TOKO:
The points I have been making on this thread have now appeared in the
WSJ. The WSJ forgot QNTM. It talks only about SEG. Hang on to QNTM,
though, because all the strong points we have discussed here are still
valid and will once make this stock explode. SEG is advancing today
because of the WSJ article, but when the whole news on QNTM is out,
QNTM will be at the top.
Sankar
WSJ: December 12, 1997
Production in the Region Will Become
Cheaper, but Sales Likely to Take Hit
For giant disk-drive maker Seagate Technology Inc., there
has been no shortage of ripple effects from the economic
crises coursing through Asia. The hard part has been
figuring out whether the news is bad or good.
This article was prepared by Wall Street Journal staff
reporters Lee Gomes, Dean Takahashi in San Francisco
and Wayne Arnold in Kuala Lumpur, Malaysia.
Consider: In October, the world's biggest drive maker took
a $63 million charge because of a badly timed hedging bet
on the plunging currencies of Thailand and Malaysia, where
Seagate has many of its plants. While the charge was a
shock for shareholders, there was also an upside: The
currency declines that triggered it also meant lower
manufacturing costs for Seagate, the biggest private
employer in those two countries.
That bit of good news, though, was
quickly offset by bad news in South
Korea, where a weakening won gave
Seagate's competitors like Samsung Group the chance to
cut their prices. Panic time? Not so fast. Because of the
same South Korean crisis, the likes of Samsung are facing a
credit crunch that appears likely to curb their ability to
expand operations. That's potentially a big plus for Seagate,
because the company is struggling with an industrywide glut
of disk drives. But a scarcity of credit is also bad news, of
course, since consumers and corporations in South Korea
and the rest of Asia will be buying fewer personal
computers, in which most of Seagate's drives are used.
Confused? Join the crowd.
U.S. investors are clearly alarmed about the fate of
America's highflying high-technology multinationals, and are
threatening to stampede out of the sector. The tech-laden
Nasdaq Stock Market has sunk nearly 5% this week. Such
behavior isn't completely irrational, because the net effect of
the Asian turmoil is bound to be negative, at least in the
short term. Japan and the Asia-Pacific region, excluding
China, represent about a quarter of the global economy, and
their collective growth rate may go from robust to nil next
year. More than a third of America's $150 billion of
high-tech exports go to the region, and the sales of the units
of U.S. companies located there dwarf those exports.
Asian Dependency
Top markets for American high-tech exports
1996
(billions)
% Change
Since 1990
European Union
$35.99
+43.1%
Canada
24.42
+80.0
Japan
17.98
+107.1
Mexico
12.72
+144.5
Singapore
8.02
+160.2
South Korea
7.34
+161.0
Taiwan
5.79
+119.7
Malaysia
4.96
+144.3
Hong Kong
4.92
+195.7
Brazil
4.06
+237.3
Philippines
3.00
+277.9
Australia
2.69
+57.6
Thailand
2.03
+144.2
China
1.93
+253.1
Israel
1.69
+135.1
Source: American Electronics Association
But it's proving to be surprisingly difficult to figure out the
precise bottom-line impact of the crisis on individual U.S.
companies or even industries. Some will be big losers, but
others will be hurt only moderately, while others could get
off scot-free. That, in turn, is one of the unexpected lessons
of the current situation: That answers don't come easily in a
globalized economy where countries are simultaneously
suppliers, customers, partners and competitors to American
companies. While tech companies are the U.S.'s biggest
exporters, the rest of America's multinational manufacturers
are subject to similar confusion.
International Business Machines Corp. says it has so many
plants around Asia -- 14 in five countries -- that it has no
central record of all purchasing and manufacturing. And
Motorola Inc. says that even to provide a comprehensive
accounting of production at its facilities throughout Asia
would take several days of calling company executives.
One result is that the next few months may see more weeks
like this past one, when companies describing Asia's impact
seemed to be on different planets. On Wednesday, for
example, Oracle Corp. blamed Asian woes for part of a
sales shortfall that drove its shares down 29% in the busiest
trading of a major stock in Wall Street's history. But on the
same day, executives of Packard-Bell NEC Inc. were
predicting that the crisis would actually be good for their
business by cutting the costs of components.
