. It is one of a series of export potential studies made by the Business and Defense Services Administration (BDSA), U.S. Department of Commerce. These studies seek to uncover new or expanding opportunities overseas for U.S. businessmen by identifying and describing specific markets for particular prod- ucts or groups of products. George Donat, Administrator Business and Defense Services Administration April 1964 EDITORIAL PREPARATION This export potential study was written by Theodore C. Col- lins, Office of Scientific and Technical Equipment, Business and Defense Services Administration, Donald S. Parris, Director, in collaboration with the Electronics Division of that office. Commercial Officers of the Foreign Service of the United States collected pertinent information in West Germany and Italy. The Bureau of International Commerce, U.S. Department of Com- merce, supplied economic data. Additional sources of information include U.S. Government reports and publications, official government publications' of West Germany and Italy, and the Organization for Economic Cooperation and Development. PREFACE DESCRIPTION OF SEMICONDUCTOR DEVICES The semiconductors covered in this study range from the simple to advanced types. A semiconductor is a material that conducts electricity better than an insulator but not as well as a metal conductor. High- purity ger- manium and silicon are the semiconductor materials in most common use. The term semiconductor is also used to describe devices made of a semiconductor material. Semiconductors are sometimes called " solid state" devices because their operation depends on the structure and characteristics of solids, whereas conduction in electron tubes occurs in a vacuum or in gas. Copper oxide and selenium rectifiers, thermistors, and photocells are all semiconductors, although quite different from the newer solid state devices, including transistors, general-purpose diodes and recti- fiers, controlled rectifiers, voltage regulators, reference diodes, tunnel diodes, solar cells, light sensitive semiconductor devices, thermoelectric semiconductor junctions, and related semiconductor devices. Digitized by the Internet Archive in 2012 with funding from LYRASIS Members and Sloan Foundation http://archive.org/details/marketforsemiconOOunit CONTENTS Page Preface— Description of Semiconductor Devices v Part I.— Federal Republic of Germany and West Berlin Summary Analysis 1 The West German Economy 2 The Semiconductor Market 3 The Market for Electronic Products Employing Semiconductors .. 5 The Market for U. S. -Manufactured Semiconductors 9 Part II. -Italy Summary Analysis 15 The Italian Economy. 16 The Semiconductor Market 17 The Market for Electronic Products Employing Semiconductors.. 19 The Market for U.S. -Manufactured Semiconductors 21 Part I. — Federal Republic of Germany and West Berlin SUMMARY ANALYSIS The West German semiconductor market has grown in recent years with the expansion and sophistication of the domestic electronic in- dustries. West German production of semiconductors 1 increased from DM 85.5 million ($20.4 million) in 1960 to DM110.9 million ($27.7 million) in 1961. 3 It declined to DM92.8 million ($23.2 million) in 1962 as a result of a weakening of domestic and foreign demand, especially for radio and television receivers, concurrent with growing international competition. Production was expected to show a renewed uptrend in 1963. Semiconductor technology is not as advanced in West Germany as in the United States, owing largely to post- World War II restrictions on the electronic industries and to the relatively small expenditures being made for product research and development. Private industry continues to finance and conduct most research activities in West Germany. As mass production of the various types of semiconductors becomes possible, West German prices tend to drop to levels equal to or slightly lower than those applicable to similar types imported from the United States. West German imports of semiconductors reached a peak of DM27.5 million ($6.9 million) in 1961, then fell back to DM25.3 million ($6.3 million) in 1962. In the first half of 1963, they totaled DM15.5 million ($3.9 million). In this 6 -month period, the Netherlands, which had been the leading supplier throughout 1960-62, lost its position to the United States. West German exports of semiconductors rose to DM23.4 million ($5.9 million) in 1962, up 25 percent from the previous year. During the first 6 months of 1963, exports totaled DM10.7 million ($2.7 mil- lion) . West German production of and foreign trade in the products in which semiconductors are used continue to present an unsettled pic- ture. The value of radio and television receiver production in West Ger- , many declined from a peak of DM2,105 million ($501 million) in 1960 iTransistors, diodes, rectifiers, and similar devices. 2 Value data in this report have been converted from deutschmarks to U.S. dollar equiv- alents at the rate of 4DM - $1.00, beginning 1961; prior to 1961 at the rate of 4.2 DM = $1.00. 1 to DM1,828 million ($457 million) in 1962. Product saturation in the domestic market and stiffening international competition were re- sponsible for this trend. From I960 to 1962 imports of radio and television receivers rose some 134 percent to DM26.9 million while exports dropped 31 percent to DM420.1 million. The United States plays a minor role in this type of trade. In the radio communications equipment sector, domestic production continued to rise in 1962, reaching almost $100 million. Although total imports increased by more than 50 percent in 1961-62, the U.S. share declined from 20 to 13 percent of the total owing to increased com- petition and the termination of large government projects. West German production of electronic measuring, testing, and con- trol equipment and electronic computers has expanded rapidly in re- cent years. The value of production of electronic computers in 1962 was more than three times the 1960 level; production of electronic measuring, testing, and control equipment increased by more than 42 percent-- from DM826 million to DM1,176 million. The United States continued to dominate the import market in 1962, providing 66 per- cent of West Germany's imported electronic computers and 50 per- cent of its imported electronic measuring, testing, and control equip- ment. The demand for labor-saving equipment is attributed to the pressures of rising labor costs and growing competition in domestic and foreign markets. In general, there is considerable market potential in West Germany for semiconductors imported from the United States. U.S. manufac- turers are the sole suppliers of many advanced types of semicon- ductors; on the other hand, they meet considerable competition in less advanced types. The market for semiconductors used in electronic measuring, test- ing, and control equipment, and electronic computers appears to be the most promising as the trend toward increased automation and participation in NATO defense is expected to continue. Semiconductors imported from the United States are subject to a tariff higher than that for similar imports from the Common Market countries, and also to an equalization tax. U.S. semiconductor firms can enhance their market position by in- tensifying their sales, service, and promotional