INTERNATIONAL ECONOMIC & ENERGY WEEKLY 19 AUGUST 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000300060004-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: December 22, 2016
• Document Release Date: February 22, 2011
• Sequence Number: 4
• Publication Date: August 19, 1983
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Intelligence
Weekly
International
Economic & Energy
Secret
DI JEEW 83-033
19 August 1983
854
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
International
Economic & Energy
Weekly
19 August 1983
iii
Synopsis
1
Perspective-High-Technology Materials
25X1
25X1
3
Briefs Energy
International Finance
Global and Regional Developments
National Developments
13
High-Technology Materials: Intensifying Foreign Competition
25X1
25X1
19
South Korea: Moving Up the Technology Ladder
25X1
25X1
23
Japan: Financial Strength Spurs Auto Industry
2.5X1
25X1
29
Bahrain: Offshore Bankin
g
25X1
25X1
Comments and queries regarding this publication are welcome. They may be
directed tol Directorate of Intelligence,
Secret
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
International
Economic & Energy
Weekly
Synopsis
Perspective-High-Technology Materials
New materials are being developed that increase the strength and durability as
well as lower the operating costs of a wide variety of commercial products and
military systems
High-Technology Materials: Intensifying Foreign Competition) 125X1
Materials development has long been driven by pressures from within industry.
Now this is changing. Governments in Japan and France, in particular, are in-
stituting national programs for R&D and are moving quickly to develop
indigenous production capabilities.
South Korea: Moving Up the Technology Ladder) 25X1
South Korea is embarking on an ambitious plan to restructure its industrial
base in favor of skill- and knowledge-intensive industries. Seeking a second
economic takeoff, the Chun government is targeting microelectronics, comput-
ers, machine tools, and sophisticated shipbuilding for rapid growth.
Japan: Financial Strength Spurs Auto Industry I I 25X1
The enormous financial power of the major Japanese automobile firms gives
them a substantial advantage in competition that will involve the world's auto
manufacturers during the balance of the 1980s~
Bahrain: Offshore Banking
Offshore banks have boosted Bahrain's foreign exchange earnings, provided
high-paying jobs, and enhanced Bahrain's prestige as a regional financial
center. Recent protectionist moves by the Saudi Arabian Monetary Authority,
increased competition from banks in Saudi Arabia and Kuwait, and lower
regional oil revenues are likely to slow the sector's growth.
iii
Secret
DI JEEW 83-033
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 :
CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Perspective
Weekly
International
Economic & Energy
19 August 1983
High-Technology Materials
Advanced materials, such as ceramics and composites, are becoming increas-
ingly important to the economic and military capabilities of industrialized
nations. These materials will increasingly determine the performance and
competitiveness of a wide range of civil and military items. On the military
front, for example, a tank's performance could be enhanced by using ceramic
engine components. On the commercial side, markets potentially affected by
advanced materials-transportation, electronics, computers, telecommunica-
tions, and machine tools, among others-are cumulatively worth hundreds of
billions of dollars annually.
Materials development has long been driven by pressures from within industry,
a process rarely of direct concern to policymakers. Now this is changing.
Governments in Japan and France, in particular, are no longer willing to leave
national progress in advanced materials to the uncertainties inherent in
private-sector investment decisions. Instead, they are instituting national
programs for R&D and are moving quickly to develop indigenous production
capabilities.
Foreign successes in advanced materials have several important economic and
strategic implications for the United States. For one thing, leadership in
advanced materials can translate into strong competitive leverage for products
in world markets. In addition, emergence of strong foreign capabilities in
advanced materials complicates US efforts to control the flow of such
technology, especially to the Communist countries.
The growing role played by advanced materials and the concentration of
productive capacity could make these materials a security-of-supply issue of
the 1990s. A number of factors contribute to our concern on this score. One of
the most important is the emphasis in a few countries, particularly Japan, to
develop plant capacity well before markets develop. This could lead to
overcapacity which may discourage potential US producers from entering the
field. Hence, the relevant production technology for selected materials-
design and manufacturing capabilities, production experience, and know-
how-for key military and civilian applications may never be established.
Secret
DI IEEW 83-033
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Energy
Italian Problems in According to Italian press reports, Sicilian authorities, who are committed to
Using Algerian Gas taking 30 percent of Italy's Algerian gas purchases, have ordered the state
electricity company to convert two oil-fired power plants to gas. The conver-
sion will take about 10 to 12 months and is expected to cost nearly $10 million.
The move resulted from a slowdown in the development of gas infrastructure
due, in part, to delays in passing legislation to provide financial incentives to
communities and firms participating in the construction project. Even if
development is completed, however, Sicily could still be faced with an
oversupply of Algerian gas due to sluggish growth of demand. As a result, offi-
cials may order other power plants converted to gas and block plans to build
coal-fired facilities and nuclear plants in southern Italy.
Kuwait Changes Oil Kuwait is actively seeking buyers for its crude oil on the spot market, a
Marketing Strategy strategy the Kuwaitis have refrained from using until now. According to
Embassy sources, approximately 125,000 b/d in spot sales have already been
arranged for the third quarter, with some crude selling for as much as 28 cents
above the official price of $27.30 per barrel. In addition to raising revenue, the
increased production is welcome news for Kuwaiti industry, which has suffered
over the past six months from reduced availability of oil-associated natural gas
for the country's electric power and natural gas liquids plants.
Iran Raises Price on Iran's national oil company, NIOC, has announced price increases on its
Heavy Crudes heavier grade crude oils. NIOC hiked its 31-degree API Iranian heavy and
Sirri crudes by 20 cents and $1.20 per barrel, respectively, effective on
10 August. Iranian heavy-which constitutes nearly half of Iran's oil ex-
ports-now sells for $27.10 per barrel and Sirri crude for $26.75 per barrel.
Demand for heavier crudes has been fairly strong in recent months, particular-
ly in countries with refineries equipped to process heavier grade crudes into
lighter products such as gasoline and diesel fuel.
Phillips To Process According to press reports, the Norwegian Government has agreed to special
With Ekojisk tax concessions that will allow Phillips Petroleum to proceed with an enhanced
Waterflood recovery project at the Ekofisk oilfield. Under the agreement Phillips will be
permitted to accelerate the writeoff of the project's development costs. The
waterflood project, due to be completed in 1987, is expected to cost about $2
billion and will yield an additional 150-200 million barrels of oil. Although the
Norwegian Government has recently rejected industry suggestions that modi-
fications to the present tax structure are required to optimize offshore .
development, this concession could indicate a new willingness by the govern-
ment to consider future tax changes.
3 Secret
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Indonesia and South After more than two years of negotiations, Indonesia has agreed to supply
Korea Agree on LNG South Korea with 2 million tons of LNG annually for 20 years. Deliveries
Trade from Indonesia's Arun LNG facility in northern Sumatra will begin in early
1987 at a price-currently about $5.10 per million Btu-pegged to a basket of
Indonesian crudes. According to an industry source, Pertamina-Indonesia's
state-owned oil company-has obtained two LNG tankers from South Korea.
Seoul plans to use the LNG in power plants and for home heating.
Irish Oil Find The first promising oil discovery in Irish waters in over 12 years has sparked a
wave of speculative fever and may lead to greater exploration in the area.
Although the discovery has not yet been declared commercially viable, the first
two tests have produced oil flows at rates of 2,600 and 6,500 barrels per day,
respectively. The only commercial hydrocarbon discovery in Irish waters to
date was the Kinsdale field, about 100 kilometers south of the new discovery,
which was discovered by Marathon Oil in 1971 and began commercial
production in 1979. Seven more test wells are planned for the southern section
of the Celtic Sea this year based on new seismic techniques that enable
geologists to look below the chalk deposits in the shallow waters.
