For the Clinton Administration's biggest foray yet into industrial policy, it started remarkably casually. In February, 1993, Laura D'Andrea Tyson, chair of the White House Council of Economic Advisers, voiced the opinion in a meeting with National Economic Council Chief Robert E. Rubin that under the right conditions, Washington might want to intervene to help a specific industry. One example, she suggested, might be flat-panel displays, a Japanese-dominated technology that's a vital component in everything from laptop computers and video games to control-panel displays in jetliners.
The idea percolated in Rubin's mind for several weeks. Then, after a briefing with electronics executives, he reminded an aide of the suggestion. "You know that flat-panel idea?" Rubin asked. "Laura wants to use it as a case study." So a memo was drafted to Pentagon acquisition chief John Deutch, asking for a major study of government support for flat screens. That directive bore fruit on Apr. 28, when the Defense Dept. announced a bold plan to spend $587 million over the next five years--and up to $1 billion overall--to jump-start a commercial U.S. industry.
The tale of how Uncle Sam came to anoint flat panels as a chosen industry offers an unusual window on industrial policy, Clinton style. The basic thrust: Pick only those areas where the private sector is falling short of a critical national goal--in this case, defense needs. Then fund research, but only in technologies picked by industry. And finally, decide whether the national need is so great that government must provide incentives to manufacturers. That approach, Clinton Administration officials argue, will avoid costly industrial-policy failures, such as the estimated $2 billion poured into the doomed synthetic-fuels effort from 1970 to 1984.
Pentagon strategists began by addressing a narrow issue: How could it get the screens it needed? Some $200 million in funding from the Defense Dept.'s Advanced Research Projects Agency (ARPA) from 1989 to 1993 had helped companies--including Texas Instruments Inc., Xerox Corp., and others--develop a dazzling array of innovative flat-screen technologies.
The rub: None of the technology "was showing up in Defense's procurement pipeline," says Kenneth S. Flamm, the Pentagon's dual-use technology maven. In the face of Japan's lead, companies did not want to risk the huge sums needed to build manufacturing capacity.
Flamm was determined to fix that problem. A former Brookings Institution economist who was brought in, in part, to study the flat-panel situation for Tyson and Rubin, Flamm badgered everyone for data--on the size of flat-panel markets, the cost of building plants, and the extent of defense needs. There were some big surprises. One was how rapidly the market is growing: Analysts figure it could hit $20 billion by the year 2000. Another shock was how small the defense demand would be. "There's no way that Defense will amount to more than a 5% share of this exploding marketplace," says Flamm.
SEED MONEY. The findings suggested that the traditional Pentagon tack of paying for military-use-only plants would be futile. Far better for Uncle Sam to spend seed money to create a strong commercial industry, Flamm argued. But how could the federal government entice U.S. companies to shell out up to $400 million to build full-scale factories?
The answer came during a marathon, late-December meeting of Flamm's 15-member interagency team in a rented room at the Institute for Defense Analyses in Alexandria, Va. Why not offer matching research-and-development subsidies--up to $120 million--to companies that committed their own money for a manufacturing facility? That way, the U.S. government would not infringe on global trade rules that bar manufacturing subsidies. "We thought, 'God, this could be the magic bullet,'" recalls Flamm.
From there, Flamm had to sell the plan to higher-ups. It helped that industry was beginning to present a united front. Flat-panel makers--such as Planar Systems, OIS Optical Imaging Systems, and Photonics Technology--had been at loggerheads with the computer industry over a 1991 dumping suit the panel makers had brought against Japan. Duties on made-in-Japan parts threatened to raise the computer makers' costs.
A breakthrough occurred when OIS decided to side with computer makers and withdraw its complaint. By early this year, some computer companies had even joined the ARPA-funded U.S. Display Consortium (USDC), a group of flat-panel makers and suppliers. "If they were still at each other's throats," says a White House official, "the Administration would not have gone forward."
"GIANT STEP." The crucial question now: Will companies ante up their share? TI says it will, but others are being cautious. "What the government is proposing is a giant step," says Richard T. Archambault, vice-president for high-resolution technologies at AT&t. "But we still have more homework to do" before signing on.
Even if AT&t, Motorola Inc., and others take Flamm up on his offer, it will be tough for the U.S. to catch up with Japan. Not only does Japan hold a 95% market share in active-matrix liquid-crystal displays, the leading technology, but Sharp, NEC, and Toshiba are continually making clearer and less power-hungry screens. U.S. hopes largely are pinned on competing technologies, such as field-emission screens, arrays of tiny mirrors, or gas plasma. "Maybe the vaunted Japanese technology machine made the wrong decision," suggests Curtis M. Stevens, chief financial officer of electroluminescence maker Planar Systems Inc. Of course, Japan is working on these alternative technologies, too.
There are political worries as well. For one, Senator John C. Danforth (R-Mo.) attacks the plan as a thinly disguised "production subsidy." He calls it "a terrible policy for the U.S. to get into and a real perversion of trade policy." And even if the plan survives such sniping, it could fall victim to Congress' insatiable appetite for pork. Washington insiders warn that the Pentagon must be wary of lobbying for active-matrix screens by AT&t, Motorola, and IBM. Says Joseph Tasker Jr., director of federal regulatory affairs at Compaq Computer Corp.: "If Washington ends up choosing a particular technology, they've screwed up."
The Administration is confident it can skirt these quagmires. "This is a good example of the kind of policy we need," says Tyson. If they're right, the picture for the U.S. display industry could soon brighten. And if they're wrong, taxpayers will foot the bill.