efforts. THE WEST GERMAN ECONOMY The West Germany economy has grown at an impressive rate for more than a decade. The country's gross national product (GNP) more than tripled between 1950 and 1962, advancing from $23 billion to $82 billion at current prices. This rate of growth far exceeded the record of the United States in the same period. Personal consumption expenditures, as a part of GNP, increased from $15 billion in 1950 to $44 billion in 1961. Per capita expenditures rose from $454 in 1954 to $703 in 1961. The industrial production index of West Germany increased from 203 in 1957 to 263 in 1961 (1950 = 100). The index of manufacturing industries (intermediate producers, capital and consumer goods, and food processing and stimulants) increased from 209 to 275 in the period. Overall economic growth, however, has been slowing down since 1960. On the basis of constant prices, GNP increased only 4.0 per- cent in 1962, as compared to 5.5 in 1961 and 8.8 percent in 1960. As a result of considerable losses in output owing to severe winter weather and a reduction in the number of working days, GNP in the first half of 1963 increased only 1 percent over the same period in 1962, again in constant prices. Subsequent production, however, indicates that the growth rate will return to the 1962 level. Manufacturing industries have actually increased their share of the GNP over the past decade. Personal consumption and government procurement have also grown considerably and are expected to pro- vide ample stimuli for further, but more modest, expansion. This is illustrated, in part, by the 30-percent increase made in defense ex- penditures in the first half of 1963 over the same period in 1962. This expansion in West Germany's economy, especially in the in- dustrial and defense sectors, should continue to result in a ready mar- ket for semiconductors and the end products in which they are used. THE SEMICONDUCTOR MARKET Production West Germany is the leading producer and exporter of electronic equipment in Europe. The West German electronic industries re- corded a healthy growth of about 10-15 percent annually in the past 10 years, and increased threefold between 1954 and 1959. The value of electronic equipment and components produced totaled about $1.3 bil- lion in 1962. More than 200 companies were engaged in manufacturing electronic products in Germany by 1963. Employment totaled about 165,000, of which 65,000, or almost 40 percent, were in the radio and TV sector. Emphasis has been shifting in the West German electronic indus- tries from the consumer market toward the market for industrial, commercial, and military items. It is in these nonconsumer sectors that the most encouraging growth is anticipated. Production of semiconductor devices declined substantially in 1962 owing to steadily declining output of radio receivers attributable* pri- marily to a weakening of domestic and foreign demand concurrent with growing international competition. Production statistics for semi- conductors in 1959-62 appear in table 1. Table i.— West German Production of Semiconductors, 1959-62 (Thousands of dollars) Type 1959 1960 1961 1962 Total 14,933 20,367 27,731 23 , 209 Transistors, diodes, and similar devices 10,585 4,348 14,790 5,577 19,877 7,854 16 , 066 7,143 Source: Gesellschaft fur Marktf orschung m.b.H. West German exports of semiconductors reached almost $5.9 mil- lion in 1962, an increase of 25 percent over 1961 levels. The Nether- lands received 28 percent of West Germany's semiconductor exports in 1962; other important customers were Sweden, Denmark, and Italy, each accounting for about 10 percent of the total. West German manufacturers who participated in the 1963 Hanover International Industry Fair predicted that quantity production of solid state integrated circuits would begin in the spring of 1964. Companies developing solid state circuitry include Siemens and Halske AG, Tele- funken GmbH, and Valvo GmbH. Valvo expected to begin production in 1963 of an integrated circuit consisting of four diodes, one transistor, four resistors, and one capacitor. Telefunken has developed two low- noise UHF mesa tetrodes for use as converters, oscillators, and high- frequency amplifiers. Research and Development Electronic components manufacturers so far have not had the benefit of government research funds. The consensus of German components manufacturers at the 1963 Hanover Fair was that they were not likely to undertake development projects without government aid. The electronic industries have criticized the country's universities for concentrating too heavily on basic research at the expense of ap- plied research. Industry spokesmen reported early in 1963 that by far the greatest proportion of electronics research work being carried out in West Germany was being done in industrial laboratories, and that 80 percent of this work was applied research. Both industry and universities complain that lack of coordination and communication have led to extensive duplication of effort and misused resources. Shortages of skilled personnel and lack of fa- cilities work a hardship on existing laboratories and their staffs. On the other hand, production technicians claim that laboratories do not turn out enough ideas to keep their production and design staffs busy. The Domestic Industry The general interaction of labor supply, wage costs, and productiv- ity in the development of the electronic industries and the semicon- ductor market has the inevitable effect of increasing the automation of manufacturing, clerical, and service functions. A persistent shortage of labor makes it necessary to import work- ers from other countries. In 1962, industrial wage rates in West Germany were, on the average, 35 percent higher than in Italy, 25 percent higher than in Benelux, and 9 percent higher than in France. Of the West German industries, wages per man hour and relevant labor costs in the electronic industries were among the highest; the electronic industry work week, averaging 42.5 hours, was among the shortest in European industry. Heretofore, there have been no "electronics engineers," their functions being performed by electrical engineers who have special- ized in electronics after graduation. Companies are attempting through a form of apprenticeship to train workers who are not university graduates to become electronics specialist. Profit margins declined in the electronic industries in 1962 as a result of a 13-percent increase in wage and salary costs combined with only a 1.5-percent increase in productivity. Distribution The majority of German semiconductor producers supply their customers direct from the factory or through regional sales offices. Other producers utilize wholesalers and retailers specializing in specific types of end products— radio and television receivers and associated components. Consumption Apparent consumption of semiconductor devices in West Germany totaled approximately $23.6 million in 1962— domestic production of $23.2 million plus imports of $6.3 million, minus exports of $5.9 million. This represents a decrease of $6.3 million from the 1961 total of $29.9 million, which stemmed largely from reduced production of television and radio receivers. The reduction in dollar value of consumption is also due in part to a decrease in prices of semicon- ductors