Speculation on recoverable reserves by the oil industry based on the first test
results suggest ranges from 30 million to 200 million barrels. The more
optimistic figure would make financially hard-pressed Ireland, which currently
imports nearly all its oil, self-sufficient. Even if the new find proves not
commercial at current prices, it probably will generate continuing interest in
the area that many oil industry sources believe contains commercial quantities
of oil.
Mexico Announces Treasury Secretary Silva Herzog on Sunday, the day before Mexico's second
Public-Sector Debt extension of its public-sector debt moratorium ran out, announced agreement
Rescheduling for rescheduling $20 billion of public-sector debt. Silva Herzog said the
agreement will be signed on 26 August, just over a year after Mexico City
announced suspension of principal repayments. The US Embassy indicates,
however, that this agreement will only cover the debt of the three largest
public-sector borrowers. This probably indicates final details of individual
agreements with over 25 other Mexican agencies remain to be worked out.
According to press reporting, financial terms remain the same as those
proposed last December-an eight-year rescheduling with a four-year grace
period and interest rates of 1.87 percentage points over the London interbank
offer rate or 1.75 points over the US prime rate.
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Mexico Meets Second- According to Embassy reporting, the IMF recently informed Mexican policy-
Quarter IMF Targets makers that Fund analysis of budget and financial data indicates that Mexico
was in compliance with stabilization targets through midyear. The Embassy
also reports that the Bank of Mexico this week plans to draw its third $325
million quarterly IMF loan installment and $600 million remaining from the
second tranche of its $5 billion commercial loan. Mexican financial authorities
indicate that these funds will be used later this month to help liquidate the re-
maining $1.2 billion short-term BIS swap loan. Despite Mexico City's
eligibility to draw the $1.1 billion third tranche of the commercial loan, US
Embassy sources indicate that policymakers believe financial reserves are
adequate to allow them to postpone the drawdown for a month or more.
25X1
Venezuelan Debt Finance Minister Sosa reportedly is again asking US lenders to reschedule
Talks Stall Venezuela's debt while refusing to accept their demands for tough economic
adjustments. The bankers indicate they will not participate in a refinancing
program while overdue interest payments mount on loans to Venezuelan
borrowers. Venezuela also has begun negotiations with the IMF, but Caracas
insists that austerity policies pose unacceptable political risks during a
presidential election year
Neither side is likely to compromise much, and without an IMF program
Caracas will only continue postponing principal payments on short-term debts
this year. This will prevent it from obtaining new funds and trade credits and
cause a substantial reduction in imports that will disrupt the economy. The de-
terioration in the economy is increasing the likelihood that the government
party will be defeated at the polls in December.
Global and Regional Developments
Kuwaiti and Saudi Aid The US Embassy in Kuwait reports that Kuwait and Saudi Arabia will, on
for Iraq Iraq's behalf, sell some 248,000 barrels per day of crude oil from the Neutral
Zone, a jointly administered area whose oil production is shared equally by the
two countries. Earlier information had indicated that only some 74,400 barrels
per day from Kuwait's share would be supplied. The Arabian Oil Company be-
gan marketing the crude for Iraq earlier this month. Since April, Saudi Arabia
also has been supplying Iraqi customers with more than 240,000 barrels per
day-worth about $2.4 billion annually-from Saudi oilfields.
25X1
If the entire allotment from the Neutral Zone is in addition to the Saudi aid,
as appears likely, Iraq will gain an additional $2.5 billion over the next year.
The income would provide the Iraqis significant balance-of-payments relief,
but it would not be enough to spare them from making additional cuts in
imports this year.
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Debt-Troubled LDC Exports of many debt-troubled LDCs continued to decline in first-quarter
Exports Remain Weak 1983. For a selected group of 12 countries, seasonally adjusted exports fell an
estimated 15 percent from fourth-quarter 1982. Most of the decline was due to
a falloff in sales from oil-exporting LDCs. Nigerian exports plummeted over
50 percent while Mexico's foreign sales were down about 25 percent. Despite
the overall decline, three debt-troubled LDCs-Argentina, Brazil, and Ecua-
dor-registered a significant increase in exports in the first quarter. On the
whole, exports of debt-troubled LDCs probably remained depressed in the
second quarter. Lower oil prices, continued import cuts by some LDCs, and
the roughly four-quarter lag between OECD economic revival and recovery of
LDC exports probably held foreign sales of many debt-troubled countries in
check.
Exports of Selected Debt-Troubled LDCs a
Million US $
Argentina
9,140
7,620
2,280
2,100
1,460
1,810
2,300
Brazil
23,290
20,180
5,360
5,010
5,090
4,750
5,130
Chile
3,910
3,820
980
980
970
890
920
Costa Rica
960
870
230
230
210
200
190
Ecuador
2,540
2,140
560
540
560
480
560
Mexico
19,380
21,580
4,220
5,070
6,240
6,180
4,750
Peru
3,250
3,230
770
880
790
800
620
Panama_
330
370
70
100
80
120
80b
Philippines
5,650
4,970
1,270
1,290
1,190
1,220
1,150 b
Nigeria b
17,370
14,280
3,780
3,260
3,470
3,780
1,730
Sudan
660
500
110
100
130
160
90b
Venezuela b
20,100
16,600
4,050
3,220
4,470
4,750
4,110
a Seasonally adjusted quarterly data may not add to annual totals.
b Estimated.
OPEC Continues In an effort to ease their financial difficulties, OPEC countries are continuing
Postponing Capital to delay, reduce the size, or indefinitely postpone capital projects. Indonesia,
Projects Saudi Arabia, Nigeria, and Venezuela are implementing massive cuts. Indone-
sia is rephasing 47 major construction projects totaling an estimated $21
billion. Saudi Arabia has reduced capital spending, particularly on the
development of the Jubail and Yanbu industrial cities, and two major pipeline
projects and two complexes for saline water conversion have also been shelved.
6
Secret
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
In addition, payments are being delayed up to 90 days and new contracts are
not being awarded. The Nigerian National Economic Council has recommend-
ed that all public-sector capital projects not yet under way be suspended with
the exception of agricultural projects. Shrinking petroleum export earnings
have forced Venezuela to postpone indefinitely spending on roads, bridges,
urban development, and petrochemical/electricity generation projects. A
pickup in oil export earnings later this year, as anticipated by OPEC, probably
will be insufficient to allow a resumption of capital investments.)
Swedish-Danish Recent Danish preparations to test-drill for oil in the Kattegat Strait, located
Continental Shelf between Denmark and the southwest coast of Sweden, sparked a weeklong
Boundary Dispute confrontation between the two countries in early August. Denmark claims the
boundary of its economic zone should be placed between the small, virtually
uninhabited Danish island of Hesselo and the Swedish mainland, while the
Swedes argue for a boundary line drawn from mainland Denmark, effectively
giving them a larger part of the potentially oil-rich shelf. After a rather heated
exchange of letters, and a meeting between Swedish Prime Minister Olof
Palme and Danish Prime Minister Poul Schluter in Helsinki on 7-8 August,
both parties agreed to renew bilateral negotiations within a few weeks.
According to US officials in Stockholm, negotiations on the disputed sea 25X1
territory have taken place before, but no agreement was ever reached.
Stockholm's negotiating position is complicated by the fact that it is also
involved in a dispute with the Soviets on a Baltic Sea continental shelf
boundary. Sweden's position in that situation is similar to the Danish stance on
the Kattegat-Sweden wants a boundary on the eastern edge of the Swedish
island of Gotland, instead of between the island and the Swedish mainland, as
the Soviets insist. Although Sweden and Denmark are also at odds over several
other issues-including the reintroduced Swedish proposal for a Nordic
nuclear-weapons-free zone-we believe that prospects for a reasonable bound-
ary settlement are good because both sides want to put behind them an
embarrassing situation that has marred their otherwise good relations.
