NEWLY INDUSTRIALIZING COUNTRIES: GROWING INDUSTRIAL COMPETITORS

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Intelligence
Newly Industrializing Countries:
Growing Industrial Competitors
State Dept. review completed
Confidential
GI 82-10216
October 1982
Copy 400
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Directorate of Confidential
Intelligence
Newly Industrializing Countries:
Growing Industrial Competitors
This paper has been prepared b
Office of Global Issues. Comments and queries are
welcome and may be addressed to the Chief, Third
World Issues Branch, OGI,
Confidential
GI 82-10216
October 1982
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Newly Industrializing Countries:
Growing Industrial Competitors 25X1
Overview The so-called newly industrializing countries (NICs)' are moving rapidly
Information available into head-to-head competition with the United States and its industrial
as of I October 1982 allies in the market for more sophisticated manufactured products. The
was used in this report.
NICs are aggressively reshaping the structure of their industrial sectors to
shed their image as low-cost producers of relatively simple, labor-intensive
goods in favor of new, high-growth products. Lower labor costs and
government subsidization of manufacturing will make NIC exporters
tough to compete with, putting additional stress on employment and output
in the industrial nations. As the NICs compete more aggressively in both
OECD and Third World markets, we expect them to become more active
participants in such industrial country-dominated forums as the GATT.
Based on the industrial plans and recent trends in the industrial sectors of
each country, we believe that the NICs will be able to complete their shift
to a more capital- and technology-intensive stage of production by the end
of the decade. Specifically, we believe the NICs will:
? Strengthen their existing capital-intensive steel, shipbuilding, and auto-
mobile industries.
? Manufacture a greater share of the components used in their light-
assembly industries, particularly in the electrical products sector.
? Make significant inroads into the low- and medium-technology growth
industries of machine tools, telecommunication equipment, and small
computers and their related peripherals.
? Expand their role as centers for financial, business, transportation, and
information services.
The speed and extent to which the NICs progress into these lines of
production are linked to the economic performance of OECD countries and
to how quickly the NICs are able to eliminate several obstacles. We believe
the more prominent of these tasks include: overcoming a growing shortage
of skilled laborers; developing the marketing, spare parts, and servicing
networks necessary to gain worldwide consumer acceptance for their
products; and building the R&D capability to develop and design new
products and innovations in production methods. The Asian NICs will
probably be more successful than Brazil and Mexico in solving these
problems because of their stable economies and relatively advanced
industrial sectors.
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GI 82-10216
October 1982
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It is difficult to assess critically the NICs' progress in restructuring their
industrial sectors because their strategies are so recent, and the pace has
been temporarily slowed by global recession. Nonetheless, some early
supporting trends in the development of the resources needed to make this
transition are evident:
? Labor productivity is rising rapidly, especially in Singapore and South
Korea.
? Foreign investment flows are generally growing, especially in Singapore
and Mexico.
? Several NICs are establishing reputations as reliable designers and
suppliers of 'more sophisticated products such as computer equipment
(Brazil), precision engineering and electronics (Singapore), and machine
tools (Taiwan).
Several aspects of the NICs' shift in industrial development strategies will
directly benefit the United States. We expect some increase in demand for
US manufactures of capital equipment and technology and greater oppor-
tunities for foreign investment, licensing, and credit transactions to arise
from the NICs' industrial push. In addition, growing NIC incomes should
stimulate demand for US-produced consumer goods.
The NICs' emergence alongside the Big Ten 2 industrial countries as major
competitors in manufactured goods markets and in lining up supplies of
raw materials will, however, attract much more attention than any
projected financial gains for the United States. The NICs' tendency is to
focus on a narrow range of products that almost guarantee successful
market access rather than producing a gamut of marginally competitive
items. By aggressively siphoning off these profitable, highly visible niches,
the NICs could very well prolong the trade tensions between the industrial
and developing countries that currently take place over traditional labor-
intensive products.
We believe that the Asian NICs will probably present the greatest
challenges to the industrial countries. Because of their ambitious industrial
plans, advanced industrial base, and efforts to improve their indigenous
human resources, they have the potential to move rapidly into the market
for more sophisticated manufactured products. Troublesome financial
2 The Big Ten countries include Belgium-Luxembourg, Canada, France, Italy, Japan, the
Netherlands, Sweden, the United Kingdom, the United States, and West Germany.F_
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problems, high rates of domestic inflation, large unfilled home markets,
and relatively less developed industrial bases will probably constrain
Mexico and Brazil to their established capital-intensive industries as the
major source of export earnings.
The growing technological sophistication of production in the NICs could
create the potential for them to become alternative suppliers to the Soviet
Union in the event of future Western trade sanctions. While the NICs lack
the broad industrial base of the United States and most European
countries, they will probably be able compete in quality and price on sales
to the Soviet Union of a narrow range of goods without the security or po-
litical interests that currently constrain Western sales. Indeed, the NICs'
development strategies in many ways mesh well with the needs of the
USSR for. such products as computer equipment and software, microelec-
tronic products and production processes, telecommunications systems,
machine tools, and even such traditional NIC products as oil exploration
equipment, shipbuilding technology, and chemicals. While most of the
NIC manufactures are unlikely to be as sophisticated or as sensitive as
those currently on COCOM-restricted lists, for example, even the avail-
ability of standard products and established technology would save the
Soviet Union time and money in R&D costs and engineering risks and
result in more efficient product acquisition.
25X1
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Shift in Industrial Development Strategies 3
1. NICs: Some Determinants of Industrial Performance, 1980 3
2. Singapore: Net Investment Commitments in Manufacturing 19
1. Newly Industrializing Countries: Economic Growth and Income viii
2. Newly Industrializing Countries: Indicators of Industrial Develop-
3. Newly Industrializing Countries: Share of OECD Imports of Manu-
factures 2
4. Newly Industrializing Countries: Net Direct Foreign Investment 6
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Table 1
Newly Industrializing Countries:
Economic Growth and Income
Average Annual Real GDP Average Annual Per Capita GDP
Growth Rate (percent) Real Per Capita 1981
GDP Growth Rate (US $)
1961-73 1974-81 1961-81
(percent)
1,560
2,460
Table 2
Newly Industrializing Countries:
Indicators of Industrial Development
Average Annual Growth Industrial Production Shares of World Manufactures Exports as
in Industrial Production as Share of GDP Industrial Production Share of Total Exports
1961-70
Brazil
9.7
Hong Kong
8.2
Mexico
9.1
Singapore
12.5
South Korea
17.2
Taiwan
16.4
1971-79 1960 1979 1963 1977 1960 1980
9.6 35 38 1.57 2.49 a 3.0 37.6 b
4.3 34 31 0.08 0.21 80.0 91.1
6.4 29 38 1.04 1.45 11.0 11.2
8.6 18 36 0.05 0.10 26.0 46.7
16.5 20 39 0.11 0.69 15.0 89.5
20.5 29 51 0.11 0.46 32.3 90.8
a Data for 1976.
b Data for 1979.
2.7 38 34 40.25 36.90 65.0 65.7
5.6 45 42 5.48 9.14 79.0 94.5
2.1 53 49 9.69 8.85 87.0 83.6
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Newly Industrializing Countries:
Growing Industrial Competitors
Past Success
The newly industrializing countries (NICs) -Brazil,
Hong Kong, Mexico, Singapore, South Korea, and
Taiwan-have often been cited as models of develop-
ment for the remainder of the Third World. IMF data
show that between 1961 and 1981 the NICs' average
annual growth rate in real GDP was roughly 7
percent, far in excess of the 4-percent growth regis-
tered by OECD countries for the same period (table
1). As a consequence of this growth, the NICs have
raised their per capita GNP to $2,400, more than
three times the average of the rest of the Third World.
Much of the surge in the NICs' growth, according to
development theorists, has rested on their outward-
looking or export-led growth policies. In fact, they
have often been castigated for the impact that their
growing manufactures exports have on the production
and employment in industrial countries. The outward-
looking policies used by the NICs, which contrast
with the import-substitution development policies fol-
lowed by many other LDCs, have typically included
the following elements:
? The establishment of a more liberal trade and
payments regime with relatively free trade for both
exports and imports of inputs needed for export
production.
? The introduction of a unified exchange rate system,
often accompanied by a devaluation and other
measures to maintain a competitive exchange rate.
? The use of fiscal incentives, such as accelerated
depreciation allowances and tax exemptions for
profits generated by exports, to aid domestic export-
ers and to attract foreign investment into promoted
industries.