and electronic components from 1961 to 1962. These figures do not allow for those components included in equipment and devices made by large manufacturers who produce their own components. The consumption of semiconductors, being electronic components, naturally corresponds to the manufacture and sale of electronic end products. In West Germany these end products are in the form of entertainment equipment, radio communications equipment, radar, and other commercial and industrial electronic equipment. THE MARKET FOR ELECTRONIC PRODUCTS EMPLOYING SEMICONDUCTORS Entertainment Type Electronic Equipment The Federal Republic of Germany and West Berlin ranks among the world's leading producers of radio, television, and other elec- tronic equipment for home entertainment. However, the growth of this sector of the West German economy, which was vigorous in the 1955-60 period, has slackened considerably owing to weakening de- mand in the domestic market and stiffening international competition. Table 2 reflects recent cutbacks in production. Owners of radio and television receivers must have licenses, which are issued by the German postal authorities. The number of tele- vision licenses issued in the Federal Republic passed the 7 -million mark in December 1962. More than 90 percent of the 18 million West German households had radio receivers at the end of 1962. Only 1.8 million people owned tape recorders. Approximately 67 percent of West German households have record players. Stereo equipment sales have lagged, but should increase as prices decline and as the trend to larger living quarters continues. Tabic ■ West German Production of Radio and Television Receivers, 1959-62 (Thousands of dollars) Type 1959 1960 1961 196 2 Total 425,510 501,196 492,941 456,971 171,313 181,289 202,555 184,285 Table and console Portable 132,434 23,072 15,807 254,197 125,996 40,660 14,633 319,907 127,638 52,184 22,733 290,386 107,843 56,354 20,088 272 686 Automobile Television sets, single and combined Source: Gesellschaft fur Marktf orschung m.b.H. West Germany's imports of electronic entertainment equipment expanded considerably in 1962 (table 3). Large shipments of table and console radios came from the Netherlands and portable radios from Japan and Sweden. Table 3.— West German Imports of Radio and Television Receivers, 1960-62 (Thousands of dollars) Type 1960 1961 196 2 Total 2,734 3,784 6,728 Radio receivers, total 2,368 3,168 5,950 n.a. n.a. n.a. 366 279 2,339 550 616 1 064 4 ,398 488 Television receivers, single and combined 778 n.a. — Not available. Source: American Consulate General, Frankfurt; Der Ausson handel der Bundesrepublic Deutschland: Statistisches Bundesant Wiesbaden Teil, 1960. West German exports of entertainment type electronic equipment decreased from $124 million in 1961 to $105 million in 1962. Major customers were the Netherlands, Switzerland, Sweden, and France. Radio Communications Equipment and Radar Production of radar, sonar, and radio communications equipment in West Germany continued to increase in 1962 (table 4). Table 4.— West German Production of Radio Communications Equip- ment and Radar, 1959-62 (Thousands of dollars) Type 1959 1960 1961 1962 Total 53,785 71,079 87,522 99,051 39,725 4,549 9,511 55,955 4,741 10,383 63,765 6,036 17,721 72,816 Radar, sonar, and similar equipment.... Other radio communications equipment... 9,309 16,926 Source: Gesellschaft fur Marktf orschung m.b.H. The market situation in the electronic communications equipment field in the Federal Republic is influenced to a great extent by the de- mand for its products from the Bundespost., the industry's main cus- tomer. The outlook for the period through 1966 is optimistic because of plans for increased expenditures by the Bundespost. The amount to be spent in 1962-66 is $2.23 billion, almost double the rate of ex- penditures in the previous 5 years. Other domestic customers that expect to continue modernization and expansion of their communica- tions facilities include the police, military, public utilities, and rail- road and transport operators. German manufacturers have earmarked large sums for expansion of capacity and modernization in anticipation of increased demand for electronic communications equipment. The Bundespost operates a microwave network for the transmission of telephone messages and television programs. Expansion and im- provement of these services is causing the Bundespost continually to increase the capacity of this system. In the Federal Republic, VHF omnidirectional radio range (VOR) equipment is being expanded and modernized. Within the framework of the development of a tactical air navigation system for military purposes (TACAN), a range finder that can be used in connection with VOR has been developed. Such VORTAC installations have already been delivered, and are operating successfully. The German Decca chain is also used for aeronautical radio navi- gation. The Federal Ministry of Transport operates 11 radio beacons along the German coast. The Bundespost operates a three- station direction- finding network. In addition, the German Decca chain is available for maritime radio navigation. Radar is being used in German coastal waters. Telefunken, Decca, and Phillips supply most of this equipment. Most German oceangoing ships are equipped with radar equipment produced by German licensees of foreign manufacturers. In the production of radar equipment for aviation, Germany has a strong foothold on the world market. Airport surveillance radar (ASR) and precision approach radar (PAR) are being used all over the world. Because of increased imports from other countries in the European Economic Community (EEC) and Japan, West Germany's total imports of radio communications equipment have risen in recent years (table 5). Meanwhile, imports from the United States have declined as the products from other countries have become more competitive and as large government contracts with U.S. companies have terminated. Table 5.— West German Imports of Radio Communications Equipment, Total and from the United States, 1960-62 (Thousands of dollars) Year Total value From the United States Value Percent of total 1960 1961 1962 31,167 47,679 72,938 13,070 9,761 9,651 42 20 13 Source: Der Aussenhandel Der Bundesrepublic Deutschland: Statis- tisches Bundesant Wiesbaden Teil 1960-62. Selected Electronic Equipment The acute labor shortage in the Federal Republic and West Berlin has been an overriding factor in the mounting demand in recent years for electrical measuring, testing, and control equipment and electronic computers (table 6). Table 6 ~ West German Production of Selected Electronic Equipment, 1959-62 (Thousands of dollars) 1959 1960 1961 1962 Total 163,845 227,738 311,885 404,587 Measuring equipment. . . . Testing equipment Control equipment 75 , 227 13,660 66,731 8,227 92,651 15,692 88,276 31,119 117,497 19,446 118,017 56,925 135,511 21 , 026 137,350 110,700 Source: Gesellschaft fur Marktf orschung m.b.H. German producers of this type of equipment are rapidly closing the technological gap that retarded their progress in the post- World War II years. However, the United States reportedly still is reaping the benefits of advanced technology and lower prices resulting from mass production. The most promising areas for U.S. businessmen are believed to be in electronic controls for the growing aircraft in- dustry, and in controls necessary for the automation of manufacturing processes. Because of the complex nature of these products, prompt and efficient servicing is important in maintaining a firm's position in this market. About 20 percent of West Germany's total production in 1962 was exported, most of it to European Economic Community countries. The United States continued to be the largest supplier of automation equipment to West Germany in 1962 (table 7). Japan pulled up faster than other competing countries. However, Japan's share of total im- ports of this type was still relatively small in 1962— only about 2 per- cent. Table 7.