Developed Countries
London To Sell The British Government is planning to sell part of its remaining stake in
BP Shares to Offset British Petroleum (BP) to raise $750 million to help reduce the expected 1984
Budget Deficit budget deficit. The government reduced its original 51-percent stake in BP to
39 percent in 1979 shortly after Thatcher took power. The sale is consistent
with Thatcher's policy of selling off state holdings. Earlier this year portions of
British National Oil Company and British Gas Corporation were offered to the
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
public. Four other state-owned firms have been "privatized" since 1979,
garnering some $2 billion for the Treasury. The planned sale next year of the
51-percent share of British Telecom, the highly profitable state telephone
company, would bring an additional $6 billion.
Thatcher has speeded up her plan to sell off state-owned assets because of
continuing budget problems. Revenues next year are expected to fall $7.5
billion short of the projected $190 billion in expenditures. Thatcher's new
economic team, including Chancellor of the Exchequer Nigel Lawson and
Energy Secretary Walker, have been frantically searching for new sources of
revenue and spending cuts to bring the deficit in line. The government fears
that the large deficit could end the economic recovery now under way.
Less Developed Countries
Philippine Balance-of- Revised Central Bank data for the first half of 1983 show the Philippines'
Payments Strains current account deficit totaled $1.6 billion, matching last year's record-setting
first-half deficit. Exports dropped 8 percent despite higher earnings for sugar
and copper, while imports remained at 1982 levels because of stronger capital
goods and raw material orders. With Central Bank liquidity severely strained,
Manila had counted on an improvement over the 1982 deficit in order to
assuage foreign commercial creditors. The government now faces the possibili-
ty that there will be little improvement in the second half of the year, despite
an 8-percent devaluation in June and several new austerity measures. Even if
traditional commodity exports continue to show improvement, the 1983
current account deficit probably will exceed $3 billion-about $500 million
more than the IMF program target.
Peruvian Payments According to the US Embassy in Lima, the Central Bank now estimates the
Difficulties 1983 current account deficit will total $1 billion, 20-percent larger than earlier
projections. Lima cut its trade surplus projection to only $65 million because of
continued depressed demand for mineral exports and weather-induced crop
shortfalls that are pushing up food imports. In addition, the services deficit is
forecast to be above $1.1 billion because of declining tourist receipts as a result
of the adverse publicity generated by terrorist activity.
The Central Bank also estimates that there will be a $3 million net outflow of
long-term private capital this year, reflecting worsening economic conditions
and concern over rising terrorist activity. Earlier, Lima cut its foreign direct
investment projection by 60 percent to $17 million because of lack of interest
in new investments in the mineral sector. With foreign reserves now at only
$500 million-two months of imports-Peru will face debt servicing difficul-
ties if it fails to attract new international lending by the end of the year.
25X1
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
secret
Burmese Economic According to the US Embassy, Burma's GDP for the year ending 31 March
Growth Slows grew by less than 4 percent, compared with 8.3 percent the previous year and
an average of 6.6 percent during 1978-82. The depressed international price of
rice, sluggish growth in the manufacturing sector, and a shortfall in oil
production were the principal causes for the slowdown. Burma's relatively poor
performance is not likely to improve markedly over the next year because of
drought in some growing areas and the poor quality of Burmese rice exports.
US Embassy officials report, however, that Rangoon is considering its first oil
imports in eight years in an attempt to reverse the economic decline.
Mauritian Elections Mauritius's longstanding economic problems-the focus of the current election
and Foreign Financial campaign-will remain intractable regardless of whether the ruling Mauritius
Assistance Socialist Movement (MSM) or its like-minded opponent wins on 21 August.
The election was called because the MSM feared a no-confidence vote in the
National Assembly over its austere 1983/84 budget. A new standby agree-
ment with the IMF was obtained in April, but conclusion of the agreement de-
pends on the passage of an austere budget for 1983/84. Passage of the budget
is likely to be assured only if the winning party secures a sizable majority in
the legislature; many members of both parties, however, are opposed to
austerity measures.
We believe that leaders of both groups contesting the election recognize that
any government will have to follow pragmatic economic policies to attract
continuing Western assistance and ensure future growth. Without such
assistance, continuing deficits could lead to increasing political instability.
According to IMF projections, the budget and current account deficits will
decline this year, but external debt servicing will rise substantially as a result
of previous borrowings. Financing these deficits will depend on some $95
million in aid from the IMF and World Bank, and $55 million in Western do-
nor assistance.
Chinese Grain Harvest Beijing has announced a summer harvest of 82 million tons, up 10 percent
and Trade Prospects from the record harvest in 1982. Summer crops normally account for roughly
20 percent of total grain production. The summer harvest was aided by an ex-
cellent winter wheat crop, which reportedly may be nearly 10 million tons
above the record harvest last year of 58 million tons. With favorable weather,
total grain production this year will match the record harvest of 353 million
tons in 1982. Chinese officials have said that purchases of US grain will
resume after the textile agreement with the United States is formally signed,
but they have not indicated if China will meet the 6-million-ton minimum
called for in the bilateral long-term grain agreement. For the past two years
China has provided the largest market for US wheat, but it has not made any
purchases from the United States since late last year.
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Soviet Economic Moscow has announced an "economic experiment"-to be instituted in
Experiment Announced selected industries on 1 January 1984-that is designed to boost worker
productivity and stimulate innovation in industry. Although the implementing
decree is vague on specifics:
? Enterprises are to be allowed greater autonomy in using investment, wage,
and R&D funds to stimulate innovation and introduce new technologies;
greater access to bank credit to purchase new equipment; and increased
flexibility to link worker and management wages more closely with enter-
prise performance.
? The current number of plan indicators is to be reduced and enterprise
performance evaluated more strictly on the basis of sales that meet contract
obligations, scientific and technological innovation, productivity increases,
and production cost reductions.
Most of the "new measures" called for have been tried before unsuccessfully.
The reordering of success indicators, for example, is a familar move. Also, the
call for increased enterprise control over R&D, wages, and investment fails to
define how much power would be exercised and implies that central authorities
still would retain considerable leverage over plant activities.
General Secretary Andropov has openly expressed his dissatisfaction with the
performance of the Soviet economy but has moved cautiously in introducing
change. In a speech to veteran party members on 15 August, for instance,
Andropov expressed discontent with the pace at which the economy is
improving and the current lack of vigor in the search for solutions to its
problems. The General Secretary indicated that more experiments-and
possibly some more sweeping modifications of the existing system of planning
and administration-would be forthcoming before the 12th Five-Year Plan
(1986-1990) begins.
Andropov's Comments General Secretary Andropov
on East European was displeased with a proposal by some Polish leaders to expand their private
Economic Reforms economic sector. He also expressed misgivings over proposals to expand factory
autonomy made by Hungarian leader Kadar during his recent visit to Moscow.
he Hungarians had approached the limits of what is
permissible on economic reform and that Moscow is increasingly concerned
with Budapest's Western economic orientation.
Andropov recognizes the need to permit differences among
"socialist" states and claims that the Soviet leader favors evolutionary change
to revitalize "socialism." The US Embassy in Budapest says that the
Hungarians remain confident that Andropov still supports the main thrust of
their reform program.
25X1
2bAl
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Some of Andropov's colleagues may be urging him to restrain East European
the role of the private sector in Poland, and Andropov is likely to resist greater
concessions to it by Warsaw. He has been a strong supporter of Hungarian
economic reform, but he may now feel that managerial autonomy there has
gone as far as it can without undermining the "socialist" system. Budapest
appears committed to further reforms, but Kadar may back off from more far-
reaching proposals to satisfy his critics in Moscow. Andropov's reported views
suggest he realizes that East European experience will provide no quick fixes
and that he will be wary of relying on market mechanisms to revitalize the
Soviet economy.