? The implementation of fairly tight fiscal and mone-
tary policies to reduce consumer goods imports and
enhance the price competitiveness of export goods.
25X1
The NICs have each developed highly successful,
labor-intensive, industrial sectors. Since 1960 the
shares of industrial production as a percent of GDP in
the NICs have risen to levels roughly equivalent to
(and sometimes exceeding) those of the industrialized
countries (table 2). These labor-intensive industries
have made significant inroads into industrial country
markets: 25X1
? The leading NIC-manufactured export is apparel
(clothing, textiles, and footwear). In 1980 apparel
accounted for 30 percent of the NICs' total manu-
factured exports. NIC exports of this commodity
probably also are the most sensitive trade issues in
OECD-NIC relations. OECD purchases of NIC
apparel products amounted to nearly one-third the
total OECD imports of this product in 1980; in the
United States, the share was nearly two-thirds
(table 3).
? The second most important NIC-manufactured ex-
port commodity is consumer electronic and leisure
goods. Exports of these products, chiefly from the
East Asian NICs and, to a lesser extent, from
border industries in Mexico, have grown much more
rapidly than other NIC exports. Their shares of
OECD imports more than doubled between 1970
and 1980.
? NICs have made significant inroads into world
markets in industrial electronics. NICs now supply
between one-third and one-half of US imports of
telecommunication equipment and transistors; they
have even made inroads into the Japanese market in
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Table 3
Newly Industrializing Countries:
Share of OECD Imports of Manufactures
Total
Chemicals
Semifinished goods
Machinery
3.2
6.5
9.7
18.3
1.5
3.3
6.3
16.9
0.8
1.6
3.0
4.7
0.5
0.4
1.9
9.1
2.5
4.9
6.7
13.9
1.1
2.3
16.0
23.8
1.5
4.8
9.0
18.7
0.3
1.7
2.1
10.7
Current Challenges
The NICs are currently confronted with several fac-
tors that threaten to restrain the future growth of
their traditional, labor-intensive export base. Labor
shortages have begun to appear in a number of
manufacturing sectors, raising the cost of labor and
reducing the price competitiveness of exported prod-
ucts. These labor shortages have been especially pro-
nounced in Singapore, Taiwan, and Hong Kong.
Official projections by Singapore, for example, indi-
cate that the economy will need some 5,000 additional
foreign workers per year to make up the domestic
labor shortfall expected through the end of the dec-
ade. Moreover, as the NICs become more heavily
industrialized, workers' heightened expectations for
improved living standards will bring upward pressure
on real wages. As a result of these higher labor costs,
several labor-intensive industries have begun to move
away from these traditional centers of production.
More importantly, however, the NICs are facing both
increasing foreign competition and developed country
restrictions for their traditional exports. An increasing
15.6
37.6
3.3
13.3
7.3
43.7
42.1
65.2
12.5
16.5
56.2
52.9
16.6
23.6
2.9
6.6
3.5
13.0
number of LDCs-notably India, the Philippines,
Pakistan, and China-are emerging as lower cost
producers of many of the products that have fueled
NIC growth. Moreover, the NICs have been among
those developing countries whose preferential access
to developed country markets under the Generalized
System of Preferences (GSP) has been most restrict-
ed.3 The OECD reports that in 1977 about 70 percent
of the preferential cutoffs imposed by the EC and 96
percent in the case of the Japanese GSP fell on the
NICs. In addition, Western countries have made
greater use of import tariffs, orderly marketing ar-
rangements, nontariff barriers, import quotas, and
other restrictive measures to protect their domestic
markets from the rapid expansion of the NICs'
exports. The IMF asserts that the most severe protec-
tionist pressures in the period since 1974 have come in
' Under the GSP, developed countries grant on a bilateral basis
duty-free entry to the exports of manufactures, semimanufactures,
and selected other products from developing countries and territo-
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Figure 1
NICs: Some Determinants of
Industrial Performance, 1980
Average Hourly Compensation in Manufacturing
Us $
W. Germany
Japan
US
Taiwan
S. Korea
Singapore
Mexico
Hong Kong -
Gross National Savings as Share of GDP
Percent
W. Germany
Japan
Us
Taiwan
S. Korea
Singapore a
Mexico
Hong Kong
Brazil
textiles and clothing, footwear, electronics, steel, and
motor vehicles-industries in which the NICs have
staged much of their past export success.
Shift in Industrial Development Strategies
The NICs' Strategy for the 1980s
In response to these rising labor shortages and mount-
ing trade pressures, the NICs are introducing new
development strategies to maintain the dynamic
Change in Labor Productivity, 1975 to 1980
Percent
W. Germany
-
Japan
US _
Taiwan
S. Korea
Singapore
Hong Konga
Gross Domestic Investment as Share of GDP
Percent
W. Germany
Japan
US
Taiwan
S. Korea
Singapore a
Mexico
Hong Kong
Brazil
growth achieved over the past decade.' These strate-
gies are spearheaded by the drive to restructure the
industrial sector toward capital-, skill-, and technol-
ogy-intensive industries. Our analysis of the industrial
plans for each country indicates that several key
industries are targeted for future development; they
' A more elaborate treatment of the details of the industrial
development strategy of each NIC is available in the appendix.
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include machine tools, microelectronics, transporta-
tion equipment, telecommunications equipment, small
computers, and financial and information services. In
the United States these nonservice manufactures ac-
count for some 6.5 million jobs and generate output
official reports indicates that the most significant
change in these measures has occurred in the area of
production policy.
worth over $450 billion.
According to statements by various government
sources, these industries were singled out because of
their high value-added content, lower manpower re-
quirements, and potential as major foreign exchange
earners. Moreover, these officials believe that most of
the resources needed to develop these industries are
readily available and that, with the proper manage-
ment, their local industries can become leading world
manufacturers of the targeted product lines.
Singapore, South Korea, and Taiwan have introduced
the most ambitious industrial strategies.' Each seeks
to replace a large share of its currently labor-intensive
production with capital-, skill-, and technology-inten-
sive industries. Singapore is also striving to become a
regional center for financial, medical consulting, and
computer services. Brazil, Mexico, and Hong Kong
are taking a less aggressive approach. Brazil's some-
what narrower aim is to achieve technological inde-
pendence in a limited number of preselected
industries, such as data processing and telecommuni-
cations. Mexico is emphasizing the expansion of
industries producing machines and tools for the min-
ing and power sectors and for the manufacture of
consumer electronic products. Hong Kong, for its
part, prefers to continue its longstanding policy of
allowing the private sector to set the pace and pattern
for development.
Supporting Policy
To achieve these industrial development objectives,
the NICs have adopted a more flexible package of
outward-looking growth policies. Our analysis of the
industrial plans described by both the press and
According to statements by government officials from
each country, the drive to upgrade industry will
require unprecedented flows of financial capital. Such
resources are beyond the ability of the NICs to
generate domestically, despite their high gross domes-
tic savings rates of roughly 20 percent of GDP. To fill
this void, the NICs have taken specific steps to
encourage greater foreign investment. These policies
include:
? Tax Concessions. The NICs offer a wide variety of
attractive tax concessions to foreign investors. These
include tax holidays of three to five years; lowered
ceilings on corporate taxes; generous depreciation
allowances, especially for expenditures on R&D;
freedom to repatriate profits; and tax exemptions on
dividends, interest, and earned income.
? Financial Incentives. The NIC governments are
directly financing large, capital-intensive industries.
Where needed, they offer loans at preferential rates
or provide venture capital. In addition, Hong Kong
and Singapore are striving to develop advanced
banking systems and financial structures.
control domestic operations.
? Government Assistance. The governments of the
NICs are widely involved in the development of a
modern and efficient infrastructure, especially for
export-oriented industries. This includes roads,
ports, telecommunications facilities, utilities, and
mass transit systems. Industrial estates are being
developed that offer subsidized rents, ready-built
factories, and other facilities. In addition, the gov-
ernments are rapidly expanding technical and voca-
tional training centers to upgrade worker skills.
While the NICs strongly encourage their industrial
sectors to greater foreign involvment, they are also
imposing performance requirements to direct the flow
and nature of foreign investment. These measures are
used to not only ensure that the desired technology is
acquired, but also to limit foreign ownership and to
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Brazil The Brazilian Government has not articulated a comprehensive industrial development strategy. Nonetheless,
the IMF has identified three themes that appear to be determining the current orientation of Brazil's industrial
development:
? Reducing the investment incentives for much of the overexpanded capital goods sector.
