Industrial Policy, Or Industrial Folly?

It seemed like a model of industrial policy--Clinton-style. On Apr. 30, tiny OIS Optical Imaging Systems Inc. was picked for a government award of up to $50 million to help build the nation's first large U.S.-owned factory for advanced flat-panel screens. The Troy (Mich.) electronics company's selection by the Advanced Research Projects Agency--the Pentagon unit the Administration hopes will promote high-tech competitiveness--shows that "government and industry can work together to develop a critical technology," says Representative Sander M. Levin (D-Mich.).

Critics contend, though, that the potential award has the scent of high-tech political pork. Instead of giving the U.S. flat-screen business a vital boost in its struggle with Japan, technology-watchers say the pending deal may hurt America's chances for catching up in a technology needed for everything from fighter-plane cockpits to wall-sized television screens. "It's a missed opportunity," says an industry expert. Although the story isn't over, it offers a lesson in the potential pitfalls of government-directed technology policy.

CUSTOM JOB. No one doubts that flat-panel displays are a crucial technology for the Information Age. Sales were $3.2 billion last year and are expected to hit $9.4 billion by 2000 (chart). And since Japanese companies own more than 95% of the market, the U.S. faces a daunting challenge in getting back into the race. "It's going to take all the best resources that the U.S. government and industry can muster," says Peter Mills, chief executive of the U.S. Display Consortium, a 10-company, ARPA-funded effort to develop the basic materials and manufacturing processes needed for fabricating displays.

But is OIS, a subsidiary of Guardian Industries Corp. in Northville, Mich., the best choice for that job--or simply the company with the most friends in Washington? Last fall, a group of Michigan lawmakers slipped $25 million into the fiscal 1993 defense budget to fund a flat-panel development effort. ARPA officials considered the congressional action misguided. The reason: The legislation was written to steer the money to the U.S. company most capable of supplying the military with the active-matrix liquid-crystal displays (LCDs) it wants--a description that fits OIS perfectly. Nonetheless, ARPA sent out a request for proposals, which critics say also favored OIS.

A group made up of AT&T, Xerox, and Standish Industries, a Wisconsin maker of LCDs, decided to bid despite OIS' advantage. "AT&T would like to get into the display business in the U.S.," says Richard T. Archambault, director of American Telephone & Telegraph Co.'s global manufacturing and engineering. AT&T needs thousands of flat screens for such products as video phones.

AT&T and other computer makers have long faced a daunting dilemma: Do they cut a deal with Japanese suppliers or struggle to make the screens themselves? If Uncle Sam chipped in, the executives reason, the industry could put together a U.S. team and raise the $300 million needed to start a world-class manufacturing effort. Toward that end, AT&T linked up with Standish and with Xerox, which has developed advanced active-matrix technology, to ask ARPA for $180 million over six years.

That put ARPA in a quandary. Only OIS' plan met the request-for-proposal's criteria, which included a proven ability to supply the military with active-matrix screens. But ARPA officials feared that handing the money to the small company, which plans to sell most of its displays to the Pentagon, would push AT&T to buy from Japan and doom chances of building U.S. flat-panel manufacturing.

VAGUE ASSURANCES. So, the agency now is playing coy. While it negotiates a final contract with OIS, ARPA is trying to keep the AT&T-Xerox-Standish group on board with vague assurances of more awards early this summer. "You haven't heard it all yet," says a senior ARPA official.

The approach has left some in the industry fuming. This is the Clinton Administration's first big industrial policy effort, "and they're giving money to a $10 million company to take on Japan," snorts one flat-panel expert. For its part, OIS insists that it won the award fairly, and that it has as good a chance of jump starting the U.S. industry as the heavy hitters. "Thinking that only the big guys can do it is dangerous industrial policy," says OIS Director Peter Young.

In fact, industrial policy opponents may wonder why AT&T and Xerox need money from the federal trough in the first place. The reason, explains Display Consortium's Mills, is that U.S. companies are too far behind Japan to catch up on their own. That may be debatable. But it is clear that a military display factory in Michigan isn't likely to worry Japan's flat-panel makers.

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