Soviets Increase Im- Soviet production of freight cars has declined in each of the last six years, and
ports of Freight Cars recent agreements with Finland, Czechoslovakia, and East Germany for
railcars and locomotives may reflect Moscow's intention to rely on imports to
supplement domestic production instead of increasing investment in domestic
output. In 1982 the Soviets concluded a $70 million agreement with the
Finnish firm Rautaruukki, Inc. to build a railcar manufacturing plant in
Finland and produce rolling stock for the USSR. Under another contract
valued at $53 million the Finnish firm Haka will build a railcar production and
repair facility at Tosho near Leningrad. Imports may account for 10 to 15 per-
cent of new Soviet freight cars annually by the late 1980s.
25X1
25X1
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
High-Technology Materials:
Intensifying Foreign Competition
New materials are being developed that increase
the strength and durability as well as lower the
operating costs of a wide variety of commercial
products and military systems. These materials can
have a tremendous impact on the competitiveness
of products cumulatively worth hundreds of billions
of dollars annually. Quicker-than-ever advances in
manufacturing processes have contributed to an
unprecedented pace in materials development.
High Commercial and Strategic Stakes
Advanced materials enhance equipment perform-
ance and/or product competitiveness in one or
more of the following applications:
? In special components critical to system perform-
ance. Although unit prices may be small relative
to overall system costs, the value of such compo-
nents to the system is high. Example applications
are: semiconductor-based memory chips and mi-
croprocessors, the single light-emitting crystal in
a laser, and composite "Chobham" armor in
modern tanks.
? As substitute materials in equipment, providing
either greater durability or lower operating costs.
Examples are: fracture-resistant composites ' in
helicopter rotors and lightweight materials in
fuel-efficient automobiles.
? In components for improving human health, such
as body replacement parts.
Many of the applications most affected by ad-
vanced materials are found in the transportation
' Composites are combinations of two or more materials. In the
most common composites, strong fibers are used to reinforce
and information sectors. In civil and military trans-
portation applications, the rise in energy prices
during the 1970s spurred ongoing R&D to improve
the fuel efficiency and durability of vehicles
through the innovative use of advanced materials:
? Diesel engines with the pistons, manifolds, cylin-
der I
heads, and liners made of ceramics can be
operated at high temperatures, improving ther- 25X1
modynamic efficiency, horsepower, and fuel con-
sumption. Experts anticipate increases of 30 per-
cent or more in fuel mileage in automobiles,
trucks, and tanks. Moreover, as technology ad-
vances permit higher engine operating tempera-
tures, cooling systems may eventually be
eliminated.
? Durable single-crystal turbine blades will help
stretch the operating lifetime of commercial jet
engines, as well as permit their operation at
higher temperatures.
? In civil airframes, composites may be near the
threshold of a major increase in use. The newest
airframes (such as the Boeing 767) already use
composites extensively in secondary structures,
such as elevators, spoilers, rudders, and engine
cowlings. Sizable rewards await airframe manu-
facturers who can safely and economically use
composites extensively in the primary struc-
tures-main wings and fuselage-of large com-
mercial aircraft.
? Automobile bodies will become lighter through 25X1
more extensive use of engineering plastics, com-
posites, I
and advanced alloys.
Secret
DI IEEW 83-033
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
turbine blades in fracture at high tem-
aircraft jet engines perature
Amorphous Transformer cores Easily remagnetized Under development; Economics may be
without loss of being field tested marginal
Lightweight High-stress parts in Fuel efficient in Under development Costs barrier to
alloys airframes and auto- vehicles widespread use
mobiles
Ceramics High-temperature a Fuel economy The uncooled, all- Raw materials inexpen-
engines in automobiles ceramic engine is a 21st- sive and widely available
and tanks century application
Automobile parts such Lighter and more Currently used in Brittleness barrier to
as turbocharger rotors, durable than metals operating prototypes wide use
cylinder liners and at high temperatures
heads, and pistons
Cutting tools Wear resistant Widely available High cost of tool break-
age limits use to special
applications
Engineering Vehicle dashboards Cheaper than non- Continuing develop- Consumer dislike
plastics and equipment shells plastics; tough, ments; some high- barrier to
corrosion resistant performance plastics extensive use
at moderate tempera- no longer advanced
tures
Fiber-rein- Aircraft, automobile, Strong and lightweight; In commercial aircraft, High cost of parts
forced plastics high-speed train bodies hence fuel efficient safety fears hold back fabrication barrier
(including in vehicles use in wings and to widespread use
carbon-carbon) fuselage
High-stress parts; Fracture resistant Increasingly
helicopter rotors, under high stress available
aircraft wings, and
brakes; automobile
drive shafts and
leaf springs; casings
for rocket motors and
jet engines
Stealth aircraft Poor radar reflector Long-range potential
Metal matrix Automobile engine In castings, much Currently in working May outcompete more
blocks stronger than unre- prototype publicized ceramics
inforced metals
automobile engines at high temperature
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Selected Advanced Materials and Applications (continued)
Advanced semi-
conductors
Gallium- Electronic circuits, Switching speed of Already used in
arsenide lasers, sensors, devices significantly military applications
receivers faster than silicon
Optical Fiber optics (glass) Speed-of-light, RF b
emission-free means of
transmitting information
Optical-computing Ultrahigh speed
elements
Index of refraction of
electro-optics sensi-
tive to pressure,
temperature, sound,
and magnetic field
Membranes Chemical industry Chemical separation
processes inexpensive
and pollution free
Water desalination
Body replacement
parts: artery, vein walls
a The higher the operating temperature of an engine, the better its
fuel efficiency. Ideally, the weight and expense of cooling systems
can be eliminated.
b Radiofrequency emissions in conventional communications often
degrade system performance and risk compromise of transmitted
information.
Already replacing metal
wires
Widely available As costs fall, industrial
use may increase rapidly
A next-century
application
Early in development Notable military
interest, such as for
submarine detection
In development Numerous potential
applications; market
could expand rapidly
In development
Minor use to date
Advanced nonmetallic structural materials also
promise some relief from dependency on Third
World suppliers of strategic minerals.
In civil and military information applications, re-
searchers are looking to increase computing speeds,
expand memory capacities, and reduce power re-
quirements for electronic components by exploiting
advanced materials. As silicon-based semiconduc-
tors approach theoretical performance limits, re-
searchers are experimenting with faster semicon-
ductor materials such as gallium-arsenide (roughly
10 times faster) and indium-antimonide (roughly
1,000 times faster when used in optical switches).
Optical fibers made of silicon glass are outcompet-
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
ing copper wires in communications applications
because of greater message-carrying capacity; the
same diameter cable is capable of carrying roughly
10 times more messages.
Reaching a High-Risk Market
The problems and risks in bringing new materials
and products to the market are often sizable.
Development is costly and time consuming with no
guarantee of technical success or economic feasibil-
ity. Market uncertainty is the greatest risk to
suppliers of innovative materials. A number of
suppliers, burdened with financial pressures, often
find it expedient to license technology, even to
overseas competitors.
