Did The Administration Compromise US Security For Japanese Trade Talks Atmospherics?

Looking the Other Way as a Key National Resource Goes Japanese

The Bush Administration’s Committee on Foreign Investment in the United States (CFIUS) recently permitted the Japanese firm Komatsu to acquire the only U.S. enterprise currently producing an ingredient crucial to a variety of American military and civilian products — ultra-high purity polycrystalline silicon.

Polysilicon is used to grow large single silicon (monosilicon) crystals which are, in turn, sliced into wafers to form the crystalline matrix from which semiconductor chips are fabricated. As such, this material forms an integral component of semiconductors and the entire micro-electronic manufacturing chain.

CFIUS — an interagency group which, pursuant to the Exon-Florio amendment to the 1988 Omnibus Trade and Competitiveness Act, is charged with weighing the national security risks associated with individual foreign investments in the United States — decided on 3 April 1990, to approve Komatsu’s acquisition of the Union Carbide division in the state of Washington. It did so despite the fact that Union Carbide is the only current domestic supplier of polysilicon with sufficient purity to meet the Defense Department’s specifications for such materials. More remarkable still, CFIUS did so in the absence of an in-depth, forty-five day investigation provided for under the Exon-Florio statute.

Isn’t This Why Exon-Florio Exists?

The Defense Production Act of 1950, as amended by the Exon-Florio amendment to the Omnibus Trade and Competitiveness Act of 1988, gives the president express authority to review and investigate proposed foreign acquisitions that could impair national security. In enacting this amendment, Congress specifically wanted to empower the president to prevent the loss to the American defense industrial base of U.S. companies that provide indispensable products or other key technologies.

Despite strong concerns expressed by both the Departments of Commerce and Defense, however, CFIUS declined to exercise its authority to put the Komatsu transaction on hold, pending the completion of a forty-five day investigation into the matter or otherwise to act to ensure that such a vital capability remains available to the United States.

Instead, citing concerns over the sensitivity to such an action of U.S.-Japanese trade talks then in full swing and the potential chilling effect on foreign investment in the United States from this sort of investigation, CFIUS decided not to interpose any objection to the sale of the Union Carbide division in question.

DoD Critical Technologies Plan

This decision is ironic insofar as it roughly coincided with the release last month of a major Defense Department assessment of key technologies vital to the national security. The 1990 Critical Technologies Plan submitted by the Department of Defense to the Senate and House Armed Services Committees states that:

The dominance of silicon-based semiconductor manufacturing technology will continue for a decade or more. Long-term DoD/DoE efforts in microelectronics technology can be expected to significantly involve silicon technologies for the indefinite future. In fact, advances in silicon-based technology continue at an impressive rate, making it progressively more difficult for alternative technologies to compete with it over the near-to mid-term.

Addressing the importance of silicon technology — including polysilicon materials — to the national security, the report goes on to observe that:

Microelectronics technology has a pervasive effect on virtually every U.S. weapon system, current or future…. Silicon technology will continue to prevail during the very high-speed integrated circuit (VHSIC) era and for a long time thereafter and will continue to be the technology of choice for specialized applications….Important as microelectronics circuits are today, future weapons systems will rely even more upon advances in semiconductor fabrication techniques.

SEMATECH’s Mission

Another irony arising from the CFIUS decision to accede to the sale of the last U.S. manufacturer of ultra-high purity polysilicon is the utter inconsistency of that transaction with the objectives of SEMATECH. This consortium was launched by Congress in 1988 and formed last year with a $200 million budget. Its mandate is to assure the development and enhancement of the domestic semiconductor equipment industry and materials supply base; the object is to provide reliable indigenous supplies of such semiconductor-related technology in support of the Nation’s industrial and defense needs.

According to the DoD Critical Technologies Plan, "[SEMATECH] is emphasizing strengthening the domestic companies that make the equipment used to fabricate microelectronic circuits and improving the reliability and utilization of the equipment."