— West German Imports of Selected Electronic Equipment, Total and from United States, 1960-62 (Thousands of dollars) 1960 1961 196 2 Electronic measuring, testing, and control equipment : # Total 16 , 243 6,545 6,821 5,415 23,590 11,201 3,537 1,675 25,449 From United States 12,704 Computers: Total From United States 6,080 4 013 Source: Der Aussenhandel Der Bundesrepublic Deutschland Statis- tisches Bundesant Wiesbaden Teil, 1960-62. THE MARKET FOR U.S.-MANUFACTURED SEMICONDUCTORS Imports The United States was the leading supplier of semiconductors to West Germany in the first half of 1963, in terms of value. In the 1960- 62 period, the Netherlands was the leading supplier, both in weight and in value of shipments. However, the Netherlands' value share of West German imports declined from 78 percent in 1960 to 46 percent in 1962, while the share of the United States increased from 14 to 27 per- cent. Table 8 indicates the changing patterns in West German semi- conductor imports. Table 8.- ■ West German Imports of Semiconductors, by Country of Origin, 1960-62 and January- June 1963 (Thousands of dollars) Country 1960 1961 1962 January- June 1963 Total 5,930 6,867 6,337 3,868 United States Netherlands United Kingdom France Japan Other countries 824 4,605 n.a. 28 316 157 1,441 4,261 n.a. 65 328 772 1,717 2,993 n.a. 168 243 1,216 1,372 1,351 303 142 95 605 n.a. — Not available. Source: American Consulate General, Frankfurt. Assessment of Competition At present, the United States, owing to its technological lead, is the sole supplier of many types of semiconductors to West Germany. How- ever, U.S. semiconductors of the less advanced types meet considerable competition. The Netherlands has a firm grip on West German imports of simple and inexpensive semiconductors. U.K. and French manufacturers and West German manufacturing subsidiaries of U.S. companies offer the most competition in advanced semiconductors. The subsidiaries some- times use their sales organizations to distribute other related U.S. component lines, and are themselves large consumers of U.S. semi- conductors. In many cases, U.S. semiconductors are preferred over lower priced non-U.S. products because of their reputation for high quality. Manufacturers present at the 1963 Hanover Fair expressed the view that West Germany was far behind the United States in miniaturi- zation and microminiaturization. No detailed comparison of the prices of German and U.S. semi- conductors is available. West German industry sources consider their prices equal to or slightly lower than U.S. prices for comparable items. Prices Prices of semiconductors are declining with the adoption of mass production techniques. Table 9 compares the price movements of semi- conductors and related products in 1961-62. Table 9.— Index of Prices of Semiconductors and Related Electronic Products in 1961 and 1962 (1958 = 100) Product 1961 1962 37 88 102 100 104 109 29 Components, including semiconductors Entertainment-type electronic products Radio communications products 84 103 103 104 112 Source: American Consulate General, Frankfurt. Activity of U.S. Producers in West Germany The records of the U.S. Trade Center at Frankfurt indicate that there were more than 200 U.S. electronic equipment and components manufacturers active in the German market in mid- 1%3, selling through agents or sales subsidiaries. A number of these firms also manufacture or assemble components or equipment. Sixty- two of the U.S. firms, including at least 26 manufacturers of components, partici- pated in the Trade Center Electronic Components Show. To an increasing extent U.S. firms are selling direct to their cus- tomers through overseas sales organizations; their use of importers or agents is generally being discontinued. U.S. firms can usually make deliveries faster than their competi- tors, according to West German industry sources. Many U.S. firms can supply certain items from stock. Where the maximum delivery time among non-West German, including U.S., firms is 12 weeks, West German manufacturers often require 6 months to 1 year. Domestic Importers and Distributors More than 30 of the West German firms engaged in importing and wholesaling electronic components are identified and described in a current U.S. Department of Commerce Trade List. 3 The list can be purchased for $1.00 from the Bureau of International Commerce, U.S. Department of Commerce, Washington, D.C., 20230, or from any De- partment of Commerce Field Office. The information in the list in- cludes basic trade and industry data; sources of pertinent government regulations; and names, addresses, and functions of more than 60 distributors of electronic products. When submitting offers to German firms, U.S. exporters should quote prices c.i.f. German or Netherlands port and give details con- cerning discounts and rebates. 3 Title: "Electronic Equipment, Electronic Tubes, and other Electronic Components and Accessories— Importers, Dealers, and Manufacturers— Federal Republic of Germany and West Berlin." West German Trade Promotion Manufacturers of semiconductors are organized under the Central Association of the German Electrical Industry (ZVEI). Two trade associations serving the electrical equipment and elec- tronic industries are the Federal Association of Wholesalers of Elec- trical Equipment and the Central Organization of German Associations of Agents and Brokers. Some trade publications of the industry are "Elektro-Anzeiger," Elektro-Welt," "Elektronik," "Elektronische Datenverabeitung," "Na- chrichten-technische Zeitschrift," "Elektronische Rechenanlagen," and "Elektronische Rundschau." Exhibitions and fairs play an important role in the development of business relations between manufacturers and dealers and in the ex- change of information. A special exhibition of radio, television, and phonograph equipment is organized every other year and held in a key city, sometimes West Berlin. Equipment is also displayed at the annual spring International Industry Fair in Hanover. Tariff and Nontariff Barriers * Members of the EEC enjoy the advantage of lower tariff rates on semiconductors than are imposed on competing non-EEC countries. On July 1, 1963, the rate for EEC countries was reduced from 6.0 to 4.8 percent and the rate for other countries was raised from 13.5 to 14.9 percent. In addition to the tariff, a turnover equalization tax of 6 percent must be paid on all imports. U.S. Sales Potential in West Germany Because of their technological head start and early entry into the West German semiconductor market, U.S. companies are expected to hold their sales lead. However, the markets for certain types of