For materials users, timing in product development
and market entry can be critical. At one extreme,
companies that fail to apply advanced materials at
an early stage may be hard pressed to catch up with
competitors, as their technically outdated or over-
priced products slump in market share. At the
other extreme, overaggressiveness in application of
advanced materials can be disastrous. The Rolls-
Royce bankruptcy and bailout in the 1970s by the
British Government resulted in part from using
unproven turbine blades made of composite materi-
al in a new jet engine. The engine (now the RB21 1)
was for the then new wide-body jumbo jets. F--]
Industry Structure
The importance and pervasiveness of advanced
materials in civil and military applications have
driven many corporations, as well as most govern-
ments, to be active in materials R&D. In the
conventional sense, however, there is no materials
industry per se and no major players dominate the
field. In the United States alone, research groups
pursuing advanced materials number in the hun-
dreds, if not the thousands. Most groups reside
within manufacturing firms-some of which are
multinationals-or in universities affluent enough
to afford necessary research equipment. Addition-
ally, a few independent laboratories specialize in
materials research.
Government involvement in materials R&D, once
rather selective, is on the upswing. The US Govern-
ment has pursued materials R&D for advanced
military, nuclear, space, and, more recently, ener-
gy-related applications. Responsibility for develop-
ing and exploiting advanced materials for other
applications has been left primarily to the private
sector. Overseas, this government-private industry
pattern has been mirrored to a large degree, but
this is changing
Intensifying Foreign Competition
Foreign governments-Japanese and French in
particular, which are looking for high-technology
solutions to improve their long-term industrial com-
petitiveness-are moving quickly to develop indige-
nous capabilities in key advanced materials. In the
short term they are encouraging firms to be aggres-
sive in installing production capacity for some of
the most promising new materials, even in the face
of weak demand. For the long term, Tokyo and
Paris are undertaking unprecedented national pro-
grams, funding "common-denominator" materials
research with the intent of fanning out results to
domestic commercial firms for proprietary product
development.
Japan. Tokyo has initiated several programs to
develop advanced materials:
? In FY 1981 MITI provided initial funding for a
decade-long effort, the "Next-Generation Indus-
tries Basic Technologies Research and Develop-
ment Program." The projected funding for mate-
rials under this program is $250 million.'
? The Science and Technology Agency in FY 1981
launched basic research on materials via four
R&D projects: superfine particles, special struc-
ture substances, fine polymers, and perfect crys-
talline structures. The agency is planning to
25X1
E
25X1
25X1
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
i Kevlar/graphite hybrid composite
O Graphite composite
0 Improved aluminum alloy
or forged fittings
Spoilers
Inboard airlerons
Advanced materials in the Boeing 767 are designed to produce a
light, durable, and fail-safe structure with low cost of ownership.
This drawing shows the distribution of hybrid Kevlar/graphite
composites and graphite composites.
25X1
300382 8-83
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
spend $36 million over the five-year lifespan of the
projects.
? The Ministry of Education is sponsoring training
programs to supply qualified personnel for engi-
neering and production positions.
Several examples illustrate areas where Japan is at
the forefront of materials technology:
? Toyota already markets an automobile whose
engine contains metal-matrix (ceramic fibers in
aluminum) piston caps.
? Isuzu is commercializing ceramic parts in diesel
engines. Ceramic glow plugs are already on the
market, and ceramic precombustor cups (the hot-
test part of the combustion chamber) will soon
follow.
? A Japanese corporation, Kyocera, controls about
70 percent of the world market in ceramic pack-
ages for microelectronic chips.
Western Europe. The French announced in late
1982 their national program for materials develop-
ment funded at 1 billion francs ($125 million)' for
three years. Under the Mitterrand government's
new plan for industrial revitalization, the French
are counting heavily on newly nationalized compa-
nies to take the lead in such research. The West
Germans are focusing on development of the ce-
ramic diesel engine, having formed both a consor-
tium of domestic companies for cooperative R&D
and a Max Planck Institute to specialize in ad-
vanced ceramics. Individual firms, both private and
public, in these two countries and in a number of
other West European countries have carved out
leadership roles within specialty niches in advanced
materials-such as Ciba-Geigy (Swiss), a major
supplier of matrix polymers for composites, and
Aeritalia, the main supplier of composite parts for
the Boeing 767.
25X1
E
25X1
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
South Korea: Moving Up the
Technology Ladder
South Korea is embarking on an ambitious plan to
restructure its industrial base in favor of skill- and
knowledge-intensive industries. Seeking a second
economic takeoff, the Chun government is target-
ing microelectronics, computers, machine tools, and
sophisticated shipbuilding for rapid growth. Seoul
has adopted a broad set of policies aimed at
encouraging manpower development, enhancing
the country's R&D capabilities, and attracting
advanced technology from abroad. Seoul is likely to
establish solid market niches in selected medium-
technology products, particularly small computers,
computer peripherals, and machine tools.
Focusing on Technology
The South Korean Government, which fostered the
rapid development of labor-intensive, light manu-
facturing industries-textiles, footwear, plywood,
and consumer electronics-during the 1960s and
early 1970s, undertook an ambitious program to
broaden the country's industrial base in the mid-
1970s. Judging that it would gradually lose its
comparative advantage in labor-intensive light in-
dustries to lower cost producers, Seoul vigorously
pushed a shift to capital- and technology-intensive
industries in its Fourth Five-Year Plan (1977-81).
These included machinery, iron and steel, automo-
biles, shipbuilding, chemicals, and more sophisti-
cated electronics. The private sector, responding to
government financial incentives-especially subsi-
dized credit-invested heavily in these targeted
industries.
South Korea is focusing on upgrading technology in
the Fifth Five-Year Plan (1982-86). Emphasis is on
investment in R&D and manpower development.
Skill- and knowledge-intensive industries, as op-
posed to capital-intensive industries, are being en-
couraged. Korean economic planners believe that
knowledge-intensive industries, with their relatively
low energy requirements and high reliance on
skilled labor, will best exploit the country's primary
strength-its work force-while protecting it from
its primary weakness-a lack of natural resources.
Seoul is targeting electronics (semiconductors, com-
puters, and communications equipment), general
machinery (machine tools and parts and compo-
nents), and shipbuilding for rapid expansion. Ex-
ports of these products are expected to increase 30
percent a year during 1982-86. By the mid-1980s
Seoul intends to be producing large-scale integrat-
ed circuits, microcomputers, sophisticated electron-
ic switching systems, and more advanced types of
ships and offshore equipment. Industries that use
large amounts of energy-particularly steel, non-
ferrous metals, and petrochemicals-will grow
slowly. Improving quality will be the watchword for
light manufacturing such as textiles, clothing, and
footwear, as these industries move into higher-
value-added ends of product lines.
Supporting Policy
Seoul has adopted a detailed set of policies to move
up the technology-ladder. The Ministry of Science
and Technology's Five-Year Research and Devel-
opment Plan contains a wide range of policies to
encourage manpower development, enhance domes-
tic R&D, and attract foreign technology. As in the
past, Seoul is providing generous tax and financial
incentives to encourage firms to invest in targeted
skill-intensive fields. By 1986, Seoul projects that
R&D spending will equal 2 percent of GNP, as
Secret
DI IEEW 83-033
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
compared with 1 percent in 1982. Seoul is also
protecting domestic producers from imports in se-
lected industries, particularly computers and ma-
chine tools, by banning or severely restricting im-
ports of such products.
To meet the increased need for skilled workers,
Seoul is implementing a broad-based program to
upgrade educational and technical training. Uni-
versity enrollment is being expanded significantly,
scholarships and research subsidies are being in-
creased, and military exemptions are being granted
to graduate students. In addition, overseas training
programs and exchanges with prestigious foreign
universities are being expanded. Seoul is also put-
ting priority on attracting Korean-American engi-
neers and scientists from abroad.
Seoul expects the country's nine government re-
search institutes to play a major role in upgrading
the nation's technological prowess. These research
institutes work closely with private firms in indus-
try-oriented R&D. The Korea Institute of Electron-
ics Technology, for example, is the center for the
development of computer technology and semicon-
ductors. Many of the public research institutes are
located in the Taedok science city in central Korea
alongside private and university research institutes.