? Using a system of special incentives to relocate industry away from Rio de Janeiro and Sao Paulo to the miner-
al-rich northeast regions of the country.
? Striving to achieve technological independence in the petrochemical, data processing, merchant marine,
telecommunications, petroleum extraction and refining, steel, and aircraft industries.
Hong Kong The government of Hong Kong prefers not to intervene in private-sector business or trade, but assists by
developing the institutions and infrastructure needed to support these sectors. According to several press reports,
Hong Kong's Department of Industry has launched several programs to attract high-technology industries and
encourage joint ventures with Hong Kong industrialists:
? The focal point of the drive has been the Taipo Industrial Estate, which provides at nominal costs the basicfa-
cilities for firms manufacturing high-technology products.
? It is opening industrial promotion offices in San Francisco, Tokyo, London, and Stuttgart.
? A Vocational Training Council has recently been established to coordinate the technical and vocational
training of workers who will man high-technology industries.
Mexico Mexico's Industrial Development Plan for this decade indicates that the Mexican economy has been structurally
weakened by past policies of import substitution. Embassy sources report that the plan's remedies for these
weaknesses include:
? A major expansion of steelmaking capacity.
? Geographic decentralization of industry to underdeveloped areas of the country.
? Expansion of the capital goods sector into mining, power equipment, and machines for the production of
consumer electronics.
Mexico's current severe financial crisis will probably delay but not substantially shift implementation of this
strategy.
Singapore In 1979 the government of Singapore embarked upon a program publicized as a "Second Industrial Revolution."
The goal is to transform Singapore into a high-technology manufacturing sector and regional center for such so-
phisticated services as banking, insurance, medical consulting, and computer software by the 1990s. The program
is based on a three-part package:
? A series of government-mandated wage increases to discourage labor-intensive production and encourage
increased labor productivity.
? Investment incentives to increase the capital-intensity of production for 11 high-technology industries.
? Vocational training and education to upgrade worker skills.
South Korea South Korea's drive to broaden its industrial base began, as described in several press and Embassy reports, in
1977 when Seoul introduced itsfive year plan for 1977-81. Recognizing that South Korea's low-cost, labor-
intensive industries would lose their export competitiveness, the plan called for a shift to the capital- and
technology-intensive industries of shipbuilding, machinery, iron and steel, automobiles, and electronics. The
recently released Fifth Five-Year Plan (1982-86) seeks to further develop and expand these industries. However,
rather than expanding their number, the plan seeks to upgrade the existing product processes and product
technology to strengthen their export competitiveness.
Taiwan Armed with a Ten-Year Plan for 1981-90, Taiwan has launched an ambitious program to upgrade its
manufacturing sector. According to the press and several official reports, the plan centers on a shift away from
labor- and energy-intensive manufacturing to more capital- and technology-intensive industries such as
sophisticated electronics, telecommunications, machinery, and metals. An important element in Taiwan's
industrial strategy is the Hsinchu Science-Based Industrial Park. The park is designed as a seedbed of high tech-
nology from which local industry can evolve. To ensure that technology-intensive industries are attracted to
Hsinchu Park and other industrial areas, government publications indicate that Taipei offers a variety of
financial and tax incentives to prospective investors.
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The NICs have also introduced several new measures
to further develop their indigenous human resources.
By establishing special skill development funds to
finance training, expanding the technical and voca-
tional training programs, and increasing the number
and quality of training facilities to upgrade worker
skills, the NICs seek to improve labor productivity.
Success to Date
The NICs have made some progress in attaining the
goals laid out by the industrial strategies. 6 It is
difficult to evaluate their progress critically and pro-
ject future success because the strategies are so new
and the pace of their industrial restructuring is slowed
by the global recession.
So far as we can determine, the greatest impact of the
NICs' restructuring efforts appears to be in the
development of human resources. By introducing a
variety of vocational training programs to upgrade
worker skills and automating production lines, several
of the NICs have boosted labor productivity. In turn,
this has eased some of the pressure caused by labor
shortages and contributed to the competitiveness of
their manufactured products. The most notable gains
have occurred in South Korea and Singapore where
average labor productivity growth has increased from
10.4 and 2.6 percent in 1980 to 15.0 and 5.4 percent,
respectively, in 1981. Progress has been slower in the
more complex economies and conservative societies of
Mexico and Brazil, where the sheer magnitude of
human resource programs is larger and the marginal
impact of improvements harder to detect.
Some of the NICs have also begun to attract in-
creased flows of foreign investment. The most success
has been achieved by Singapore and Mexico, which
rely on the United States and Japan for a large share
of their inflow. According to Embassy reports, howev-
er, foreign investment, while on the rise, has fallen
short of targeted goals (table 4).
The NICs' efforts to attract capital have been ham-
pered by high interest rates and slowed global eco-
nomic growth. These factors have caused Taiwan to
6 Additional details of the NICs' success to date beyond these
highlights are available on a country-by-country basis in the
Table 4
Newly Industrializing Countries:
Net Direct Foreign Investment a
2,706
4,639
4,956
6,636
Brazil
1,244
2,223
1,544
2,300
Mexico
678
1,337
1,846
2,253
Singapore
596
941
1,454
1,900
South Korea
105
16
-7
82
Taiwan
83
122
119
101
delay some of its planned investment. In addition,
nationalistic economic policies have reduced the at-
tractiveness of foreign investment in Brazil, and a
weakened foreign investment policy has eroded the
Korean investment climate. Because foreign invest-
ment is a key to the success of their industrial
development objective, we believe the NICs will prob-
ably become more energetic in their efforts to attract
new investment as world economic conditions im-
prove.
Our analysis indicates that the NICs' shift in industri-
al strategies has not yet had a pronounced impact
upon the structure or growth of their industrial
output. This result is not surprising. When the NICs
shifted from import-substitution policies to export-led
policies, it took, according to several studies of the
NICs' past industrial performance, roughly 10 years
for the change in policies to be reflected in their
industrial output. Although it is too early to assess
rigorously the long-term impact of these strategies,
some progress has been made in shifting the industrial
orientation.
Brazil has achieved some success in shifting its
industrial orientation. Presently, Brazil is building
much of the basic infrastructure needed to support the
Carajas Regional Development Program, a project
designed to turn the northeast corner of Brazil into a
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prosperous mining, minerals processing, and agricul-
tural region by the end of the decade. Brazil has also
made strides toward achieving technological
independence in several industrial subsectors:
? Brazil is the sixth largest non-Communist producer
of civil aircraft, according to the Aerospace Indus-
try of America. As a result of Brasilia's drive for
technological independence, Brazil has developed
some capability to produce selected avionics; howev-
er, almost all the technologically advanced propul-
sion systems and more sophisticated avionics must
still be imported.
? Brazil also leads the Third World in production of
locally designed computer equipment. More than
one-half of the $1.7 billion in Brazilian computer
equipment sales projected by industry officials for
this year will accrue to Brazilian-owned firms.
Brazil is also in the embryonic stages of computeriz-
ing its telecommunications system and developing a
microelectronics industry.
Reports from a variety of sources indicate that Bra-
zil's overall progress has been limited by: the reluc-
tance of foreign firms to transfer their best technol-
ogy, a shortage of skilled laborers, and austere
government policies that were needed to cool Brazil's
dangerously overheated economy. We believe that
over the next several years, industrial growth will
continue to be led by its proven motor vehicle, steel,
machinery, shipbuilding, and petrochemical indus-
tries.
With the exception of the electronics subsector, Hong
Kong's industrial sector has been slow to move up the
technological ladder. Earlier this year Hong Kong
joined Japan, South Korea, and Taiwan as the princi-
pal Asian producers of integrated circuits. Although
these are low-capacity devices for consumer goods,
press and official reports indicate that there is grow-
ing fear among industrial countries that Hong Kong
may become a funnel for uncontrolled technology
transfer to China. We believe that the small-scale
private enterprises, which are the foundation of Hong
Kong's economy, lack the financial capital to develop
a viable high-technology sector. Thus, it is our judg-
ment that most of the future economic growth of
Hong Kong will be in its traditional role as subcon-
tractor, a center for financial and other services, and
entrepot port, particularly for China.