semi- conductors are already being exploited by manufacturers in a number of countries. The countries making the strongest inroads are the United Kingdom, France, the Netherlands, and Italy. The healthy growth in the demand for measuring and testing devices and electronic computers is expected to continue. In this market, U.S. firms have a considerable headstart. Industry's trend toward automation and West Germany's increasing contribution to NATO defense point to a growing demand for advanced semicon- ductors. The outlook for the radio communications industry is less promis- ing. The U.S. share of that market has been declining in recent years, as competition from non-U.S. sources intensifies and as large gov- ernment projects are completed. The market for semiconductors used in consumer equipment is generally more highly saturated than the market for other types. Further penetration by U.S. firms is most likely in applications where advanced semiconductors can be utilized. In the opinion of several West German semiconductor users, U.S. firms can enhance their position by: (1) establishing or expanding sales organizations to enable direct person- to- person contact with potential customers. (2) improving maintenance and consulting services and other tech- nical support activities. (3) reducing delivery time, especially on replacement orders. (4) increasing participation in fairs and exhibitions. In short, the West German market for American electronic com- ponents, including semiconductors, offers U.S. manufacturers ex- cellent opportunities to initiate, develop, and expand their exports to Germany now and in the foreseeable future. The market character- istics, however, are expected to continue to change gradually, the em- phasis shifting from consumer and entertainment products to elec- tronic instruments and components for industrial, commercial, and military applications. The United States will be facing increasingly stiff competition from both domestically produced and imported electronic components, but it should continue to maintain its leading position as an exporter to West Germany. This will be due in no small part to the high reputation which the United States enjoys for advanced design and sophistication of its electronic products and the high standards of reliability and work- manship that these products meet. Part II. — Italy SUMMARY ANALYSIS The demand for semiconductors in Italy is accelerating with the growth and modernization of manufacturing industries. Production in Italy of semiconductors, including transistors, diodes, and similar devices, and rectifiers increased to almost $12 million in 1962. x Italy produced about 7U percent of the entertainment type semiconductors it consumed in 1962, and approximately half of its non- entertainment type consumption. Price competition among manufacturers of entertainment type semiconductors has been so severe that many firms have curtailed or discontinued production of this type. Domestic manufacturers have not undertaken production of advanced types of semiconductors be- cause of the limited demand for most products in that category. Rising labor costs have placed further pressure on semiconductor manufacturers' profit margins. Thus, the practice of hiring extra employees rather than making more efficient use of the existing work force is giving way to the use of improved methods and labor-saving devices. Product research and development activity is small by U.S. stand- ards in both the private and the public sectors, but it is growing, especially in the latter. For fiscal year 1963, the Government ap- propriated $93.5 million for scientific research purposes. Government contracts and military procurement are also increasing but are likewise small by U.S. standards. Italy imported almost $4.9 million worth of semiconductors in 1962, up $0.5 million from 1961. The Netherlands maintained its position as leading supplying country by a slim margin over the United States, each of these countries accounting for about 35 percent of Italy's semi- conductor imports. In early 1963 the United States took a slight lead over the Netherlands. Exports from Italy in 1962 exceeded $2.9 million, about 3 times the 1961 total. France, the Netherlands, and West Germany were the major customers. The outlook for products using semiconductor components is gen- erally favorable. The number of radio receivers in use early in 1963 totaled about 9.2 million. Italian production of transistorized radios is, expected to expand, despite growing competition from Japan. The market for table models employing vacuum tubes is declining. Pro- duction of transistor radios increased by 70,000 units from 1961 to lvalue data in this report have been converted from lire to U.S. dollar equivalents at the rate of 625 lire = US$1.00. 1962, while production of tube type radios increased by only 37,000 units. The market for television receivers in Italy is far from saturated. An estimated 3.8 million receivers were in use in early 1963. Pro- duction of television receivers was estimated at 850,000 units in 1961 and 790,000 units in 1962; the decline in 1962 was attributable to re- current strikes during the peak season. Considerable growth is fore- seen for transistorized television. Italy's imports of radio receivers, television receivers, and tape recorders totaled $10.9 million in 1961 and $12.2 million in 1962; exports totaled $8.2 million and $8.8 million in the respective years. In the field of radio communications and radar equipment, Italian exports greatly exceed imports. In 1962, exports totaled $15.4 million and imports, $4.2 million. The automation of business and production operations is being en- couraged on account of rising labor costs and threats of a labor short- age. Several Italian firms are striving for a share of the growing market for electronic computers and industrial control instruments. The high-fidelity market is still relatively untapped. FM broad- casting is growing, being encouraged by the Government. If present trends continue, the United States will displace the Nether- lands as Italy's leading source of semiconductors. However, the Netherlands is expected to remain highly competitive, while West Germany, France, and the United Kingdom will probably make sub- stantial gains as contenders for the market. U.S. manufacturers presently have the advantage of more advanced solid state technology and the ability to produce in volume a wide va- riety of advanced semiconductors, but Italian and other European manufacturers are closing in. Already, they can produce and sell many entertainment type semiconductors at prices below those of U.S. types. Competition in more advanced semiconductors is ex- pected to intensify in the near future. In view of the highly competitive and rapidly changing condition in the Italian semiconductor market, close contact is important. A good Italian agent or representative can be an invaluable asset to the U.S. semiconductor exporter. THE ITALIAN ECONOMY Italy's gross national product increased substantially in 1954-62, from $20.2 billion to $37.9 billion at current prices. The 1962 in- crease over 1961 amounted to 12 percent. This increase, however is about double the growth rate in real terms because of inflationary factors. Italy's overall rate of growth in real terms will probably