The importance the government attaches to up-
grading the country's technological base is under-
scored by the quarterly science and technology
review meetings in which the heads of the research
institutes make oral presentations to President
Chun on their plans and progress.
South Korean economic planners also want to
attract advanced technology from abroad through
joint ventures and technical licensing agreements.
Seoul envisions the inflow of foreign investment
increasing from the $100 million per year average
of recent years to $700 million in 1986. To encour-
age this growth, the Ministry of Finance has
announced several policies to improve the foreign
investment climate. The government has also liber-
alized regulations concerning technology imports
and this has resulted in increased inflows in recent
years
Industry's Role
Taking their cue from the government and armed
with technical licensing agreements with multina-
tionals from the United States, Japan, and Western
Europe, South Korea's large conglomerates are
gearing up for a major move into skill-intensive
areas. Nowhere is this more apparent than in
electronics:
? Hyundai-the country's largest conglomerate-
has announced a five-year, $450 million invest-
ment program to mass produce semiconductor
chips in facilities in South Korea and in Califor-
nia's Silicon Valley.
? Samsung, backed by a technical agreement with
ITT, will pour $400 million into semiconductors
and electronics projects over the next five years.
With the startup of its joint venture plant with
Corning Glass in March, Samsung has already
become a world-class competitor in one of the
most difficult glass technologies, glass picture
tubes for color televisions.
? Gold Star, which has been in the forefront of
Korea's electronics industry, plans to turn out
64K RAM chips by 1984, a goal they can
probably reach.
? Samsung has a licensing agreement with Hewlett
Packard for minicomputer production, and three
other Korean firms will be making home comput-
ers this year.
South Korean businessmen are also seeking to
move into other more technology-intensive
industries:
? The Kolon group has joined forces with Japan's
Fanuc Corporation to set up South Korea's first
plant to manufacture industrial robots.
? Daewoo is moving into more sophisticated ma-
chine tool production, including numerically con-
trolled machine tools.
:25X1
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
JCL L CL
? Hyundai is upgrading its technological capabili-
ties in the auto industry; the company has a
technical licensing agreement with Mitsubishi to
produce a front-wheel drive car that will be
marketed in the United States in the mid-1980s.
Strengths
South Korea has a number of factors working in its
favor in moving ahead with its industrial restruc-
turing. The country's highly motivated, well-edu-
cated, adaptable work force remains a major ad-
vantage. South Korean schools will turn out
thousands of highly qualified engineers and scien-
tists over the next decade. From a cost perspective,
South Korean engineers will remain a bargain;
their wages are only one-fifth to one-fourth those of
their US counterparts
The size and diversification of Korea's major con-
glomerates give the country an important advan-
tage over the other East Asian newly industrializ-
ing countries. Korean industrial giants can afford
to gamble on new products and take initial losses in
the new, technology-intensive industries, offsetting
the red ink with profits from their other business
areas. They also have greater financial resources to
commit to developing new products. In addition,
South Korea's larger population and GNP give it a
larger domestic market.
South Korea's demonstrated capabilities in assimi-
lating new technology and the government's clear-
cut commitment also augur well for the country's
move upmarket. South Korea has already moved
ahead of the other East Asian NICs in semiconduc-
tors.
The speed and extent to which South Korea suc-
ceeds in moving to more advanced technologies will
depend on Seoul's success in dealing with several
internal obstacles and on how rapidly international
demand increases. The advance of the East Asian
NICs into the same fairly narrow range of medi-
um-technology products could lead to overcapacity
unless global demand increases sharply:
? South Korea will need to develop better market-
ing and quality control to demonstrate to consum-
ers the reliability of its products in these new
areas.
? Despite its ambitious training program, supplying
enough skilled workers could present another
obstacle, particularly in meeting the demand for
scientists.
? Perhaps the most significant problem is the coun-
try's somewhat tarnished image among foreign
investors. A number of foreign companies have
charged that the policies of the South Korean
Government have been arbitrary and unrespon-
sive in recent years.
Significant Advances Coming
We do not foresee South Korea's moving into a
broad range of high-technology products. It lacks
the size and financial capabilities to imitate Japan's
broad industrial development, and its level of tech-
nology will remain well behind that of developed
countries for at least the rest of the 1980s. In our
judgment, South Korea will be successful over the
next five years in establishing market niches in
selected medium-technology product
In shipbuilding, Seoul hopes to expand exports
from its current 8-percent share of the global
market to about 10 percent, a gain that would be
made largely at the expense of West European and
Japanese firms. In microelectronics and machine
tools, South Korean companies will be competing to
some extent with both US and Japanese companies;
in some cases the Koreans are aiming at product
lines that US and Japanese firms are giving less
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
emphasis to as they themselves move up to higher
technology goods, such as in less sophisticated
lathes and lower priced stereo equipment. Nonethe-
less, some small and medium-sized US companies
are likely to feel the increased competition. In
textiles and footwear Seoul's strongest competitors
will be the other East Asian NICs.
25X1
25X1
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Japan: Financial Strength
Spurs Auto Industry
The enormous financial power of the major Japa-
nese automobile firms gives them a substantial
advantage in competition that will involve the
world's auto manufacturers during the balance of
the 1980s. This growing financial strength gives
Japanese companies more flexibility than US firms
to:
? Sustain investment in expanding and upgrading
production facilities.
? Support an R&D program that can take high
risks.
? Mount large foreign investment programs and
move production offshore to assure access to third
markets.
Furthermore, because the auto industry is increas-
ingly becoming a user of advanced technology, the
strong Japanese automobile sector should also help
enhance the competitiveness of Japan's high-tech-
nology industries
Steady Financial Growth
The financial strength of Japan's automakers has
increased steadily over the past decade. With a
high-quality, fuel-efficient product line and an
aggressive marketing strategy, Japanese firms have
been able to ride out both market downturns of the
past decade (1974-75 and 1980-81). These high
sales volumes, in conjunction with their ability to
increase labor productivity and reduce manufactur-
ing costs, have provided high returns on sales and
capital over the past decade. High returns have
enabled the producers to reduce long-term debt,
further reducing costs. Toyota, in fact, has been
debt free since 1978.
Most Japanese auto firms have maintained positive
cash flows, despite the current slowdown in sales at
Japanese Financial Reporting
We believe that the collective financial power of
Japanese automakers is significantly greater than
is reflected in their annual reports. Since Japanese
auto companies are final assemblers of components
from highly integrated groups of independently
reporting subsidiaries, the annual reports under-
state the financial power of the parent firm. Toyota
and Nissan, for example, each have more than 200
subsidiaries, and the value added at Toyota repre-
sents only about 30 percent of the total value-of the
vehicle. Furthermore, unconsolidated financial re-
porting allows the automakers to conceal a variety
of transactions. Industry sources believe funds are
transferred among affiliated companies with differ-
ent accounting periods to hide profits and cash
reserves.
home and growing constraints on export volume.
Faced with voluntary quotas, the Japanese have
raised profit margins by selling higher value vehi-
cles and by taking advantage of favorable exchange
rates. As a result, net working capital, a general
measure of liquidity, has also remained high or, in
the case of Toyota, increased. US firms, in con-
trast, were forced to invest heavily in R&D and
process technologies during the recent sharp sales
downturns in order to increase competitiveness. To
finance these large capital needs, US firms have
had to cut dividends, reduce working capital, liqui-
date assets, and turn increasingly to long-term
debt.