To some extent, American investors may not care much
about precise answers. They have driven many tech stocks
skyhigh in anticipation of enormous growth rates, so even a
moderate slowdown could make some currently inflated
price-to-earnings ratios unsupportable. Huge uncertainties
also unnerve high-tech investors. What if China's currency
begins to crumble? What if Japan can't stop the shrinkage
of its economy? What if a desperate drive for dollars by the
Asian nations causes a world-wide export war?
Right now, the conventional wisdom is that the region is
more likely to gradually recover than spin out of control, if
the affected countries implement reforms demanded by the
International Monetary Fund to root out the core causes of
their problems: easy credit, mismanaged banks and
misallocation of funds to massive projects run by the
cronies of bankers or politicians.
No one knows if these nations have the willpower to
implement such reforms. But in the meantime, whether Asia
is a problem or an opportunity for American companies
depends on what precisely they, and their competitors, do
in the region. The crucial factors are the location of
manufacturing facilities and customers.
The best situation is to make products in the countries with
the most devalued currencies, but sell most of the goods to
other, healthier regions. Hewlett-Packard Co., for example,
makes nearly half its ink-jet printers in Southeast Asia,
where currencies have dropped 20% to 40%. Seagate,
based in Scotts Valley, Calif., makes nearly all its computer
drives in Southeast Asia. So both companies stand to
benefit from lower payrolls, energy bills, maintenance costs
and the like, since these overhead expenses are paid in local
currencies that have become significantly cheaper relative to
the dollars generated by sales.
But the residents of these countries buy only a tiny fraction
of the products they make. Even the Japanese and the South
Koreans, the No. 3 and No. 6 importers, respectively, of
American high-tech goods, are relatively minor markets for
H-P and Seagate compared with the U.S. and Europe. So
such U.S. companies are somewhat buffered from the
recessions and lower purchasing power that are the
inevitable consequence of the reform measures being
adopted throughout the region.
Seagate, which has 82% of its work force in the region,
expects lower operating costs to help offset its recent
currency charge of $63 million. More than three-fourths of
Seagate's drives go into personal computers or servers sold
in markets other than Japan and Asia. Dick Warmington,
H-P's managing director of Asian operations, says that the
company's exports from its 18 factories strewn throughout
seven Asian countries exceed its nearly $7 billion of sales in
the region. While H-P buys most of its components in
dollars, its operating costs, mainly labor, are dropping
sharply.
"It's got to be helping us," Mr. Warmington says.
The Worst Scenario
The worst situation is to be heavily dependent on Asian
markets, but make products in the U.S. or, even worse,
high-cost Europe. For such companies, the Asian turmoil is
a resounding negative. Chief among them are suppliers of
the equipment used to make semiconductors, a $28 billion
industry dominated by U.S. suppliers like Applied Materials
Inc. and LAM Research Corp. The market leader, Applied
Materials, gets about 10% of its revenue from South Korean
chip makers and up to 25% from Japanese manufacturers.
The downturns in Asia have hammered the shares of the
equipment makers' stock. Shares in Applied Materials, for
example, are off nearly 50% from their summertime highs.
Analysts say this is one case where the market isn't
overreacting. "It's serious," says Richard Aurelio, executive
vice president of the semiconductor-equipment business for
Varian Associates Inc. in Palo Alto, Calif. "Our business
will be off in Korea. My gut reaction tells me they're going
to spend about 50% less in 1998."
The biggest factor in determining the amount of pain felt by
American tech companies is the mix of their customers.
Oracle, for example, owns about 80% of the database
market in Japan, so it was hurt by the recession there while
its competitors were relatively unscathed. In a sense, Oracle
is being punished for its success. Meanwhile, IBM, the No.
2 player in database software, reports brisk sales of its latest
product in South Korea, Thailand, Singapore and Hong
Kong.
The main driver of the U.S. technology boom has been the
huge PC industry. International Data Corp., a
market-research firm, expects the Asian crisis to shave 1.3
percentage points off 1997 PC unit-shipment growth, to an
estimated 14.2%, and about 1.4 percentage points in 1998,
to about 13.5%. Rival Dataquest is making similar forecasts.