re- main between 5 and 6 percent; the 1963 rate was about 5.7 percent. Italy is rapidly becoming a highly industralized nation, the in- dustrial sector accounting for 40 percent of the total GNP. The most highly industrialized centers are located in northwestern Italian cities including Milan, Turin, and Genoa. Italian industry employs 8 million people, or almost 40 percent of the work force. In 1962 per capita income in Italy was $700 and steadily rising. Private consumption expenditures continued to advance, reaching $23.9 billion, compared with $21.1 billion in 1961. This rising standard of living has created an increased demand for consumer goods— automo- biles, television sets, refrigerators, and washing machines. Manufacturing industries increased their share of GNP from 27 percent in 1954 to 33 percent in 1961. This trend reflects the con- tinuing Italian industrialization program, and, as the economy expands, indicates a climate favoring the sale of semiconductors for various manufactured goods. THE SEMICONDUCTOR MARKET Production Semiconductor production in Italy climbed to nearly $12 million in 1962. According to industry estimates, the products made comprised 18 million transistors, diodes, and similar devices, and 800,000 recti- fiers. Nearly 67 percent of the total output were of the less advanced varieties used in radio and television receivers (entertainment type semiconductors) . Domestic production accounted for about 70 percent of all enter- tainment type semiconductors consumed in Italy in 1962 and approxi- mately half of the nonentertainment types. Italian producers of nonentertainment type semiconductors are faced with the problem of creating a viable market in Italy for many of their newer products, a task not made any easier by the lack of any sizable military consumption. Until a large market develops, domestic manufacturers will not be able to produce a full line at profitable levels. The picture is quite different in the entertainment type semi- conductor market. As a result of severe price competition between the numerous producers of germanium entertainment type semiconductors, several firms had curtailed or discontinued production of this type by June 1963. Industry sources believe more firms may follow suit. Italy imports most of its technical know-how in the semiconductor field through licensing and affiliation agreements with U.S. and Eu- ropean producers. Only a few firms operating in Italy do any devel- opment work, and solid state research is just beginning at the Uni- versities of Bologna and Pavia. Since there is little Government ac- tivity in the field, no standards have been developed for Italian mili- tary or NATO contracts. Italian manufacturers are troubled with rising production costs. Semiconductor production in Italy is said to be as fully mechanized as is economically feasible in this field of rapidly changing technology where new developments threaten to render production equipment ob- solete long before it is fully depreciated. At the same time, Italy is fast losing the advantage in labor costs it once enjoyed. Overall labor costs in the electronics sector have increased approximately 20 per- cent since the end of 1961. Wage rates in Italy are equivalent to those in Belgium, France, and the Netherlands. Italy's semiconductor exports for 1962 are valued at more than $2.9 million, about 3 times the 1961 and 13 times the 1960 level. Major customers were France, which received nearly 34 percent of these exports, and the Netherlands and West Germany, nearly 25 percent each. Types of Production Between 60 and 75 percent of Italian production consists of alloy or diffused germanium entertainment type semiconductors of both high and low frequency. Several companies, including Philips Italiana and Societa' Generale Semiconduttori (SGS), make nonplanar silicon tran- sistors and diodes, but only SGS, which is one- third owned by Fair- child Semiconductors of Mountain View, California, makes planar and planar- epitaxial silicon semiconductors. All Italian producers except Philips Italiana, base their specifica- tions on the 2 N and 1 N systems established by the U.S. Electronic Industries Association for transistors, rectifiers, and diodes. The manufacturers of low- frequency germanium transistors for use in entertainment products often sell kits of several transistors, de- signed to the customers' specifications. High-frequency entertainment type germanium transistors are also on the market. High and low frequency entertainment type silicon transistors were not being marketed in commercial quantities as of late 1962. One company was reported to be selling sample quantities at germanium transistor prices in order to develop the market. It is believed that as Italian demand for semiconductors grows more silicon transistors will be produced, and that soon prices may drop to the level being quoted for low-frequency germanium types. Advanced types of germanium and silicon semiconductors produced in Italy include silicon planar transistors, silicon planar diodes, silicon rectifiers (non-planar), germanium transistors for computers, and germanium diodes for industrial and computer uses. Philips is the largest producer, and other firms usually follow its lead in prices. The second largest producer is Societa' Generale Semiconduttori. Research and Development Research and development activity is being stepped up, aimed at the production of advanced semiconductors and the products in which these components are used. Government contracts and military procurement, including those from NATO, are small by U.S. standards, but increasing. In March 1962 it was announced that all research activities were to be coordinated by the Government as part of a national economic pro- gram and that scientific research expenditures would increase in pro- portion to the expected growth in national income. Later in the year a new cabinet post was created for scientific research. Agencies in- volved in research and development in the electronics field include Consiglio Nazionale delle Ricerche, Instituto Superiore delle Tele- communicazioni, Fondazione Bordoni, and the Institutes of Technology of Milan and Turin. For the fiscal year ending June 30, 1962, the Italian Government appropriated approximately $92 million for scientific research to be performed by various government ministries and organizations. The appropriation for fiscal year 1963 was $93.5 million. These amounts represent about 0.3 percent of Italy's gross national product, ap- parently the lowest ratio among the advanced industrial nations of Europe. Italian space research efforts are presently concentrated on the " San Marco Project," whose goal is the launching in 1964 of a scientific satellite into an equatorial orbit from an Italian mobile platform. Other participation in space programs includes Italy's membership in the European Space Research Organization and the European Launcher Development Organization. Italian industry spent $83.1 million for research in calendar year 1961, according to preliminary Italian Government estimates. Almost half of this amount went toward a category that includes architecture, engineering, and manufacturing. Distribution Italian producers of semiconductors are finding that their rapidly changing and highly competitive market requires that