EXECUTIVE SUMMARY; SURREBUTTAL MEMORANDUM OP THE COMMITTEE TO PRESERVE. AMERICAN COLOR TELEVISION (a.k.a. COMPACT) INTRODUCTION AND SUMMARY

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1 EXECUTIVE SUMMARY; SURREBUTTAL MEMORANDUM OP THE COMMITTEE TO PRESERVE AMERICAN COLOR TELEVISION (a.k.a. COMPACT) INTRODUCTION AND SUMMARY The entire thrust of SMC's argument-in-chief is that Sanyo needs subzone status in order to compete with other U.S. color television producers. This essentially confirms COMPACTS allegation that Sanyo intends to use the proposed subzone primarily to import components, especially picture tubes, and to ship the complete television sets assembled therefrom into the U.S. market. This would have extremely adverse effects upon both U.S. manufacturers of television receivers and U.S. producers of picture tubes and glass envelopes. That the U.S. government has recognized the import sensitivity of the U.S. color television and picture tube industries was recently confirmed in a letter from the Office of the United States Trade Representative. I. APPROVAL OF THE SMC APPLICATION WILL NOT BE CONSISTENT WITH THE INTENT OF THE FOREIGN-TRADE ZONES ACT, JUDICIAL PRECEDENT AND ADMINISTRATIVE PRACTICE Sanyo seems to claim that use of FTZ's for importation for consumption should always be permitted, regardless of the effect on other U.S. companies or workers. Analysis of the Act, judicial precedent, and the Board's past practice demonstrates the consistent concern of Congress, the courts and the Board for the impact of particular zones on domestic industries. A. Legislative History During consideration of both the 1934 Act and its 1950 amendment, there was extensive congressional discussion of the potential injury which FTZ's could inflict on American manufacturers. 0 Rep. Celler, the sponsor of the Act, specifically stated that FTZ's should not be permitted to give zone occupants an "undue [competitive] advantage" over domestic manufacturers outside the zone. B. Judicial Interpretation When fully (rather than selectively) analyzed, the Armco case strongly supports the view that the Board must expressly find that the proposed use of an FTZ would not harm domestic industries.

2 -2-0 Far from "implicitly rejecting!" the view that zones should not be used to import or produce "import sensitive" products, the Armco district court's opinion implicitly espouses the view that import sensitive industries should be protected from injurious zone activities. 0 The Armco appellate court stated that "[t]he single most important factor" considered by the Board's Examining Committee was the risk of injury to the U.S. steel industry. * The subzone in Armco clearly had the effect of creating opportunities for domestic industries and workers which would otherwise have been absent. 0 The Armco court's "hole in the tariff wall" remark can be properly understood only with reference to these two factors the absence of injury to the domestic industry and the capture of an otherwise unavailable business opportunity. The "hole" which the proposed SMC subzone would punch in the "tariff wall" does not meet this dual test. C. Administrative Practice Nor does the Board's past practice manifest a policy categorically in favor of zone manufacturing for domestic consumption. 1. The Berg Steel Case In the Berg Steel case, the Board approved the FTZ application subject to the conditions that Berg's operations be reviewed after four years and that Berg Steel elect privileged status for any product (e.g., carbon steel plate) coming into the zone that was subject to an antidumping or countervailing duty order, or the trigger price mechanism ("TPM"), and destined to be sent into customs territory after transformation. The facts of the Berg Steel case do not support Sanyo's contention that the Board's action was merely an application of a well-established Board policy that products will be excluded from an FTZ (or admitted subject to conditions) only when those products (in the form in which they enter the zone) are the subject of a "comprehensive import restraint program." 0 Aisrs opposition to the Berg Steel project was based on the injurious effects the operation would have upon manufacturers of large diameter pipe as well as domestic companies supplying them with steel plate. 0 The Commerce Department's analysis of the likely impact of the proposed Berg Steel zone confirmed Aisrs allegations, and focused on the effects of the proposed zone on both pipe manufacturers and their suppliers. 0 Not only did the Board's "privileged status only" restriction have the effect of preserving "the integrity of the TPM," but it also deprived Berg of the substantial duty advantages zone

