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The Fairchild Deal : Trade War: When Chips Were Down

THE FAIRCHILD DEAL: Next: Fairchild's demise.

November 30, 1987|WILLIAM C. REMPEL and DONNA K.H. WALTERS | Times Staff Writers

Brooks' hostile reception was building before he got to Washington. The very day newspapers reported the Fujitsu offer, Charles Ferguson of the Massachusetts Institute of Technology's Center for Technology, Policy and Industrial Development picked up the phone and began ringing alarm bells throughout the capital.

He called the Defense Department, the White House, contacts in the intelligence community--and Smith. Like a Paul Revere warning that "the Japanese are coming," Ferguson said Fairchild was too important to be lost to Japan.

"It was a profoundly disturbing situation," said Ferguson, who has written extensively about the competitive decline of the U.S. semiconductor industry and its strategic implications. "It wasn't in the national interest for Brooks to sell out to Fujitsu."

Ferguson said it was an illustration of "lifeboat diplomacy," an attempt to save Fairchild first while betraying the American semiconductor industry--and perhaps the national interest.

The message fell on receptive ears. At both the Commerce Department and U.S. trade representative's office, aides began investigating the issue immediately. And at the Defense Department, Bryen told his aides bluntly: Stop the sale.

Government attorneys were asked to find any legal grounds for blocking the sale. The Pentagon ordered its general counsel to respond within 24 hours.

"The DOD general counsel ended up working on it for three or four days. It didn't matter. The fact was, except in extreme cases, there was no such authority," said a former Administration official.

It also was apparent early that any antitrust concerns would be insufficient to stop the deal. A Fairchild-Fujitsu combination would not have controlled enough of any segment of the chip market to warrant legal action.

Nor could serious objections be raised over its defense contract work. Although 35%-45% of Fairchild's sales were to defense contractors, the company was not the sole technology supplier to any of them. Also, it was not directly involved in any classified projects. And defense concerns over foreign ownership already had been resolved in 1979 when French-controlled Schlumberger bought Fairchild and established a New York-based subsidiary to operate it.

'Red Herring'

"The national security issue was a red herring," said one Administration official.

The last resort for opponents of the Fairchild sale seemed to be "the old guy with no teeth"--the Committee on Foreign Investment in the United States (CFIUS).

It may be one of the oddest creatures in the federal bureaucracy, a committee designated to monitor and investigate foreign investments but not empowered to intervene. CFIUS was born in the aftermath of the Arab oil embargo amid fears the oil cartels would use their burgeoning cash reserves to buy America.

The interagency panel is composed of high-level representatives from the departments of treasury, state, defense and commerce, as well as the U.S. trade representative and the Council of Economic Advisers.

Inevitably, CFIUS gets only the most politically sensitive transactions. Fairchild clearly qualified on that score. In fact, Fairchild was the only case singled out for investigation in 1986 from among $209.3 billion in foreign investments. The $200-million sale represented less than 0.1% of that total.

In the decade since its creation, however, CFIUS had never opposed a single foreign investment. On the rare occasions when substantial policy questions could not be resolved, the panel sent its recommendations to the Cabinet. But neither had the Cabinet ever discouraged a foreign takeover.

No laws bar foreign investment and, in fact, Reagan Administration policy formally welcomes such investment. In 1983, President Reagan called a "free and open international investment climate" the key to U.S. and world economic recovery.

"Foreigners had a huge role in building this country. The one thing we've never done in 200 years is prevent foreign investment," said R. A. Cornell, deputy assistant treasury secretary, a top CFIUS official.

But in late October, 1986, Baldrige and top U.S. trade officials--some of whom had helped draft the Reagan open investment policy--believed the world had changed and that it was time to reevaluate whether some critical American companies should be off-limits to foreign control.

That question would be at the heart of the CFIUS debate.

But as its Fairchild review began, CFIUS appeared headed in the same direction it had always gone: away from intervention.

The sides were entrenched from the beginning. Treasury, the State Department, a significant faction of Pentagon officials and virtually all Administration economists lined up behind the open investment policy and disputed the techno-hawk view that Fujitsu should be an exception.

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