We believe Mexico has probably made the least 25X1
progress to date in shifting the orientation of its
industrial sector. The most visible success has been
limited to the already well-developed power equip-
ment industry, which benefits from close association
with large multinational firms such as General Elec-
tric Co. and Colt Industries. Embassy sources report
that the other targeted industries such as steel are
hobbled by high costs, poor quality control, and
inefficient state-owned production. In addition, Mexi-
co's current financial problems will slow the pace of
industrialization by reducing the availability of invest-
ment funds. Although Mexico will not soon emerge as
a major international industrial competitor, we be-
lieve that, over time, it will probably be able to
overcome serious bottlenecks and lay much of the
foundation in capital goods production that it needs
for continued industrialization. 25X1
Singapore's drive to restructure its economy has
yielded impressive results. The manufactures' share of
GNP is growing relative to the traditional services
sector, with gains in electronics especially pro-
nounced. Labor productivity gains of more than 5
percent last year compared favorably with those of
Japan (2.1 percent) and the United States (0.9 per- 25X1
cent). Recent foreign capital inflows have been con-
centrated in the high-technology enterprises targeted
by the government's wage-boosting policies. Singa-
pore is carving out a small but important niche in
precision engineering products and high-grade con-
sumer and industrial electronics, as well as in such
traditional industries as chemicals, machinery, and
transport equipment. Nonetheless, we expect Singa-
pore's small size and tight labor market to limit
industrial expansion and leave the services sector
dominant in both size and rate of growth.
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The effects of South Korea's Fifth Five-Year Plan are
still nascent, Seoul having only announced this plan
earlier this year. According to several Embassy and
press reports, Seoul has found it difficult to quickly
shift its emphasis to new high-technology lines be-
cause of the sheer size of earlier investments in such
primary industries as steel, petrochemicals, automo-
biles, and textiles. Moreover, like Singapore, South
Korea has a critical shortage of skilled workers. Our
analysis of the industrial sector suggests that the
higher technology products that emerge will probably
be directly related to South Korea's traditional rather
than wholly new industries. For example, the ship-
building industry will probably begin to produce more
specialty vessels and the electronics industry will
move into the top range of consumer products and
into such industrial products as office machines and
telecommunications equipment.
Taiwan is well on the way toward development of the
electronic and machine tool industries. According to
Embassy and press reports:
? Its exports of electronic products have increased by
nearly 50 percent since 1979, and at that rate we
calculate that electronics will replace textiles as
Taiwan's dominant export either in 1982 or 1983.
? In only two years Taiwan grew from the world's
18th largest machine tool exporter to the 11th
largest and is the dominant producer of several
types of tools. Taiwan is responding rapidly to the
increased demand for more sophisticated kinds of
machine tools.
? Finally, investment by electronics, information pro-
cessing, and machinery enterprises in the keystone
Hsinchu Industrial Park is well ahead of schedule.
Long-Term Prospects
In our judgment, the NICs will be able to progress to
a more capital- and technology-intensive stage of
production during the 1980s.
recent advances in manufacturing
techniques have provided a growing number of ma-
ture, technologically stable industries that are suitable
for transfer to the NICs. The most notable advances
have occurred in the steel, transport equipment, petro-
chemical, and precision equipment industries. More-
over, each has a relatively low-cost labor force; an
adequately developed industrial base and supporting
infrastructure; strong backing from their respective
governments; reasonably good access to external fi-
nancing; a stable political system; and access to the
requisite technology, be it by direct purchase, joint
venture, licensing arrangement, or outright piracy. F
The NICs' advance into these higher stages of pro-
duction will probably develop along four lines:
? There will be a strengthening of the existing capital-
intensive industries of shipbuilding, steel, and auto-
mobiles as the NICs attempt to modernize and
expand their productive capacity.
? More of the components used in their established
light-assembly industries, particularly in the electri-
cal and electronic sectors, will be manufactured
locally.
? Significant inroads will be made into the low- and
medium-technology growth industries of machine
tools, telecommunications equipment, and small
computers and their related peripherals.
? The NICs will expand their roles as centers for
financial, business, transportation, and information
services.
Whereas the Asian NICs will probably concentrate
their industrial development in light industry using
low and medium technology and in services, we
believe that much of the industrial development in
Brazil and Mexico will be focused in the existing
capital-intensive industries and be oriented in large
measure to these countries' substantial internal mar-
kets.
The speed and extent to which the NICs successfully
develop these lines of production will be closely linked
to the economic performance of OECD countries and
to how quickly the NICs are able to overcome several
internal obstacles. A sustained period of OECD
growth would not only stimulate the demand for the
types of products the NICs seek to export but also
lower the cost of capital and encourage greater for-
eign participation in the development of the NICs'
industrial sectors.
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NICs: Potential Lines of
Major Export Competition
Machine tools
Small computers
Computer terminals
Related computer
equipment
Marine industry
Shipping services
Consumer electronics
Industrial electronics
Precision equipment
Transport equipment
Heavy industrial equipment
Singapore is rapidly emerging as a regional purveyor of software with the potential to expand into
other industrial and Third World markets.
Taiwan, Singapore, South Korea, and Brazil currently manufacture a broad range of noncomputerized
machine tools, including conventional lathes, drilling machines, and machining centers. Each intends
to be a strong contender for shares of the Asian market, which has been a Japanese stronghold.
Brazil, Taiwan, South Korea, Hong Kong, and Singapore have developed the capability to manufac-
ture minicomputers and microcomputers. Future production will probably include cheap imitations of
proven systems such as the Apple computer and special application minicomputers.
Brazil, Taiwan, South Korea, and Hong Kong currently manufacture a wide variety of cathode-ray
tube (CRT) terminals and seek to expand into such special-purpose equipment as Chinese-language
computer terminals.
Brazil, Taiwan, South Korea, and Hong Kong are also beginning to specialize in the production of disc
and magnetic tape drives, data entry equipment, modems, printers, and character readers.
Taiwan, South Korea, and Hong Kong have developed the capacity to manufacture integrated circuits
on a small-scale basis. Each country plans to purchase the requisite technology to further expand
production and progress beyond the video games and watches for which these are currently used.
South Korea and Brazil are currently recognized among the world's major shipbuilders. They, as well
as Singapore, are also expanding into the oil rig construction and ship repair sectors.
As regional trade centers, Hong Kong and Singapore are expanding their shippingfleets to capture a
greater share of the charter service. South Korea, Brazil, and Taiwan also seek to expand their role.
Singapore, South Korea, Taiwan, and Hong Kong are rapidly moving into the top range of such
consumer electronics products as videotape players and recorders, audio equipment, and electronic
household appliances.
Taiwan, Singapore, and South Korea will probably continue their marked growth in the production of
electronic switching equipment, sophisticated telephone instruments, electrical instrumentation, and
office machines.
Singapore and Taiwan have the capacity to manufacture precision engineering products. These would
include optical instruments, medical supplies and equipment, measuring devices, photographic
equipment, and high-grade electronic components.
South Korea, Taiwan, Brazil, and Mexico presently manufacture a wide range of transport equipment
and parts. Recent investments, by Taiwan and Brazil in particular, will probably allow them to expand
their exports into Third World markets.
Mexico, South Korea, and Taiwan will probably expand their production of steam generators,
turbogenerators, and high-capacity pumps.
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We believe the most prominent obstacles to the NICs'
shift upmarket include: a growing shortage of skilled
laborers, gaining worldwide consumer acceptance for
their products, and building a sufficient R&D
capability:
? Although the NICs have undertaken measures to
upgrade the skills of their labor force, we do not
believe that the future increase in supply will quick-
ly match the growth in demand for these skilled
laborers except in Taiwan.
? The new- or medium-technology goods to which the
NICs are shifting are highly differentiated; sales
will be dependent on price as well as product
quality, design, and marketing. It is our belief that
if the NICs are to establish a reputation as depend-
able producers of these goods, they will have to
develop an advanced marketing system to identify
consumer wants, establish brand identity, and con-
struct a worldwide spare parts network. Until they
establish this infrastructure the NICs will probably
concentrate on locating small market niches that
can be quickly exploited by their local firms or
produce under contract for established Western
enterprises.
? The current NICs will face strong competition both
in their waning traditional lines of production and in
their new product areas from both industrial coun-
tries and such potential NICs as India, Colombia,
Thailand, and Malaysia. To maintain their export
growth, the NICs will need a much greater R&D
capability to develop new products, improve product
quality, and innovate production methods.
Implications of the NICs' Industrialization Drive
Industrial Countries
In our judgment, the industrial restructuring effort
and the factors that gave rise to it will create both
benefits and potential problems for the United States
and its industrial allies in Europe and Japan. On the
benefit side, the NICs' shift upmarket will probably
result in greater industrial country involvement in the
development of the NICs' manufacturing sectors.