Secret
DI IEEW 83-033
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
US and Japanese Automakers: Comparative Financial Performance
Toyota General Motors
? Nissan Ford
Honda
Comparative Sales Performance
Million units
Long-Term Debt as a Share of
Long-Term Capital Net Working Capitalc
Index: 1970=100 Billion US $
Return on Total Long-Term Capitalb
Percent
Primary Operating Cash Flow it
Billion US $
a Ratio of net profits to sales revenue.
b Ratio of net profit to long-term debt plus equity.
c Current assets minus current liabilities.
dNet profits plus depreciation less capital spending.
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
~A P411,14,
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Flexing Financial Muscle
Japanese automakers are currently using their fi-
nancial strength to prepare themselves for the
uncertain market environment of the next few
years. They are investing in advanced plant and
equipment, long-term R&D, overseas production
facilities, and diversified product areas.
Domestic Capital Spending. Usually over half of
each company's financial resources ' are used to
strengthen its production capabilities and manufac-
turing efficiencies. Although much smaller than for
US firms, continued increases in capital expendi-
tures confirm the plowback of Japanese resources
into capacity expansion and manufacturing proc-
esses to meet future world markets:
? We estimate Japanese annual production capabil-
ity will increase by 1.3 million vehicles to a total
of 12.5 million vehicles by 1985. Although nei-
ther Toyota nor Nissan have announced plans to
expand domestic production facilities, most
smaller firms intend to increase capacity signifi-
cantly. Toyo Kogyo, for example, has three new
assembly plants under way, each with a capacity
of 240,000 cars per year.
? Major expenditures on manufacturing
technologies include the application of advanced
robotics, CAD/CAM (computer-aided design/
computer-aided manufacturing) and flexible
manufacturing systems. Toyota and Toyo Kogyo
are testing new automated stamping presses that
will virtually eliminate labor in the entire
stamping to assembly operation. Overall, industry
experts estimate the Japanese will increase pro-
ductivity 20 percent in the late 1980s by increas-
ing the use of automation in the manufacturing
process.
To maintain high levels of capital spending, Japa-
nese auto firms are increasingly seeking equity
funds. The equity is owned primarily by Japanese
financial institutions (rather than by individual
shareholders), which have tended to be uncon-
cerned about short-term profits or a quick return on
investment. Thus, Japanese firms can use the capi-
tal to focus on longer term investment decisions,
rather than to generate short-term profits for
shareholders' dividends.
R&D Expenditures. Financial power, coupled with 25X1
aggressive management, has enabled Japanese auto
firms to undertake some high risk R&D choices.
Current R&D expenditures center on further im-
provements in vehicle fuel efficiencies such as
developing ceramic ignition parts, electronic engine
and transmission controls, and improving aerody-
namics. Industry specialists indicate that one of the
most important near-term Japanese product devel-
opments is an electronically controlled direct injec-
tion diesel engine for use in passenger cars. We 25X1
expect these engines to be introduced by Nissan,
Toyota, and Isuzu in the mid-to-late 1980s.
he introduction of
these engines will give the Japanese a major com-
petitive boost in the world diesel car market.
Longer term R&D expenditures focus on ceramic
diesel engines and composite materials. Isuzu, for
example, has successfully road tested diesel engines
with ceramic parts. In the composite materials
area, Toyota is already marketing a car whose
engine incorporates aluminum pistons reinforced
with alumina-silica ceramic fibers 25X1
Japan's competitive position 25X1
will be enhanced because its automakers have the
financial ability to assume the high risks and cost
of moving these developments into production.
Foreign Investments. To overcome market access
restrictions, firms such as Nissan and Honda are
using a substantial proportion of their funds to
establish production facilities overseas. Heavy reli-
ance on foreign sales-Honda exports 73 percent of
total production, Nissan 53 percent, and Toyota 41
percent-makes the Japanese extremely vulnerable
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
US and Japanese Automakers: Research and Development
and Capital Expenditures
- Toyota General Motors
? Nissan Ford
Honda
Capital Expenditures
Billion US $
Research and Development Expenditures
Billion US S
Capital Expenditures as a Share of Sales Research and Development Expenditures
Percent as a Share of Sales
Percent
300390 8-83
Secret 26
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
to these restrictions. Consequently, Japanese auto
companies have spent an estimated $1.5-3.0 billion
on foreign assembly and manufacturing plants over
the past three years.
The Japanese have concentrated on building assem-
bly rather than manufacturing plants abroad, thus
retaining production of high value-added compo-
nents, such as engines and drive trains, at home.
This approach keeps auto employment high in
Japan, maintains economies of scale in Japan's
highly automated plants, and gives the manufac-
turers control over price and quality of major
components central to the performance of the car.
Although Japanese investment in developed mar-
kets, particularly the United States, has attracted
the most press attention, the majority have been set
up in the fast-growing markets in Asia and Latin
America.
Other Investments. Japanese automakers are also
using their strong financial position to invest in
areas outside the firm. These investments have
been made in subsidiaries and affiliates as well as
nonaffiliated companies. The investments provide
affiliates with cheap capital funds, especially for
R&D, and the parent firm a means to reduce
component costs through vertical integration and to
increase control over suppliers. Investments in non-
affiliates offer auto companies a means to diversify
their financial holdings and to reduce risks through
diversification of product lines. Japanese companies
are venturing into housing, machinery, and aero-
space-all largely financed from the vehicle sales
base.
Industry analysts believe the financial power of the
Japanese will tend to increase, relative to their
competitors, over the next decade. This growing
divergence in financial strength will enable Japa-
nese producers to increase the rate of new product
and plant technology introductions and continue to
move production facilities abroad. Unless the cur-
rent market upturn persists for three to five years, 25X1
financial experts believe it is unlikely that US
automakers will ever regain the relative financial
power they held prior to 1979.
The ability of Japan's auto firms to finance state-
of-the-art production lines and support an aggres-
sive research and development program will un-
doubtedly affect the competitiveness of a broad
range of Japanese industries. The auto industry, as
a growing user of advanced technologies, will have
a particularly significant impact on the robotics,
electronics, and advanced materials sectors. For
example, the' edge that Japanese firms have gained
in applying advanced robotics to the automotive
sector has reinforced their advantage over US and
West European robotics and machine tool manu-
facturers. Currently, development of ceramic auto
engines is the focal point of a widespread Japanese 25X1
effort to exploit advanced ceramics. 25X1
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Bahrain: Offshore Banking
Offshore banks-those that can do business only in
foreign markets-have grown faster than any other
segment of Bahrain's economy in the past decade.
These banks have boosted Bahrain's foreign ex-
change earnings, provided high-paying jobs, and
enhanced Bahrain's prestige as a regional financial
center. The offshore banking sector, which now
controls more assets than offshore markets in Sin-
gapore and Hong Kong, is facing harder times,
however. Recent protectionist moves by the Saudi
Arabian Monetary Authority (SAMA), increased
competition from banks in Saudi Arabia and Ku-
wait, and lower regional oil revenues are likely to
slow the sector's growth.
The rapid expansion of Bahrain's offshore banking
sector began in 1975. Bahrain authorities, seeking
to diversify the economy and to take advantage of
the enormous oil revenues generated by the oil
price increases of 1973-74, courted offshore banks
with:
? An excellent location near lucrative markets in
Saudi Arabia, Kuwait, and the United Arab
Emirates.
? First-rate communications facilities.
? Permissive banking laws that give offshore banks
freedom from taxation, exchange controls, and
reserve requirements.
? A willingness to tolerate Western lifestyles.
? A time zone that enables banks to do business
with the Orient in the morning and the West in
the afternoon.
Bahrain's attempts to attract foreign banks were
boosted by the civil war in Lebanon, which ended
Beirut's role as the Middle East's financial center.
By early 1983, 73 offshore banks were operating in
Bahrain. The major Western banks-well-estab-
lished in Bahrain-are being joined by new and
aggressive Arab banks with large amounts of public
funds at their disposal, reflecting the trend among
Arab financial institutions to play a larger role in
investing Arab government funds. With assets of
about $60 billion, Bahrain's offshore market now
surpasses those in Singapore and Hong Kong.