3 -3- *P status would normally bring and thus of its competitive advantage over U.S. steel pipe producers. 0 Otherwise put, the Boardts manifest intent in the Berg Steel case was to minimize the risk to both domestic competitors and suppliers posed by Berg's potential use of the zone for manufacturing for domestic consumption. 2. The Zenith and RCA Zone Operations The RCA and Zenith zones are so fundamentally different from SMC's proposed subzone that they provide no support for the instant application. 0 RCA used its zone until May 1981 as a world-wide distribution center for semi-conductors. No duty savings were achieved or achievable as a result of any inverted tariff. No manufacturing was performed. No significant advantages for its U.S. television operations were obtained. 0 Zenith's Me All en, Texas, zone operation also does not engage in assembly or manufacturing. It merely "provides support services to assembly plants in Mexico." 0 On the other hand, SMC's proposed manufacturing subzone would establish a precedent for the future. Indeed, Toshiba America, Inc. and Sharp Electronics Corp. have already expressed their interest in applying to obtain FTZ status for their own manufacturing operations. n. SANYO DOES NOT REQUIRE SUBZONE STATUS TO REMAIN COMPETITIVE Sanyo's major theme that it requires subzone status in order to remain competitive in the U.S. television industry is without merit. A. Sanyo's Portrayal of the Health of the U.S. Television Industry is Inaccurate The ITC fs two most recent decisions do not support the view that the domestic television industry is currently in a state of health. 0 In its 1980 decision under section 203 of the Trade Act of 1974, the ITC specifically found that the domestic industry had not fully recovered from the "serious injury" inflicted on it in The major symptom of continued ill health was the industry's "generally low profit levels." 0 Similarly, in its 1981 decision under section 751(b) of the Trade Agreements Act of 1979, a majority of the ITC also took note of the domestic industry's dismal profitability. 0 Far from "holding that... Japanese-owned American producers, such as SMC, behaved in the same essential manner

4 -4- as American-owned manufacturers," the majority in the section 751(b) investigation concluded that Japanese-owned domestic producers would in fact benefit from a resumption of significant Japanese dumping. 0 More recent import statistics show that for the full year 1981, Japanese imports of complete receivers increased 69.5 percent over 1980 levels, increasing Japan's U.S. market share from 4.0 to 5.7 percent. Moreover, Japanese imports of incomplete receivers with picture tubes more than doubled in 1981, and imports of Japanese picture tubes alone rose by 84 percent. 0 These trends confirm the analysis of the majority in the 751(b) decision: the Japanese would appear to be supplementing the production of their domestic subsidiaries and Japanese tube producers are apparently diverting an increasing number of picture tubes to the United States in response to softening of tube demand in Japan and in other Japanese export markets. B. Sanyo's Portrayal of its Competitive Position in the Domestic Television Industry is Contrary to FacT Sanyo has presented a ludicrous portrait of itself as a small, struggling company endeavoring to compete against huge, corporate giants which "dominate the market Sanyo has Misrepresented its Own Competitive Strengths e Sanyo gives only footnote acknowledgement to its own comfortable status as the nation's fifth largest producer fifth in a field of Sanyo's production for the Sears label gives it a total market share of between 7.5 and 9.0 percent. 0 Sanyo's extensive use of the Sears private label also explains the low brand name recognition for Sanyo. 0 SMC's merchandise contract with Sears is a source of considerable competitive advantage to Sanyo. 0 Advertising and marketing costs are assumed by Sears. 0 Sears is one of the few retail outlets for color televisions which can provide customer credit to enhance sales., 0 Private label manufacturing for Sears enables SMC to lower its production costs. 0 Contrary to SMC's representation, Sanyo Electric remains a significant manufacturer of color television receivers.

5 -5-0 Sanyo Electric is the second largest consumer electronics manufacturer in Japan, with 1980 sales of $4.7 billion and assets of almost $3.6 billion, an amount that dwarfs the assets of Zenith Radio Corporation, the current U.S. industry leader. 2. Sanyo has Exaggerated the Competitive Advantages of Other Domestic Producers SMC has completely mischaracterized the role and "advantages" of the integrated U.S.-owned color television producers. 0 SMC's own commercial behavior and that of its parent, Sanyo Electric, completely undercut complaints about the advantages of integration. Neither SMC nor its parent has made any attempt to build or invest in its own tube production facility. 0 The demise of the television business of GTE graphically demonstrates that integration does not ensure viability. Over the long-term, if intense television price competition, aggravated by less-than-fair-value prices of Japanese televisions, prevents a pass-through of increased tube costs, the profit margin of the integrated producer will necessarily be reduced. 0 The seven Japanese-owned companies producing color television receivers in the United States have, in fact, had absolutely no difficulty in competing with the U.S.-owned integrated producers. 0 While production by Japanese-owned domestic firms rose by 150 percent between 1977 and 1980, production by U.S.-owned producers rose by only 29 percent during the same period. 0 In fact, non-integration gives SMC certain definite competitive advantages. 0 SMC has far more flexibility in its purchasing. 0 SMC is not handicapped by the increased costs incurred by integrated U.S. producers who currently face excess tube production capacity. 3. The Mexican 807 Operation of RCA, Zenith and NAPC Do Not Justify Granting Sanyo Subzone Status Sanyo contends that U.S. producers' use of Mexican labor gives them a competitive advantage over SMC (which does not use Mexican facilities), and that SMC's "substantially similar" use of a subzone would restore the