This will entail greater opportunities for foreign direct
investment, licensing arrangements, management and
purchasing agreements, and direct loans to the elec-
tronics, machine tool, electrical equipment, and trans-
portation equipment industries that draw strong NIC
government support.
Moreover, we believe US and other industrial country
exporters will probably find export prospects particu-
larly good for investment goods. The best prospects
include industrial raw materials; industrial and office
products that increase labor productivity, such as
computers and word processors and control process
equipment; and most products that can be used in the
automation of electronics, raw materials processing,
and warehousing and cargo handling. Rising NIC
incomes also pose opportunities for consumer goods
and food exports.
We also believe, however, that the NICs' shift away
from their traditional lines of production could create
potential problems. As the NICs move upmarket, they
will probably emerge alongside the Big Ten countries
as major competitors for export markets and supplies
of raw materials. We believe that the Asian NICs,
because of their relatively advanced industrial sectors,
ambitious industrial planning, and major efforts to
develop their indigenous human resources, will proba-
bly present the greatest challenges. They have already
established a reputation as leading exporters of tex-
tiles, apparel, and consumer leisure goods and have
the potential to move rapidly into specialty electronics
and machinery products. Brazil and Mexico will be
slower to emerge as major forces in international
trade. While they strive to stabilize their domestic
economies, resolve their troublesome financial prob-
lems, and further strengthen their industrial base,
they will rely upon their proven capital-intensive
industries as the primary source of manufactures
export earnings.
In export markets, the NICs almost certainly will not
compete in the broad range of high-technology prod-
ucts that sell on the basis of quality, taste, and
product reputation. Rather, the NICs will locate
market niches in the capital- and medium-technology
goods that can be exploited on the basis of price. The
fallout of this is that the NICs, especially the Asian
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NICs, will be successful in entering these new mar-
kets and that many of the trade tensions and adjust-
ment problems that presently exist between the Unit-
ed States, Europe, Japan, and the NICs over
labor-intensive goods will shift to new products.
North-South
The NICs' industrial restructuring will probably af-
fect the way these LDCs act in international forums.
As they develop over the 1980s, their interests in trade
and financial issues should more closely coincide with
those of the United States and its industrial allies.
Hence, these LDCs are likely to become more active
participants in such bodies as the GATT.' Similar to
the industrial countries, the NICs will probably try to
use GATT rules to: preserve existing markets for
traditional commodities as long as possible, even
though production of these products is being deem-
phasized; assure favorable--or at least nondiscrimina-
tory-tariff and nontariff barrier treatment for new
product lines; and protect their own domestic markets
from encroachment by lower tier LDCs.
In the World Bank, Mexico and Brazil will find it
increasingly difficult to avoid "graduation" from mul-
tilateral concessional aid programs (the other NICs
have already passed that mark). Moreover, as the
NICs' development widens the gap between them and
the rest of the Third World, we expect the NICs to
downplay even further their currently ambivalent role
(except that of Brazil) in supporting "southern" issues
in favor of protecting useful international systems.
Indeed, the 1980s could see the emergence of tensions
over trade access between the NICs and other LDC
markets.
East-West
The emergence of some NICs as reliable producers of
more sophisticated manufactured goods may make it
more difficult for the United States to restrict Soviet
access to strategically useful commodities and tech-
nologies, especially in the event of trade sanctions
imposed on the Soviets. By any measure, the NICs'
products are currently less advanced in design, quali-
ty, and production volume compared with industrial
'South Korea, Brazil, and Singapore currently belong to the GATT
and Taiwan reportedly is seeking membership. Mexico has long
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country goods and are well below the threshold of
sensitivity for COCOM-restricted items. The NICs
are making headway, however, and within the next
three to five years when they will probably be capable
of manufacturing higher technology products they
may not be easily swayed to voluntarily limit lucrative
export sales to the Communists as COCOM nonmem-
bers Sweden, Switzerland, and Austria historically
Even without reaching the technological levels em-
bodied in COCOM-type goods, however, the NICs
will be producing goods extremely useful to the
USSR. In many ways, the NICs' industrial plans
mesh well with Soviet bottlenecks. We know, for
example, from past experience that the Soviets are in
the market for such commodities as computer memo-
ries and disk drives, semiconductor devices and the
processes to manufacture them, computer software,
telecommunications equipment, process controls, ma-
chine tools, and sophisticated metallurgical tech-
niques. All of these areas figure highly in the NICs'
new industrial drives. In addition, such traditional
NIC industries as oil exploration and production
equipment, chemical processes, and shipbuilding tech-
nology are in demand by the USSR. The ability to
purchase manufactured goods and production tech-
niques from NIC markets or even to pirate technology
from both NIC firms and Western affiliates in the
NICs (as the Soviets do currently from firms in
Europe) would not tip any strategic balance. It would,
nonetheless, certainly enable the Soviets to save on
R&D costs, shorten leadtimes, reduce engineering
risks, and result in more economical product acg25X1
tion.
25X1
Thus far, the NICs have shown little desire for
substantial manufactures trade with the Soviet Bloc.
Political differences and longstanding export strate-
gies, which concentrate manufactures exports in a few
lucrative markets, have limited this trade. The NICs
have demonstrated, however, that they will seek out
alternative markets, such as the OPEC countries, to
maintain export growth when OECD markets slump.
If the NICs were to perceive that the Soviet Bloc was
lucrative, there is little that would prohibit them from
expanding their manufactures trade with the Soviet
Bloc.
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Appendix
A Detailed Survey of the NICs'
Industrial Goals and Performance
According to the IMF, the current orientation of
Brazil's industrial development tends to fall along
three broad lines. First, Brasilia is seeking to reduce
the investment incentives for much of the capital
goods industry, which is considered by local planners
to have excess capacity. Steel, aluminum and alumi-
na, cement, and petrochemicals are excluded from
this initiative. Second, using a system of special
incentives, Brasilia is attempting to relocate industry
away from Rio de Janeiro and Sao Paulo to the
mineral-rich regions in the northeast part of the
country. Third, Brasilia is sxriving to achieve techno-
logical independence in a limited number of industrial
sectors. These include the petrochemical, data proc-
essing, merchant marine, telecommunications, petro-
leum extraction and refining, steel, and aircraft indus-
tries. This is accomplished by government policies
toward transnationals that strike a balance between
inducing foreign holders of technology to transfer it to
Brazil, controlling the type and cost of the technology
purchased, and reserving the most dynamic sectors for
local manufacturers.
A focal point of Brasilia's industrial relocation effort
is the Carajas Regional Development Program, which
is being undertaken in the northern states of Para,
Maranhao, and Goias. The objective of the program is
to turn this neglected corner of Brazil into a prosper-
ous industrial and agricultural region by the end of
the decade. The drawing card is the largest known
cache of mineral wealth in the world. According to
press and official reports, this region's resources in-
clude iron ore, copper, manganese, bauxite, nickel,
tin, and gold. In addition, gold is being mined at a
nearby site in Serra Pelada.
Presently, much of the basic infrastructure needed to
support the mining, minerals processing, and agricul-
tural projects to be developed under the Carajas
Project is being built. Some $3.8 billion has been lined
up for the construction of pilot plants, roads, commu-
nications, port facilities, and hydroelectric plants.
Progress on the project has been good. The facilities
are in place for alumina processing, which, according
to several analysts, will be among the world's largest
within the decade, and iron ore production is sched-
uled to begin in 1985 with an initial production level
of 15 million tons of sinter-feed ore. Industry officials
estimate that iron ore production will reach 35 million
tons per year by 1987. 25X1
Brasilia has also achieved some success in attaining its
goal of technological independence in several prese-
lected industrial subsectors. Industry studies indicate
that the transfer of technology has been especially 25X1
successful in the aircraft industry. Starting from a 25X1
base of virtually no aircraft production, Brazil has
Brazil is currently the sixth-largest non-25
Communist, aircraft-producing nation in the world.
As a result of the drive to achieve technological
independence, industry studies indicate that Brazil is
developing the technology to manufacture selected
avionics. These studies, however, also indicate that the
aviation sector is still highly dependent upon foreign
manufacturers for technologically advanced propul-
sion systems and avionics equipment, which can ac-
count for as much as two-thirds of the value of an
assembled aircraft. 25X1
25X1
The technology transfer strategy has also been suc-
cessfully used to develop the electronic data process-
ing industry. By regulating the imports and direct
manufacturing by multinationals to reserve the micro-
and mini-computer market for local manufacturers
and combining foreign technology obtained through
licensing arrangements with its own product develop-
ment, Brazil has established an industry that leads the
Third World in the production of locally designed
computer equipment. More than half of the $1.7
billion in Brazilian computer equipment sales project-
ed by industry officials for this year will accrue to
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Brazilian-owned firms. The industry currently offers
a wide range of products, including video display
units, data entry equipment, word processors, micro-
computers, and minicomputers.