Importantly, the Center has learned that SEMATECH’s analysts in Houston concurred with the assessment that the loss of the polycrystalline silicon manufacturing capability to the Japanese is of concern. This view was amplified in a seminal report recently prepared by over 60 experts in the field:

It should be noted that the United States has become dangerously dependent on Japan for much of the equipment used for semiconductor manufacture….The ability to manufacture one’s own semiconductor products rather than relying on suppliers from another country is clearly preferable. But beyond relying on the end products, there is also the question of being able to produce both the materials (e.g., bulk silicon) and the manufacturing equipment (e.g., wafer steppers) rather than relying on suppliers from other countries.(1)

A special concern that arises from such a dependency, of course, is the prospect that foreign (or foreign-owned suppliers) may prove unwilling to provide the materials or equipment in question to the Defense Department — or other priority U.S. users — when needed. In fact, American manufacturers have already been told by Japanese producers of computer components and materials that there will be months-long delays in filling U.S. orders — delays not being experienced by the American companies’ competitors in Japan.

Action Comes on Heels of Commerce Decontrol Decision

Still more ironic is the fact that CFIUS’s failure to investigate thoroughly the full ramifications of the Komatsu acquisition comes on the heels of a Commerce Department decision in late January greatly to liberalize controls on the transfer of polysilicon to the Soviet Union. Not surprisingly, given the aforementioned importance of this technology to defense-related purposes, the Defense Department and U.S. intelligence community strongly opposed Commerce’s decontrol action.

Unfortunately, like so many others made by the Commerce Department under the rubric of "foreign availability" assessments, this decision ascribed to the Soviets alternative sources of supply for polysilicon materials that simply do not exist.

As a result of Commerce’s decontrol of polysilicon (and similar actions taken with respect to advanced computer technology, wire-bonders and silicon wafer-slicers), the Soviet Union will be able dramatically to upgrade their microelectronic manufacturing capabilities and defense industrial base. Consequently, new generations of Soviet tactical and strategic weapons, aircraft, missiles, ships, radars and command, control and communication systems — to name but a few — will be able to perform with greater lethality and higher reliability thanks to semiconductors fabricated with heretofore controlled Western technology.

Incredible as it may seem, even as the Commerce Department is agreeing to turn over important U.S. technology to the Japanese, it is opening up opportunities for trade in such technology with Moscow — opportunities from which only foreign bankers and businessmen are likely to profit.

Conclusions and Recommendation

In the congressional debate preceding enactment of the Exon-Florio amendment, considerable attention was paid to the downside risks of excessively challenging proposed foreign acquisitions. It was understood that blocking foreign acquisitions would be done only in extraordinary circumstances.

The president was, nonetheless, given authority by this statute to initiate 45-day investigation periods so as to explore fully the implications of an acquisition with possible national security ramifications and to probe possible safeguards and conditions that should be attached to the sale in the event a decision were made to permit it to proceed.

In practice, over the twenty months since the Exon-Florio amendment was enacted, CFIUS has launched only a handful of investigations. National security concerns were raised, for example, last year by the Committee — and conditions stipulated — in connection with the sale of Monsanto Material Company (a manufacturer of monocrystalline silicon) to a West German firm, Huels AG.

The Center for Security Policy believes that the intent of Congress — and the national security interests of the United States — have not been properly served by CFIUS’ failure rigorously to examine the implications of the Komatsu acquisition of Union Carbide’s ultra-high purity manufacturing capability. Moreover, the paucity of tangible results from the recent U.S.-Japanese trade talks — whose progress it was said would be threatened were the United States to investigate the Komatsu deal for forty-five days — underscores the folly of subordinating faithful implementation of the Exon-Florio amendment to such ephemeral events.

The Center calls upon the Bush Administration and the Congress to review this case with care and to consider further steps to preserve the vital U.S. capacity at stake.

1. Global Trends in Computer Technology and Their Impact on Export Control, by the Committee to Study International Developments in Computer Science and Technology, Computer Science and Technology Board, Commission on Physical Sciences, Mathematics, and Resources, and the National Research Council, (National Academy Press, 1988), p. 65-66.