6 -6- competitive balance while employing American, rather than Mexican, workers. This position has no merit. 0 U.S. producers were forced offshore by the influx of dumped television imports from Japan. 0 The Mexican 807 operations of U.S.-owned producers in fact preserve U.S. value. 0 For example, as noted by SMC, in the first nine months of 1981, 92 percent of U.S. producers1 total Mexican "imports" were, in fact, the return of American goods assembled abroad. An average of more than 30 percent of the value of these "imported"' components is value attributable to the parts themselves, that is, U.S. valueadded. 0 Sanyo is urging a false analogy upon the Board. The laborintensive work performed in the U.S.-owned producers' Mexican 807 operations the construction of subassemblies is presently performed by Sanyo in similar low-wage countries and Japan, not in Forrest City, Arkansas; approval of SMC's subzone application will not change that international division of labor. 0 The only difference will continue to be that U.S.-owned companies will use subassemblies made abroad largely from parts made in the United States by American workers, and SMC will use subassemblies made abroad from parts made in Japan by Japanese workers. 0 Rather than encourage a foreign producer to relocate operations to the United States and there use American workers and a greater amount of U.S.-produced merchandise in its manufacturing operation, the proposed subzone would encourage a foreign producer already firmly established in the United States to incorporate a lesser amount of U.S.-produced parts into its products. 0 A 1980 Sanyo set containing a Japanese-made picture tube would have had 71.2 percent of its total value added abroad. C. Sanyo Does Not Require a Subzone to Enable it to Compete With Imports From Korea and Taiwan 1. Sanyo has No More Right Than any Other Domestic Producer to an Advantage in Competing With Taiwan and Korea Arguably, SMC the U.S. subsidiary of a Japanese company proven to have engaged in unlawful dumping has considerably less right to gain an increased ability to compete with low-priced imports.

7 -7-2. Comings and N.V. Philips1 Activities in Korea and Taiwan are Irrelevant and Incorrectly Characterized * If anyone is to be vilified for Korea's and Taiwan's emergence as significant producers and exporters of color television receivers, with the capability to produce their own picture tubes, it is not Corning or N.V. Philips, but the Japanese. 0 Most of the technology used by Korea and much of that used by Taiwan is licensed from Japan, and Japanese companies have or have had ownership interests in all Korean and many Taiwanese plants. 0 Coming's activities in Taiwan and Korea are much more limited than SMC suggests. 0 Coming's Taiwanese subsidiary, Pacific Glass Corporation, manufactures glass envelopes only for monochrome (black and white) picture tubes: Corning has no involvement in Taiwanese color television production. f The Samsung-Corning glass plant in Korea will not become operative until To date, "[t]he most significant competitive factor in Korea" would appear to be the Japanese, who have provided Korea with the vast majority of its picture tube needs. 3. Sanyo's Claim That Subzone Status Will Make it Competitive With Taiwan and Korea is Without Merit but Confirms SMC's Intention to Import Tubes 0 SMC's anticipated first-year duty savings of $773,071 as a subzone will obviously not permit it to lower prices to the degree necessary to compete effectively with Taiwan and Korea. Nor will the full cost savings of 2.5 percent which COMPACT estimates SMC would realize by switching to imported tubes permit that result. 0 However, even modest cost savings and related price reductions will clearly enable SMC to compete with U.S. production. APPROVAL OF THE SANYO SUBZONE WILL AGGRAVATE INJURY SUFFERED BY THE U.S. TELEVISION INDUSTRY AND ITS SUPPLIER'S In COMPACT'S initial memorandum in opposition to the proposed subzone, we demonstrated that grant of the application would harm domestic producers of televisions, picture tubes and glass envelopes and their workers. Sanyo's increased sourcing of foreign picture tubes would lead to a loss of approximately 15 to 20 percent of the domestic non-captive market, resulting in a loss of almost 570 jobs in the tube and glass