Brazil has negotiated agreements for the transfer of
technology to the telecommunications and petrochem-
ical industries. Under the telecommunications agree-
ment described by industry officials, three foreign
firms-Ericsson, Nippon Electric, and Siemens-
have agreed to supply the technology and material to
replace the country's existing crossbar telephone ex-
change with a storage program-controlled exchange.
Once these systems are installed in Brazil's major
cities, these industry officials expect that Brazil will
sell this technology to other Latin American coun-
tries.
Brazil is developing an indigenous microelectronic
manufacturing capability.
In our judgment, Brazil will continue to progress in
achieving its goals of expanding the mining sector and
attaining technological independence in the telecom-
munications, petroleum extraction and refining, and
electronic data processing industries. However, it is
unlikely that this will result in a rapid improvement in
these industries' international competitiveness. Re-
ports from a variety of sources indicate that the
process of transferring technology has in the past been
slow. Foreign firms have been reluctant to transfer
their best or most up-to-date technology and there
exists a shortage of qualified Brazilian technicians
who are capable of carrying out these development
plans. Moreover, recent cutbacks in government pub-
lic investment and state-owned company expenditures
will probably slow the growth and development of
these industries. We believe that over the next three to
five years, Brazil will probably continue to rely upon
its proven agricultural and capital-intensive transpor-
tation, steel, and industrial machinery industries as
two Brazilian firms, Itau Technologia SA
(Itautec) and Electronics Brasileira SA (Elebra), have
been granted the sole right to manufacture and sell
semiconductor devices in Brazil. These firms are
contacting leading semiconductor manufacturers
worldwide to assess the interest and feasibility of
setting up technology transfer agreements. The goal is
to establish a complete wafer fabrication facility
capable of producing and testing bipolar and metal
oxide semiconductors within two to four years.
the primary source of export earnings.
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Hong Kong
The government of Hong Kong prefers not to inter-
vene in private-sector business or trade but assists by
developing institutions and infrastructure needed to
support these sectors. Hong Kong's Department of
Industry has launched several programs to attract
high-technology industries and encourage joint ven-
tures with Hong Kong industrialists. According to
several press reports, the focal point of the drive has
been the Taipo Industrial Estate, which at little cost
to entrepreneurs provides basic facilities for firms
manufacturing high-technology products. In addition,
it is opening industrial promotion offices in San
Francisco, Tokyo, London, and Stuttgart. A Voca-
tional Training Council has recently been established
to coordinate the technical and vocational training of
workers who will man high-technology industries. F_
Our analysis indicates that Hong Kong's manufactur-
ing sector has been slow to move upmarket. This is
evident from the 50-percent vacancy rate at the Taipo
Industrial Estate, which was specifically developed by
the government to attract high-technology industries.
Five years after the estate was set up, only 35
enterprises have signed contracts to locate there and
of these only 17 are currently in operation.
What progress has been made by the high-technology
industries located at the industrial estate has come in
electronics. Earlier this year two local firms began
test production of integrated circuits, joining Japan,
Taiwan, and South Korea as the principal Asian
producers of integrated circuits. According to press
reports, RCL Semiconductors, Ltd. manufactures
complimentary metal oxide silicon, or CMOS, chips
to be used in watches. The company's planned month-
ly fabrication rate is 12,000 three- or four-inch wa-
fers; however, production started at the 8,000-wafer
level. Elcap Electronics, Ltd. started test-running a
4K static random access memory (RAM) chip, a 32K
read only memory (ROM) chip, and a 64K ROM
chip, which are to be used in small computers and
such consumer products as video games.
The RCL and Elcap move into the fabrication of
integrated circuits may result in the transfer of
technology to China. Although company spokesmen
Reexports
Share of
Reexports
Reexports
to China
Total
of Chinese
of Chinese
(million
Reexports
Origin
Origin as
US $)
(percent)
(million
Share of
US $)
Total
Reexports
(percent)
deny having any intentions of being a technology-
transfer bridge, industry insiders agree that these
companies are either funded by or otherwise connect-
ed with mainland interests and plan to provide China
with either the technology or training to fabricate
integrated circuits.8 25X1
It is our judgment that Hong Kong will not become a
major manufacturer of high-technology products in
the near term. Hong Kong now has neither the
domestic base nor the system of government economic
incentives to offset the costs or to support the develop-
ment of a viable high-technology industrial sector.
Hong Kong's industrial reputation has been developed
around its ability to identify a growth market, to
quickly jump in, and to get out before competition
follows suit. This flexibility has derived in large
measure from the colony's free trade, free enterprise
philosophy, which has allowed small enterprises with
nominal amounts of capital to enter a market and
turn a profit in five years or less. However, according
to industry experts, the development of high-technol-
ogy industries would require vast sums of capital and
may take as many as five years to develop a successful
product, let alone to show a profit. 25X1
8 A third company, Hua Ko Electronics, is also trying to start
production of integrated circuits. However, its plans have been at
least temporarily stalled by the US Government, which has denied
it the export license for advanced electronic equipment because of
fears that the company will reexport the technology to China.
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We believe the most dynamic growth that will occur
in Hong Kong's industrial sector is in its role as a
service center and entrepot. Hong Kong's internation-
al financial center ranks third after New York and
London, according to many bankers. Hong Kong is
also reemerging as a major reexport center. Between
1978 and 1981, the reexport share of total exports
increased from one-fourth to more than one-third and
now totals $7.5 billion. The impetus to this surge is
the expansion of China's international trade and
Hong Kong's growing economic link with China. We
believe Hong Kong's value as a reexport center for
China will continue well into the next century, in
large measure because China's own transportation
facilities-road, rail, and port-are likely to remain
inadequate for some time.
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Mexico's Industrial Development Plan for this decade
indicates that the Mexican economy has been struc-
turally weakened by past policies of import substitu-
tion. According to government officials, Mexico's
advanced manufacturing sector is overwhelmingly
geared to the domestic market rather than export and
lacks a broadly based capital goods sector.
Embassy sources report that the plan's remedies for
these weaknesses include a major expansion of steel-
making capacity, geographic decentralization of in-
dustry to underdeveloped areas of the country, and
expansion of the capital goods sector into mining,
power equipment, and machines for the production of
consumer electronics. Tax incentives, subsidized ener-
gy, loans at preferential rates, new sources of capital,
and a coordinated procurement program in the public
sector are used in support of these objectives.
Although Mexico has considerable production poten-
tial in these targeted industries, our analysis of the
government policies, past trends in the Mexican econ-
omy, and current financial problems suggest that it
will be well into this decade before most of these
industries meet the production targets outlined by the
Industrial Development Plan. The devaluation, bud-
get cuts, and other measures that Mexico is taking-
or will have to take-to solve its serious financial
crisis will probably result in social and labor unrest,
capital flight, and accelerating inflation. These condi-
tions will stymie production, decrease the funding for
industrial development programs, and counter the
effect of lower export prices. Consequently, we project
a longer time frame for the development of a viable
capital goods sector, as well as slower growth in areas
where Mexico potentially has a comparative advan-
tage.
Embassy reports indicate that Mexico has invested
heavily in the power equipment industry to develop its
viability and competitiveness. Mexican firms current-
ly produce a variety of electrical equipment, as well as
steam generators, turbogenerators, and high-capacity
pumps. Because most Mexican manufacturers of pow-
er equipment are subsidiaries or licensees of large
international corporations such as General Electric
Co. and Colt Industries and because of the large size
of the domestic market, we believe that the industry
will meet its projected 12- to 15-percent average
annual increase in production over the next several
years. However, we expect that the industry will not
quickly establish much export volume because domes-
tic demand will probably outpace production through
the 1980s.
25X1
The published Industrial Development Plan projects
an average annnual growth rate of at least 14 percent
for the electronics industry over the next four years;
however, we believe this goal cannot be reached. The
industry is presently geared toward manufacturing
consumer goods containing low and medium technol-
ogy. In August 1981 the government announced a
program to stimulate the production of microcomput-
ers and minicomputers, integrated circuits, and relat-
ed peripherals. However, of the four major areas of 25X1
the computer industry-computers, terminals, periph-
eral equipment, and semiconductors
manufacturing capability only in peripherals. In our 25X1
judgment, the problems posed by stringent foreign 25X1
investment requirements, the high cost of assembly
operations compared with the Asian NICs, a growing
shortage of skilled workers, and import substitution
policies will impede foreign investors from rapidly
developing the industry. These problems are also
likely to reduce the quality of Mexican products.