Offshore bankers had originally anticipated that
they would largely channel petrodollars to areas
outside the Persian Gulf-principally Europe and
the United States. Surprisingly, however, the banks
have extended over half of their loans to borrowers
in the region-primarily Saudis. Some two-thirds
of the banks' funds have come from commercial
banks and private sources in Arab nations.
Bahrain's dynamic offshore banking sector has
given the country international stature and en-
hanced the regime's image of permanence and
stability. The banks have promoted the insurance
industry and trading in precious metals, commod-
ities, and securities. Moreover, the banks have
encouraged the development of ancillary services
such as construction and communications.
Offshore banks provided about $75 million, or 10
percent, of Bahrain's foreign exchange earnings in
1982. The offshore banking sector also directly
contributed about 4 percent of Bahrain's GDP. In
addition, offshore banks have created about 2,000
jobs in Bahrain, and they now employ 1.5 percent
of the total work force. The number of Bahraini
Secret
DI IEEW 83-033
19 August 1983
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Listing of Offshore Banking Units
as of January 1982
B.A.I.I.(M.E.)
Banco do Brazil
Bank of America
Hong Kong & Shanghai Banking Corp.
Lloyds Bank International
Manufacturers Hanover Trust Co.
Midland Bank
National Westminister Bank
Scandinavian Bank
Swiss Bank Corp.
United Bank of Kuwait
Bank of Nova Scotia
Arab Asian Bank
Grindlays Bank
Korea Exchange Bank
Kredietbank N.V.
National Bank of Abu Dhabi
State Bank of India
U.B.A.F.
Al-Saudi Bank
Banco de Viscaya
Bankers Trust Co.
Banque de Paris et des Pays Bas
Barclays Bank International
European Arab Bank (M.E.)
Frab Bank (M.E.)
Gulf Riyadh Bank
1976
1976
United States
United Kingdom
United Kingdom
United States
Switzerland
Kuwait
Canada
Bahrain
United Kingdom
Korea
Belgium
United Arab Emirates
India
France
1976
1976
1976
1977
1977
1977
1977
1977
1977
1977
France
Spain
United States
France
United Kingdom
Bahrain
Bahrain
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Listing of Offshore Banking Units
as of January 1982 (continued)
42.
Security Pacific National Bank
United States
1978
43.
Al Bahrain Arab African Bank
Bahrain
1979
44.
Bank Bumiputra Malaysia
Malaysia
1979
45.
British Bank of the Middle East
United Kingdom
1979
46.
Credit Suisse
Switzerland
1979
47.
Grindlays International, Ltd.
Hong Kong
1979
48.
National Bank of Pakistan
Pakistan
1979
49.
Overseas Trust Bank
Hong Kong
1979
50.
Saudi National Commercial Bank
Saudi Arabia
1979
51.
Scandinavian Finance
Bermuda
1979
52.
Arab Latin American Bank
Peru
1980
53.
Arab Banking Corporation
Bahrain
1980
54.
Allied Bank Corporation
Philippines
1980
55.
Arab Solidarity Bank
Cayman Island
1980
56.
Bank of Baroda
India
1980
57.
Bank of Tokyo
Japan
1980
58.
Credit Commercial de France
France
1980
59.
Kuwait Asia Bank
Bahrain
1981
60.
Banco Estado de Sao Paulo
Brazil
1981
61.
B.C.C.I.
Luxembourg
1981
62.
Habib Bank
Pakistan
1981
63.
National Bank of Bahrain
Bahrain
1981
64.
Bank of Oman
Oman
1981
65.
United Gulf Bank
Bahrain
1981
66.
Continental Illinois National Bank and Trust
Company
United States
1982
nationals employed by the banks has grown steadi-
ly-to about 1,100-and they constitute almost 60
percent of the banks' total work force. Employees
in the banking sector receive better wages than
workers in other sectors of the economy-$ 1,000
per month, as compared with $700 per month for
other private-sector Bahrainis-and they are pro-
moted without regard to their family connections or
ethnic identity, a practice that is not common in
Bahrain.
The Saudi Connection. Saudi Arabia is vital to the
continued health of the Bahrain banking industry.
Sources in Riyadh and Manama estimate that a
substantial share of Bahrain's offshore banking
activity originates in Saudi Arabia-local lending,
trade financing, and investment advice. Moreover,
Bahrain has become the principal market in the
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Bahrain: Offshore Banking'
a Yearend.
b As of early 1983
C Projected.
Gulf for Saudi riyals. Its banks handle a pool of
riyals valued at about $9 billion. The Saudi Mone-
tary Authority (SAMA) recently issued regulations
forbidding Saudi banks from borrowing riyals from
Bahrain offshore banks without prior permission.
Abdalla Saif, Governor of the Bahrain Monetary
Agency (BMA), attributes SAMA's motives to a
desire to curtail the speculative dealing in riyals
outside of Saudi Arabia, particularly in Bahrain.
According to Embassy reporting, SAMA is also
considering a tax on foreign borrowing by Saudi
companies. Some bankers see this move as a delib-
erate attempt to steer loan business toward Saudi
Arabia's fast growing domestic banks.
The Soft Oil Market. The concern about Bahrain's
offshore banking has been heightened by the re-
gional economic downturn caused by the soft oil
market. Some bankers believe that banking will be
hit as economic activity slows. Others, however,
believe that dwindling oil incomes could create new
opportunities. They believe more oil-exporting
countries will begin to consider financing projects
with borrowed money instead of oil receipts. As the
Gulf states develop new and more sophisticated
credit needs, they believe Bahrain's offshore bank-
ing community will be well positioned to provide
needed services.
Competition. Aggressive Saudi and Kuwaiti banks
have begun to erode Bahrain's lead in regional
banking. According to open sources, some Bahraini
banks are having a difficult time finding new
business because Saudi and Kuwaiti banks have
become more competitive. Competition for loan
business has been particularly fierce, with some
Arab banks cutting margins to the bone. Bahraini
banks have tried to gain breathing space by provid-
ing noncredit services such as investment banking
and gold dealing not generally available from other
Arab banks. Bahraini bankers believe they still
have an edge over Saudi banks because they are
able to attract highly skilled staff that will not live
in Saudi Arabia.
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
The rapid growth of Bahrain's offshore banking
sector is unlikely to continue. The BMA has al-
ready begun to tighten up its licensing procedures
for new offshore banks because local bankers com-
plain that there are too many banks in Bahrain for
the volume of business. So far, however, no foreign
banks in Bahrain have closed their offices.
It will be several months before the full impact of
the new Saudi banking regulations is felt. We
believe, however, that Bahrain's offshore banks will
experience smaller capital inflows from Saudi Ara-
bia, and that SAMA will continue to pursue actions
designed to enable Saudi banks to compete with
Bahrain banks. Nonetheless, we believe that Bah-
rain will continue to provide an alternative finan-
cial market for the Saudis. SAMA is seriously
handicapped in trying to assert its authority over
Bahraini banks because it lacks both experienced
personnel and an array of central bank instruments.
The Bahrain Government has been counting on
continued growth in banking as a key element in
the country's economic development plan. Bah-
rain's Minister of Labor had expected employment
of Bahraini nationals in the banking sector to
double in the next decade. According to the US
Embassy in Manama, however, the banks may
instead slowly reduce staff. A senior officer of a
large offshore bank, for example, has stated that
his bank may move its operational staff to London
where costs are lower and staff more easily recruit-
ed.
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
 Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4
Secret
Secret
Sanitized Copy Approved for Release 2011/02/22 : CIA-RDP84-00898R000300060004-4