8 -8- industries alone. In addition, Sanyo's reduced costs would enable it to reduce television set prices by approximately 2.5 percent, giving rise to a price war likely to wipe out all of the net operating profits of the entire industry. Moreover, because of static demand over the near-term, any increase in Sanyo's production will necessarily displace production by other U.S. television producers. Total job losses among tube, glass and television producers will amount to approximately 590 workers. Sanyo's attempt to refute COMPACTS analysis is entirely without merit. A. Sanyo Will Import Color Picture Tubes if Subzone Status is Granted * The central theme of SMCfs own rebuttal memorandum the supposed need to compete with other domestic television producers provides the clearest possible evidence that Sanyo will Import color picture tubes from Japan if subzone status is approved. 0 If Sanyo's estimated duty savings of $773,071 is enough to generate the effort and expense necessary to obtain a subzone, it is inconsistent to dismiss the significance of the major savings possible from a reduced duty on imported tubes. 0 For example, if Sanyo had imported only 144,000 picture tubes in 1981, the duty savings on tubes alone would have exceeded SMC's estimate for all other products combined. This quantity of tubes represents only 16 percent of SMC's estimated tube requirements for Indeed, lower tube prices already seem to have induced SMC to change its procurement policy. B. A 2.5 Percent Reduction in Sanyo's Costs as a Result of Increased Imports of "Japanese Tubes Would Foment a Price War Which Would Eliminate Industry Profits Sanyo's claim that it would use subzone cost reductions to increase profits, rather than decrease prices, is inherently incredible. 0 The subzone can be used to improve SMC's competitiveness with other U.S. and foreign producers only by allowing competitive pricing in other words, price reductions relative to competitors. 0 SMC's claim that it will not reduce prices is also belied by its investment strategy. Sanyo's investment and expansion program is not the mark of a company that is interested in using cost savings to increase profit levels. 0 Sanyo's domestic competitors, Zenith and North American Philips Corporation, have, contrary to SMC's allegation, translated their cost savings from automating and consolidating their facilities into a dollar-for-dollar reduction in prices.

9 -9-0 The well-established price competitiveness of the industry will require other domestic producers to match any price reduction made by SMC as a result of subzone status. C. Sanyo Will Ship all Increased TV Production to the U.S. Market and Not to Export Markets Sanyo's claim that SMC will be used as an export base by its parent corporation, Sanyo Electric, if subzone status is granted is absurd. Latin America offers little promise as a potential export market. 0 Brazil, Argentina, Uruguay, Paraguay and Bolivia utilize the PAL broadcast system, as opposed to the NTSC system. Because SMC does not make color televisions for use on the PAL system, these markets representing 46 percent of the total population of Central and South America are closed to SMC. 0 Central and South American countries are also notorious for their tariff and non-tariff barriers to imports. For example, Mexico categorically prohibits the importation of color televisions, and Columbia, Peru, and Venezuela all have tariff rates in excess of 40 percent. These barriers bring the total portion of the Central and South American market unavailable to SMC to over 80 percent. 0 The remaining 20 percent of the Central and South American market is composed of countries with extremely low per capita incomes, thus effectively eliminating them from consideration as export markets. 0 Sanyo's "relatively small plant in Brazil" seems more than sufficient to meet Brazilian demand. 0 Political instability and authoritarian or totalitarian regimes endemic to the region severely inhibit prospective demand for televisions, whether or not imported. 0 Sanyo established a color television production facility in Argentina in 1980, and that plant will surely service its home market in the future. D. Sanyo's Increased Production Due to Subzone Status Will Displace Production of Other U.S. Television Producers and Cause a Net Job Loss COMPACTS forecast of short-term static demand is accurate. * Television Digest's latest annual survey forecasts that U.S. demand for color televisions in 1982 will fall slightly from the record level of sales reached in Early returns for 1982 substantiate COMPACTS prediction of static or declining demand: January 1982 color television sales were down by 9.4 percent from January 1981.