We believe that government ownership and protection
from import competition will keep Mexico's key steel
industry from reaching planners targets for produc-
tion and efficiency. The state controls some 75 per-
cent of steel production, according to Embassy report-
ing. Steel facilities are presently being expanded and
upgraded. When completed, production capacity is
scheduled to swell from its current level of 7 million
tons to a peak of 24 million tons by 1990. According
to Embassy sources, Mexican planners expect that
high domestic demand will absorb most of the indus-
try's production capacity through at least 1985. After
this period, we believe that Mexico will begin to
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export steel products, but will not be competitive with
newly emerging LDC producers, such as South
Korea, Brazil, and India.
Of great importance to the US-Mexican border re-
gions is the in-bond industry. Semifinished goods are
shipped to Mexico for processing and assembly and
then reexported to the United States under special
tariff arrangements. The most important in-bond
operations include the manufacture of electrical and
electronic products, clothing, furniture, and automo-
bile accessories. The lower export prices resulting
from the recent devaluation of the peso will probably
have an expansionary impact on this sector and help
to reduce Mexico's substantial balance-of-payments
deficit with the United States. We also expect that
these conditions will contribute to a moderate growth
in both the number and output of these industries
throughout the 1980s.
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Confidential
In 1979 the government of Singapore embarked upon
an ambitious program to restructure the industrial
sector of its economy. Publicized as Singapore's "Sec-
ond Industrial Revolution," the program emphasizes a
move toward increased capital- and skill-intensive
production of higher value-added industries and serv-
ices. The goal is to transform Singapore into a high-
technology manufacturing sector and a regional cen-
ter for such sophisticated services as banking,
insurance, medical consulting, and computer software
by the 1990s.
The drive to restructure the industrial sector is based
on a three-part package, according to a variety of
sources:
? A series of government-mandated wage increases-
more than 20 percent annually in 1979 and 1980
and about 16 percent in 1981-were implemented
to discourage labor-intensive production and en-
courage increased labor productivity.
? Eleven high-technology industries have been target-
ed to receive investment incentives to increase the
capital intensity of production. They include special-
ity chemicals and pharmaceuticals, machine tools
and machinery, automotive and aircraft compo-
nents, medical and surgical instruments, and com-
puters and computer peripherals.
? Vocational training and education to upgrade work-
er skills is being emphasized. Employers can tap a
Skills Development Fund to finance approved in-
house training schemes. The fund also encourages
the use of highly skilled workers since it is financed
by employers who pay a 4-percent tax on the
salaries of workers who earn less than $375 per
month.
Although Singapore is still far from being a signifi-
cant competitor in the world market for high-technol-
ogy manufactures, its drive to restructure the indus-
trial sector has yielded impressive results over the past
two years. Embassy reports indicate that despite the
global economic slump, Singapore achieved nearly a
10-percent gain in real economic growth in 1981. This
Figure 2
Singapore: Net Investment Commitments
in Manufacturing
Total
$69.4
$129.1
$433.9
$668.8
$917.6
Foreign
55.7
104.0
378.6
572.8
628.8
Local
13.7
25.1
55.3
96.0
288.8
was aided by a labor productivity gain of 5.4 percent
in 1981, more than double the performance of 1980,
and an 81-percent increase in the real value added per
worker over 1979. Moreover, since 1979, manufactur-
ers have been investing in machinery and equipment
at much higher rates than in the past. Contrary to the
original fear that foreigners would be hesitant to
invest in Singapore because of higher wages, national
data indicate that since 1979 foreign investment
continues to flow into Singapore, though at a reduced
rate. More importantly, recent capital inflows have
been concentrated in the technology-intensive and
high value-added industries needed to improve the
competitiveness of exports (see figure 2).
The industrial-restructuring campaign is beginning to
show signs of having an impact upon the composition
of industrial output. Singapore's economy historically
has been services oriented; however, between 1978
25X1
25X1
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and 1981, manufacturing's share of gross domestic
output increased from 26 to 29 percent. This growth
was led by the electronics and transport equipment
industries. It is our belief that the manufacturing
sector will continue to grow throughout this decade.
Those sectors that have the greatest potential for
future expansion include: the chemical processing
industries (petrochemicals, pharmaceuticals, and
chemicals); the metal engineering and machinery
industries (office equipment, medical supplies and
equipment, optical and photographic equipment, in-
dustrial machinery, precision engineering products,
and machine tools); and the electrical and electronic
industries (power-generating equipment, consumer
electrical and electronic products, industrial electrical
and electronic equipment, and high-grade electronic
components).
Although our analysis shows that the advance of the
manufactures will make inroads into the growth of the
services, the service sector will continue to dominate
the economy. We believe the sectors with the greatest
potential for future growth include the financial and
the business services sector and the transport and
communications sectors. In 1981 the financial and
business sector grew by 18 percent in real terms,
faster than any other sector in the economy; it now
accounts for 17 percent of gross domestic product,
compared with 14 percent in 1979. Its future growth
will probably be spurred by the highly advanced
financial sector, which is composed of a domestic
banking component dominated by four local banks
with numerous foreign and local participants, an
offshore or Eurocurrency market, a foreign exchange
market, a stock market, and a gold exchange. The
growing role of the transport and communications
sector will derive in large measure from the activities
of the government-owned Singapore Airlines. The
government claims, according to press reports, that
the recently concluded bilateral airworthiness agree-
ment with the United States puts the aerospace
industry one leg up in becoming a regional leader in
providing aerospace services.
Over the next few years, we believe the most signifi-
cant problem that Singapore will have to overcome is
the extremely tight labor market, which has charac-
terized Singapore's economy for nearly a decade.
According to information from a variety of sources,
economic planners have begun the process of over-
coming the labor constraint to growth through train-
ing and capital investments that reduce labor input
requirements.
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Confidential
South Korea's drive to broaden its industrial base
began, as described in several press and Embassy
reports, in 1977 when Seoul introduced its Fourth
Five-Year Plan for 1977-81. Recognizing that South
Korea's low-cost, labor-intensive industries would lose
their export competitiveness, the government pushed
for a shift to capital- and technology-intensive indus-
tries. By using a mix of financial incentives and newly
constructed industrial parks, Seoul attracted massive
investments in such capital-intensive industries as
shipbuilding, machinery, iron and steel, automobiles,
and electronics. IMF data show that between 1977
and 1981 real fixed investment rose by almost 30
percent.
South Korea's recently released Fifth Five-Year Plan
(1982-86) seeks to further develop and expand this
industrial base. However, rather than expanding the
number of capital-intensive industries, the plan seeks
to upgrade existing product processes and product
technology to strengthen their export competitiveness.
To attract advanced technologies, Seoul has liberal-
ized the rules governing foreign direct investment,
which for the last 20 years has constituted less than
10 percent of total foreign capital. Eleven industries
have been targeted for further expansion over the next
five years. These include lead, steel, shipbuilding,
automobiles, electronics, petrochemicals, tires, foot-
wear, paper products, ceramics, and textiles.
Although the plan has targeted these industries for
future development, Seoul has been cautious about
the rate at which several will be expanded. For
example, a variety of Embassy and press reports
indicate that massive investments in the petrochemi-
cal industry during the previous five-year plan have
created an overcapacity problem, which has necessi-
tated that it be expanded only as fast as warranted by
domestic demand. The established footwear and tex-
tiles industries will also be expanded but, as reported
by the five-year plan, only to maintain export earnings
until higher technology products can be introduced
for export. Of the remaining traditional industries, the
higher technology products will be developed in the
shipbuilding and the electronics and electrical subsec-
tors of the machinery industry, which has been de-
scribed by the plan as the backbone of the industrial
sector's future growth. 25X1
Korean statistics indicate that up to now, the Korean
electronic and electrical industry has emphasized
assembling products with relatively low domestic
value added and high labor content. The current five-
year plan seeks to move the industry into the top
range of consumer products, for example, videotape
recorders and players, and into such industrial prod-
ucts as telecommunications equipment, office ma-
chines, electronic switching boards, and small com-
puters. In addition, it wants to further expand its
fledgling microelectronic sector. By focusing on the 25X1
production of the more mature, medium-technology
products, Seoul intends to roughly quadruple the
industry's production by 1986. 25X1
South Korea's shipbuilding industry ranks second in
terms of total production only to Japan. The indus-
try's success has derived from its ability to make
deliveries ahead of schedule, undercut the competi-
tion's price, and offer attractive financing packages.
