NEWS ANALYSIS : Pentagon Fears Loss of Important Technologies : Defense: U.S. approval of $580-million weapons-system computer subsidy underscores concern that foreign firms are taking the lead in industries crucial to national security.

WASHINGTON —  The Pentagon’s far-flung empire of government and private laboratories guaranteed for decades that American soldiers would fight with the best weapons and that U.S. industry could tap a ready source of technology for commercial products.

Those days are gone.

Instead, America’s supremacy has been replaced by a fear here that leadership is passing to foreign competitors in a number of exotic technologies crucial to future national security. The concern was highlighted last week when the Pentagon unveiled a $580-million program to subsidize the creation of a viable domestic industry to produce flat-panel displays, a type of screen used on laptop computers that is expected to play a vital role in future weapons systems.

Japanese producers, which hold 95% of the $5-billion world market, have shown no interest in selling the screens to the Pentagon and have rejected Pentagon requests for producing customized military screens. The United States has only a few small firms capable of building the screens, and they lack a single major production plant.

“It is not the last time we are going to confront this kind of a problem,” said Julie Gorte, a defense expert at the Office of Technology Assessment. “And we can’t afford to put a half-billion dollars into everything we want to save.”

Although such concerns have been smoldering for a decade, the subsidies for computer displays clearly illustrate the potential cost to the government--and ultimately taxpayers--when domestic firms stumble in global competition.

It raises serious questions about the long-term limits of American military power as other nations build their own high-technology industries that have important military applications. In some cases--nuclear weapons technology, for example--the Pentagon’s labs still have their brainpower in the wrong places for the post-Cold War world. And while government and industry are in many cases still producing leading-edge technology, in other cases they have been eclipsed because foreign competitors often have more focused research programs and can finance research and build production plants at a lower cost.

Meanwhile, the U.S. lags foreign rivals in such crucial areas as optical data storage, robotics, composite materials, ceramics and electronic packaging, according to Daniel Burton, president of the Council on Competitiveness, a private research group in Washington.

U.S. industry has clearly improved its competitive position in the world in recent years, but it is unlikely that it will ever again regain its dominance of every field of high technology, particularly in various electronics sectors, Burton said. So, the Pentagon may face gaps in critical areas, even though U.S. high-technology firms are generally healthy financially.

Future wars are expected to be increasingly fought by electronic systems, in which moving data on the battlefield will be just as important as firing artillery rounds. As was the case in the Persian Gulf War, victory will be determined in many cases by which side has better electronics.

In the case of flat-panel displays, the Pentagon believes the need will become “urgent,” according to Kenneth Flamm, deputy assistant secretary of defense. The screens, which are lightweight and show greater detail than traditional television-type displays, will allow soldiers to better absorb the massive data that will flow between high-technology defense systems.

“We think that having advantage in display technology is going to give us both tactical and strategic advantages,” Flamm said. “It’s going to minimize the loss of life in conflicts. It’s going to reduce material costs.”

But that vision runs smack into Japan’s virtual monopoly on flat-panel displays.

Sharp, Toshiba and NEC dominate the worldwide industry, which is projected to explode into a $20-billion market by the end of the decade. Sharp alone accounts for more than 50% of world sales.

Defense Department purchases are unlikely to ever represent more than 5% of that market, meaning that the Pentagon could end up being treated no different than Radio Shack by Japanese suppliers.

Richard H. Van Atta, a Pentagon technology expert, said the Defense Department has no evidence of a Japanese government policy to block sales to U.S. weapons producers, but rather, individual companies have their hands full with the burgeoning commercial market.

In addition, Japanese firms do not want to deal with the cumbersome federal acquisition regulations--the same mind-numbing rules that have driven companies such as Intel Corp. out of the defense business.

Even if Japan’s firms were willing suppliers, reliance on superior foreign products will never sit well with the American military.

“Any case where our technology is not at the forefront gives us pause,” said Christopher Hill, a senior policy analyst at Rand Corp. “It challenges our entire security strategy.”

Hill argues that if the Pentagon does not act now, Japan’s superiority in making flat-panel displays may become so commanding that U.S. firms would never have a chance to re-enter the market.

The subsidy program marks the Clinton Administration’s deepest plunge into its so-called dual-use industrial policy, in which it seeks to foster technology supported by commercial markets that can also meet military needs.

Under the policy, the Pentagon has created an office for economic security, a far throw from the historic limits of military operations.

“You do get concerned about national security when all production is so concentrated not only in one country but in one company,” said Katherine Gillman, the White House’s top defense-conversion expert. “The policy is to rely on the commercial sector, except we don’t have a flat-panel sector in this country.”

It is not clear that the Pentagon’s $580 million is going to fix the problem. The Pentagon has already been pumping about $100 million annually in research money into the industry for several years.

The new program offers additional research subsidies to firms or joint ventures that are willing to build production plants. The goal is to encourage the construction of four large-scale plants that would claim 15% of the world market and create a self-sustaining industry.

Flamm believes that a U.S. industry would provide the Pentagon with access to leading technology even before it appears in the commercial market and with suppliers willing to customize products for military use.

But the program is costly by any measure. The Pentagon estimates it will buy 15,000 flat-panel displays annually by 1998, worth up to $10,000 each, or a total of $150 million. The subsidy program in that year will amount to $140 million, a subsidy rate of nearly 100% on sales.

Such high subsidies are necessary because just a single production plant costs $400 million to build.

The Defense Department projects that in 25 years, it will be buying 90,000 of the displays every year. If the subsidies can create a domestic industry to fill that need, the program will be considered a smart investment, according to a number of experts.

“They are doing it creatively,” said Burton of the Council on Competitiveness. “It would be great if we could have a flat-panel display industry here in the United States.”