10 -10-0 The RCA forecast contained in SMC's Exhibit 4 also projects color television sales to be virtually stagnant through Long-Term Forecasts are Speculative Any long-term growth forecasts for domestic producers in the 1980's must be considered tenuous in light of certain negative factors for example, the imminent expiration of the OMA's with Korea and Taiwan and the tremendous growth registered in imports of color picture tubes in 1980 and Even if the future could be forecast with assurance, the nearterm forecast still remains of critical importance, in that sales or market share lost by U.S. producers to SMC in the next two years may represent a permanent loss. 2. Imports From Taiwan and Korea Will Not be Displaced Because SMC's proposed subzone would not give it the ability to compete effectively with, much less displace, low-priced imports from Taiwan and Korea, it necessarily follows that Sanyo's increased production will displace other U.S. production, rather than imports. 3. Job Losses will Occur Because of Japanese-owned firms' lesser labor requirements, any displacement by SMC of production by U.S.-owned producers will result in a net job loss. E. The Domestic Color Picture Tube Industry Will be Severely Injured SMC has attempted to create the myth of a "great tube shortage of 1980," in an effort to explain the recent increase in tube imports from Japan, as well as establish a basis for the claim that tube imports will not result in over-capacity in the domestic industry. This position is without basis in fact. 0 While domestic tube producers were running at a relatively high rate of capacity utilization in 1980, there was no actual shortage. 0 Indeed, Admiral Overseas Corporation's failure to start domestic production cannot be ascribed to an inability to procure a domestic source of tubes: the Television Digest article cited by Sanyo itself points out that AOC was able to sign a contract with Zenith for the purchase of American-made picture tubes. * As SMC itself points out, one factor that caused a tightening of supply in 1980 was "decisions by television manufacturers to stockpile tubes in anticipation of price increases." * There is, however, currently no picture tube shortage, as SMC acknowledges.

11 -11- * For screen sizes 13 inches and over, there is an ample U.S. supply. In fact, current tube capacity in the United States is well above production levels, and there is excessive overcapacity with respect to the commercial market. 0 The elements which gave rise to this condition of over-capacity are recent expansions of production capacity in response to increased consumption in 1980 and 1981; a near doubling of tube imports in 1981; and dramatic rises in imports of complete color television receivers. 0 If the imminent applications for subzone status on behalf of Toshiba and Sharp are granted, the loss of non-captive tube sales would expand dramatically. 0 SMC, Sharp and Toshiba together account for a total of approximately 1,600,000 units. This estimated level of production amounts to 15 percent of total domestic production in 1980, and approximately 55 to 65 percent of non-captive demand for picture tubes in that year. IV. THE FACT THAT SMC IS OWNED BY A JAPANESE COMPANY SUBJECT TO AN OUTSTANDING DUMPING FINDING IS HIGHLY RELEVANT 9 The bare fact of SMC's Japanese ownership is significant for a number of reasons. * The United States Trade Representative has recently been involved in negotiations aimed at alleviating this country's enormous trade deficit with Japan, and the proposed SMC subzone would only exacerbate that trade deficit by encouraging a dramatic increase in the Japanese value added to an SMC television set. 0 The fact of SMC's Japanese ownership also establishes the crucial nexis between its proposed subzone operation and Japanese picture tube capacity. 0 The fact that SMC is owned and controlled by Sanyo Electric Co., Ltd. a company still subject to a dumping finding is also relevant to the Board's decision whether to grant the instant application. 0 In its most recent decision, a majority of the ITC found that Japanese companies such as Sanyo Electric would be likely to resume dumping in order to benefit themselves and their American subsidiaries at the expense of U.S.-owned producers. 0 Regardless of whether Sanyo Electric is still actively dumping, the Board ought not to reward it for its past pattern of behavior by giving its domestic subsidiary the exceptional advantage of a foreign-trade subzone.

12 -12- CONCLUSION Sanyo's rebuttal brief clearly manifests SMC's true intent in applying for subzone status: SMC seeks a competitive edge over other domestic producers, an edge that can only be attained by price reductions. Increased importation of picture tubes offers the greatest potential for significant price reductions. 0 SMC could pass its duty savings on to consumers in the form of a 2.5 percent reduction in the price of a complete set. 0 This would force other domestic manufacturers to follow suit. Other Japanese-owned producers could realize similar price reductions through establishment of their own foreign-trade subzones. U.S.- owned producers would be forced to either maintain price and lose market share; reduce price and lose profits; or reduce price and maintain profits by seeking low-priced components from abroad. 0 The Sanyo subzone would also reverse SMC's trend toward using an increasing amount of U.S.-made componentry. 0 Every SMC-made television which uses a Japanese-made picture tube will contain less than 30 percent U.S. value-added, while every SMC television containing a U.S.-made tube will have over 55 percent of its value added in the United States. This has serious implications for the U.S. balance of trade. 0 SanyoTs position that it must "retain the option" of using its subzone to import tubes on a non-privileged basis is unexplained, patently selfcontradictory, and suggestive of something less than total candor. 0 Granting of the pending application would only benefit SMC and its parent in Japan at the expense of domestic producers of televisions, picture tubes, and glass envelopes and their workers. The proposed subzone is contrary to the public interest and should not be approved.