The Association of West European Shipbuilders has
calculated that, on average, South Korean shipbuild-
ing prices are at least 15 percent lower than in Japan
and Europe. In addition,
the Koreans provide loans for as much as 80
percent of construction costs and at terms well below
The shipbuilding industry is expected to become more
competitive in the future. Under the five-year plan,
the industry's capacity is to be expanded by almost 60
percent to 6.5 million gross tons by 1986. Moreover,
Korean shipbuilders have purchased the latest tech-
nology from around the world to upgrade existing
facilities and diversify shipbuilding operations into the
construction of such specialty vessels as chemicals
tankers, membrane-type LNG carriers, and roll-on/
roll-off ships and such nonvessels as offshore drilling
rigs, steel structures, and industrial plants. If success-
ful, we believe that South Korea's expansion into
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drilling rig construction would pose a real threat to
US producers, whose share of the total number of rigs
ordered in the world has steadily declined from 62
percent in 1977 to 31 percent in 1980.
Besides manufacturing industries, South Korea's im-
portant overseas construction industry is also at a
crossroad. In 1981, total overseas contracts amounted
to $13.7 billion. In comparison, South Korea's total
merchandise exports for the year totaled $21.3 billion.
Roughly 90 percent of these contracts were with the
Middle East, the majority of which were with Saudi
Arabia. Yet, because South Korean contractors are
snapping up as many infrastructure projects as possi-
ble before the Saudi market dries up, the industry is
unable to move into such technology-intensive projects
as building plants on a turnkey basis.
South Korea, like Singapore, is confronted with the
critical problem of an inadequately trained work
force. For example, projections by the Ministry of
Science and Technology show that by 1991 there will
be a demand for 83,000 scientists with M.A. and
Ph.D. degrees. However, based on current capabili-
ties, the Ministry expects that there will be a shortfall
of some 30,000 scientists.
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25X1
25X1
Armed with a 10-Year Plan for 1981-90, Taiwan has
launched an ambitious program to upgrade its manu-
facturing sector. According to the press and several
official reports, the plan centers on a shift away from
labor- and energy-intensive manufacturing to more
capital- and technology-intensive enterprises. Four
sectors specifically earmarked for development are
sophisticated electronics, telecommunications, ma-
chinery, and metals.
An important element in Taiwan's industrial strategy
is the Hsinchu Science-Based Industrial Park, pat-
terned after such American models as the Stanford
Industrial Park and surrounding Silicon Valley in
California. According to government officials, the
park is designed as a seedbed of high technology from
which local industry can evolve. The park spans more
than 2,000 hectares and offers two universities, a
research center, housing and medical facilities,
schools for foreign children, and a computer center.
Also nearby is the government-backed Industrial
Technology Research Institute (ITRI), which special-
izes in transferring technology to private industry. F-
To ensure that technology-intensive industries are
attracted to Hsinchu Park and other industrial areas,
government publications indicate that Taipei has of-
fered a number of financial and tax incentives to
prospective investors. For foreign investors, these in-
clude subsidized rents, special financing arrange-
ments, duty-free imports, tax holidays, freedom to
repatriate profits, and, in some cases, up to 49-percent
government funding of venture capital. For local
manufacturers, the primary incentive is tax relief for
expanding local operations and for new efforts abroad
to obtain secure sources of raw materials.
Taiwan has entered a transition stage that economic
planners hope will bring it to the elite ranks of
developed countries by the end of the century. Ac-
cording to government statistics, Hsinchu Industrial
Park has already attracted some 35 local and foreign
firms since it opened in 1979 and is well in advance of
the five years estimated by planners to bring in the 30
to 40 firms needed to complete the first phase of
development. Press reports indicate that park officials
plan to attract 150 companies by the end of 1990. To
date, most of the park's investors are either new
enterprises or smaller established firms. Investment
has been concentrated in the electronics, information
processing, precision instrument, and machinery in-
dustries. The park has not yet drawn companies
working in the high-technology material sciences,
energy sciences, and aeronautical engineering and
genetic engineering industries sought by Taipei.n
Signs of the incipient change in Taiwan's electronic
industry are already cropping up. According to Em-
bassy and press reports:
? In 1981 Taiwan's exports of electronic goods totaled
roughly $4.5 billion, an increase of 49 percent over
1979. We estimate, given current growth rates, that
electronics will probably replace textiles as Taiwan's
primary foreign exchange earner either this year or
next. 25X1
? Taiwan opened its first domestically owned inte-
grated circuit factory in April. Its current capacity
is 30,000 8.14 centimeter circular wafers a month,
and company officials expect to expand its capacity
to 42,000 wafers a month within two to three years.
The chips are for calculators, watches, and tele-
phone sets. 25X1
? Exports of microcomputers have steadily increased,
and one industry study forecasts total computer
exports of $360 million by 1985.
Taiwan's machine tool industry has also begun to
make impressive showings in recent years. Based on
national and UN trade data, worldwide sales of $178
million in 1980 made Taiwan the world's 14th largest
exporter of machine tools. Taiwan is now the leading
LDC producer and exporter of lathes and drilling
machines. In response to the changing international
demand, Taiwan has begun to expand its production
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Wang Computer, Taiwan Ltd.
Taiwan
September 1979
Minicomputers.
United States
Kuang Yi Co., Ltd.
United States
October 1979
Laser optical lenses and laser systems.
United Microelectronics Co., Ltd.
Taiwan
December 1979
Integrated circuits.
Sigma Delta, Ltd.
Taiwan
December 1979
Microcomputers.
Hong Kong
Microtek International Corp.
Taiwan
July 1980
Microcomputer-based products.
United States
Quartz Frequency Technology, Ltd.
Taiwan
July 1980
Precision crystals and high-precision
oscillators for communications.
Sino-American Silicon Products, Inc.
Taiwan
August 1980
Silicon bars, the raw materials for
semiconductors.
Flow Fareast Co., Ltd.
Taiwan
August 1980
High-pressure water pumps, jets, and
cutting systems.
Tecom Co., Ltd.
Taiwan
August 1980
Communications equipment.
Advanced Device Technology, Inc.
Taiwan
November 1980
Semiconductors and integrated
circuits.
Multitech Industrial Corp.
Taiwan
November 1980
Chinese-language computer terminals.
Southern Telecommunications, Inc.
Taiwan
November 1980
Computer equipment.
Comtec Taiwan, Ltd.
United States
January 1981
Temperature testing devices.
Algol Technology, Inc.
Taiwan
April 1981
Computer peripherals and terminals.
United States
Electronic Memories and Magnetics
Taiwan Design Center
Taiwan
Design of magnetic memories and
development of special processes.
Hsin Yuan Electronics Co., Inc.
Taiwan
July 1981
Power-switching devices.
Mitac Corp.
Taiwan
October 1981
Chinese microcomputer systems.
Southern Information System, Inc.
Taiwan
October 1981
Digital switchboards and other data
communications equipment.
Numertek Computer Control, Ltd. Taiwan January 1981 Computerized numerical controllers for
machine tools.
China Fiber Optic Taiwan October 1981 Optical fiber for telecommunications
Telecommunications, Inc. equipment.
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Confidential
Taiwan: Companies in Hsinchu Industrial Park (continued)
Yang Electronic Systems, Inc.
Taiwan
February 1982
Kinford Information System, Inc.
Taiwan
April 1982
Applied Mechtronics Co., Ltd.
Taiwan
April 1982
General Microsystem Co., Ltd.
Taiwan
October 1979
Warner Electric Taiwan, Ltd.
United States
February 1981
Primages, Inc.
United States
February 1981
April 1981
Sound wave tracing equipment and
minicomputer systems.
Chinese/English telex intelligence ter-
minals, personal and home computers,
and message and packet switches.
Microprocessors to control industrial
machines.
Integrated circuits.
Ball bearings.
Computer printers.
Laser rods necessary to manufacture
laser rangefinders.
of precision and heavy-duty machines as well as
numerically controlled models. The Industrial Tech-
nology Research Institute, a government-established
institute that is designed to provide research and
services to industry, projects that by 1987 Taiwan's
machine tool industry will probably manufacture $2.4
billion worth of goods, or roughly 5 percent of world
production, and rank among the top 10 of the world's
33 major machine-producing countries.
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Confidential
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