they have highly trained technical personnel to sell their products. For this reason, they prefer to sell direct to industrial customers through their own technical staffs. The high salaries required to attract trained per- sonnel have raised distribution costs to the point where they repre- sent an estimated 20 percent of the selling price. The frequency of small orders adds to distribution cost of locally made products and of imports, which continue to be sold through agents. Semiconductors from abroad are usually imported direct by elec- tronics manufacturers and assemblers, although some parts and com- ponents are distributed by importers to large retailers in the princi- pal cities for sale to radio amateurs and repair shops. The bulk of Government purchases is made through the Italian Technical Delegation located in the Italian Embassy in Washington, D.C. Major distribution centers are Milan and Turin. Regional agen- cies are operated by leading manufacturers, primarily for servicing equipment. Consumption Apparent consumption of semiconductor devices in Italy totaled approximately $14 million in 1962, comprising $9.1 million from do- mestic production and $4.9 million from imports. Italian consumption of semiconductor devices corresponds to the domestic production of end products using semiconductors as com- ponent parts. These products include electronic entertainment type and radio communication equipment, radar, and electronic automa- tion products. THE MARKET FOR ELECTRONIC PRODUCTS EMPLOYING SEMICONDUCTORS Entertainment Type Electronic Equipment The market for vacuum tube radio receivers in Itaiy is believed to have reached a plateau. Transistor radios, however, are in strong de- mand, especially the lower priced domestically produced and imported Japanese models. Italian producers hope to promote the sales of the more powerful 7- and 8- transistor radios in which they could com- pete more effectively. In 1961-62, Italian production of vacuum tube radio receivers increased by about 5 percent, from an estimated 743,000 sets to 780,000, while production of transistor radio receivers grew twice as fast, from 660,000 to 730,000 sets. The number of radios in use early in 1963 totaled 9.2 million, ac- cording to a Radio Televisione Italiana (RAI) estimate. The market for television receivers in Italy is far from saturated. The number of sets in use in early 1963 totaled 3.8 million. Tran- sistorized sets are expected to become more popular as they become cheaper and as living standards rise. A challenging potential market for battery powered receivers is represented by the 2 million Italians who live away from the national power grid. About 790,000 television receivers were produced in Italy in 1962, down from 850,000 in 1961. Both the radio and television industries were affected by a long period of recurrent strikes in the last quarter of 1962. The television industry suffered the greater damage however, because its market is more seasonal and the strikes occurred at the peak selling season. Italy's overall imports of entertainment type electronic equipment have remained fairly constant in recent years— $12.2 million in 1962 compared with $11.8 million in 1959. Exports, on the other hand, have increased sharply, to $8.8 million in 1962 from $2.4 million in 1959. Netherlands and West Germany have been the leading suppliers, and Netherlands and France, the leading customers. The hi-fi market is in its infancy, and FM broadcasting is being developed with the help of the Italian Government. Radio Communications Equipment and Radar Increasing production of radio communications and radar equipment in Italy in recent years is due largely to orders from Radio Tele- visione Italiana (RAI) and foreign buyers. Domestic companies, many of which are affiliated with foreign firms, have orders for air defense systems in Sweden and for fire control equipment with radar and missile tracking gear to be used by NATO forces in West Germany. Italy's imports of radio communications and radar equipment since 1960 have remained relatively stable. The United Kingdom, the United States, and West Germany continue to be the leading suppliers. Italy's exports of products of this type totaled $4.3 million in 1960, $17.0 million in 1961, and $15.4 million in 1962. West Germany, France, and the Netherlands were the major customers in this period. Automation Products The electronic controls industry in Italy is being encouraged by developments in both the private and the government sectors of the economy. Italian manufacturers are seeking to promote production efficiency by replacing old and outmoded equipment, by investing new capital in plant expansion, and by streamlining working methods. Ris- ing labor costs and prospects of a labor shortage provide further stimuli to demand for the automation of business and production op- erations. The Italian Defense Ministry is reported to be placing more substantial orders with firms in the electronic controls field. Gov- ernment participation in space programs such as the San Marco Proj- ect and membership in EEC space organizations is considered promis- ing by the electronic controls industry. A leading pharmaceutical company has designed and assembled its own control instrumentation for continuous chemical analysis. Other companies have taken similar action in the petrochemical and elec- tric power fields. Several Italian firms are striving for a share of the market. In 1961, Italian production of control instruments approximated $3 mil- lion. A leading Italian manufacturer of equipment for automation is Cea Perego, which produces special regulators, data logging com- puters, and process control computers for thermopower stations. This company also makes numerical controls for machines tools. Other companies manufacturing numerical control devices are Compagnie General di Elettricite of Milan, and Prodest of Milan. Olivetti is a leading computer manufacturer. Italian firms are producing in quan- tity kinetics controls for rolling mills, controls for power generators, and precision instruments. U.S. firms are the major foreign suppliers of control instruments for the Italian market. European firms, led by West Germany, United Kingdom, and France, provide most of the remaining imports. Total value of imports of electronic control instruments in 1961 amounted to $5 million. THE MARKET FOR U.S.-MANUFACTURED SEMICONDUCTORS Imports Although the Netherlands remained the leading supplier of semi- conductors to Italy in 1962, if current trends continue, the United States should take the lead in the near future. The United States held a slightly larger share of the market in early 1963 than the Nether- lands, each country accounting for about 35 percent of Italy's imports. West Germany provided approximately 15 percent, and France supplied about 12 percent (table 10). Table 10.— Italian Imports of Semiconductors, I960- 62 1 (Thousands of dollars) Country of origin 1960 1961 1962 Total 3,542 4,398 4,867 Netherlands 1,555 1,240 384 363 1,539 1,409 537 913 1,643 1,561 734 929 United States West Germany Other countries 1 Excluding imports of photocells from the United States, which amounted to $23,000 in 1960. Source: Statistica Mensile del Commercio con l'Estero Central Insti- tute of Statistics, Rome. ~~~ Assessment of Competition Italian purchases from the United States consist primarily of tech- nically advanced semiconductors not produced in Italy or in other European countries. European affiliates of U.S. firms will undoubtedly begin producing some of the newer types of semiconductors as European demand for them increases. However, U.S. research in the field and volume pro- duction made possible by the large domestic market for advanced semi- conductors within the United States have given U.S. exporters of these products a considerable advantage. Italian companies that are affil- iated with U.S. firms and have exports to EEC countries as their main purpose include Telettra and Olivetti, Pirelli ApplicazioneElectroniche, Aziende Techniche Elettroniche Del Sud (ATES), and Fabbrica Italiana Valvole Radio Elettriche (FIVRE). As of July 1%3, at least one German manufacturer, Siemens, was reportedly trying to enter the Italian market with silicon semiconduc- tors of advanced types previously produced only in the United States. Siemens' prices were said to be 30 or 40 percent below those of the equivalent U.S. product, but long delivery times have so far prevented that firm from competing effectively with U.S. manufacturers. Pre- sumably the competition will become more serious in the future, not only from Siemens, but also from the Philips Company in the Nether- lands particularly in the area of integrated circuits. Meaningful price quotations are almost impossible to obtain in view of the universal practice of giving high discounts to favored and large customers. Industry sources indicated in mid- 1963 that discounts of 50 to 80 percent were not uncommon. Societa' Generale Semicondut- tori (SGS) reports that its prices for silicon planar transistors and diodes have not changed recently but that there has been a 10-percent decrease for all of its nonplanar silicon and germanium semicon- ductors. Decreases are also expected by mid- 1964 for planar semi- conductors. The lowest prices, of course, are found in the highly com- petitive germanium entertainment type semiconductor field — an ex- treme example is one producer's price of $1.00 for seven transistors and one diode. Domestic Importers and Distributors A trade list giving descriptive data about leading Italian importers and dealers can be purchased for $1.00 from the Bureau of Interna- tional Commerce, U.S. Department of Commerce, Washington, D.C., 20230, or from any Department of Commerce Field Office. The title of the list is "Electronic Equipment, Electron Tubes, and Other Elec- tronic Components and Accessories— Importers, Dealers, and Manu- facturers—Italy." The highly competitive and rapidly changing semiconductor market in Italy makes it imperative for U.S. exporters to seek aggressive technically capable Italian agents who know the market and who can quickly solve most of the technical problems which are posed by their customers. US. exporters should avoid utilizing agents who already 22 have numerous accounts requiring their attention and preventing ef- fective promotion of any one product. Both the agent and his U.S. ex- porter should be thoroughly familiar with Italian customs procedures and the required documentation in order to reduce clearance time to a minimum. Italian Trade Promotion The trade association in Italy for all dealers in electrical and elec- tronic equipment, apparatus, accessories, and supplies is: Confederazione Generale Italiana del Commercio Piazza G.b. Beli 2, Roma The association for Italian agents and representatives is: Federazione Nazionale Associazioni Agenti e Rappresentanti di Commercio Piazza Belgioioso 1, Milano "Elettronica," a quarterly technical review devoted to electronics in general, is published at Via Arsenale 21, Torino. The official trade promotion agency is Instituto Nazionale per il Commercio Estero, or ICE (Italian Institute for Foreign Trade), lo- cated at Via Torino 107, Roma. Under the jurisdiction of the Italian Ministry of Foreign Trade, its purpose is to promote good business relations between Italian and foreign companies. It supplies and pub- lishes information on Italian trade and industry and on regulations and laws governing trade with Italy. It also acts as arbiter for the settle- ment of disputes between Italian and foreign firms, organizes Italian participation in foreign exhibitions and fairs, and helps foreign firms to contact Italian exhibitors. Tariff and Nontariff Barriers Under provisions of the European Economic Community, Italian external tariffs on semiconductors were reduced on July 1, 1963, from 27 to 24.4 percent. In comparison, tariffs applicable to Common Market countries were reduced from 16.2 to 14.4 percent. Italian customs officials include transportation costs in assessing the customs fee. They also add a 4-percent equalization charge, a 3.3-percent transaction tax charge, and an 0.5 -percent handling charge. Many of the newer types of semiconductors are not readily classifi- able under existing Italian customs specifications. Therefore, special detailed documentation is required and even with such special docu- mentation, customs clearance can consume several days or even weeks of vital delivery time. To avoid this problem, importers fre- quently pay unofficial "urgency fees" which can add as much as 5 per- cent to their import costs. The Italian import license and U.S. export license requirements are also considered important barriers that can add from 1 to 3 months to delivery time. To reduce this delay to a minimum, Italian importers of U.S. semiconductors prefer to hold their orders to under $500 in value and thus gain exemption from the U.S. export permit required for shipments valued at above this amount. U.S. Sales Potential in Italy Demand for semiconductors should continue to increase signifi- cantly as Italy's industrial complex develops and advances. No per- centage growth figures have been predicted by any source, but because Italy is still less developed in electronic fields than most other Com- mon Market countries, its growth rate in this type of activity may be higher than theirs. U.S. sales of entertainment type semiconductors such as those al- ready being produced in Italy and the rest of Europe are practically excluded by their higher prices and the tariff barrier they must sur- mount. U.S. firms seeking to export to Italy should therefore be care- ful in evaluating the market and the ability of their products to com- pete both technically and in terms of price and delivery time. Competition is expected to become stronger in semiconductors, even in the more advanced types, from such countries as the Nether- lands, West Germany, United Kingdom, and France. Nevertheless, the outlook for U.S. exports to the Italian semiconductor market appears to be encouraging. Just as in the past, the more technically advanced semiconductors will continue to offer the U.S. manufacturer his most promising mar- ket. This market is being enhanced by steadily increasing sales of Italian radio communication and radar equipment, particularly in the foreign markets. Expanding Italian production in the fields of com- puters and electronic controls should also provide the U.S. manufac- turer of advanced semiconductors a growing market for his products. ft U.S. GOVERNMENT PRINTING OFFICE : 1964 O - 732-451 PENN STATE UNIVERSITY LIBRARIES AD0DD712AAQAL,