Why isn't it more, given that a Japanese market that once
averaged 40% annual growth in units is now seeing a
decrease of 5% to 10% from last year?
Partly because the Japanese market has been a difficult one
to penetrate, and only amounts to 11% of global PC
shipments. Apple Computer Inc. succeeded there the most,
and it, like Oracle, has been hammered by the country's
downturn. At the same time, demand for PCs priced for
less than $1,000 is surging in the U.S. market, which
accounts for 36% of world unit sales, while sales are
recovering strongly in Western Europe, which buys 23% of
all PCs.
"The good news is that Europe has come on like
gangbusters," says Earl Mason, chief financial officer of
Compaq Computer Corp., the world's biggest PC maker.
"That is one advantage of a global company, in that when
one part of a market falls off, another market can bring you
up."
Growing Market
Moreover, China's demand for PCs continues to swell, with
government officials estimating that unit shipments will grow
to 10 million a year by 2000 from a current annual rate of
three million. Such growth would make China's PC market
nearly as large as Japan's. Thursday in Beijing, Microsoft
Corp. Chairman Bill Gates conceded that "this year, [the
Japanese market] won't grow very much at all," but "for us,
China is doing very well and we don't see any signs of that
changing." H-P sees the same phenomenon. Jim
McDonnell, world-wide marketing manager for H-P's PC
group, says his company sells as many PCs in China as it
does in "four or five" countries in Southeast Asia.
PC makers also assert that the devaluations will boost sales
in the U.S. and Europe by shaving $100 or more per
computer off the cost of disk drives, monitors, keyboards,
memory chips and other components bought from Asian
plants. In other words, here come lower-priced PCs. "As
components get cheaper, that will help us drive new price
points, like for the sub-$1,000 PC," says Mr. McDonnell.
In Asia itself, some customers are less durable than others.
Motorola's consumer customers in the region, who buy its
pagers and cell phones, won't be able to continue their past
rate of consumption. "The growth is going to slow down,"
predicts H-P's Mr. Warmington. "There's less money to
spend for these kinds of products."
American equipment makers are also likely to lose some
important future infrastructure contracts. But few analysts
expect many current contracts to be abandoned, or that
future spending on telecommunications will grind to a halt.
So another big part of Motorola's business -- telephone
infrastructure equipment -- will be buffered. "Are these
countries not going to connect to the Internet?" asks Lee
Doyle, an IDC analyst. "That would be wacky." Indeed,
Thursday a consortium of telecommunications giants in
Japan, China, South Korea and other Asian countries
announced $1.1 billion of contracts to build an undersea
cable linking China and North America.
Small Cuts
And the Japanese chip makers, who made billions of dollars
during a long memory-chip boom that ended two years ago,
assert they are much better positioned to keep buying
equipment from American companies than their big Korean
rivals. Fujitsu Ltd. and Hitachi Ltd. both said recently that
they will cut capital spending by only 6% and 7%,
respectively, in their current fiscal years.
Jim Morgan, Applied Materials' chief executive officer, says
none of the chip giants can delay equipment purchases for
long because the entire industry is making a crucial
transition to a more-miniaturized manufacturing process. "If
they don't invest, they don't compete," he says.
In truth, many American technology companies have bigger
problems than Asia. Analysts are starting to suspect that
companies are using the turmoil there as a convenient cover
for management blunders here. While Oracle asserted that
most of its sales shortfall occurred in Asia, analysts believe
its real challenge is a loss of market share in the U.S. to
competitors in databases and database applications.
Technology leader Intel Corp. is sacrificing profit margins
to fend off cloners of its chips. Seagate is plagued by a
price war and glut caused by its American rivals.
Asia "is not even in the top three things we're worried about
right now," says Donald White, Seagate's chief financial
officer.
Improving Climate
Nonetheless, it's easy to see how the fearful investor
psychology created by the Asian crisis could do
long-lasting damage to the shares of the American high-tech
companies. Investors learned to expect not only higher
growth rates, but unexpected bonanzas.
But over the long haul, the business climate for American
companies in Asia could actually be better than before the
crisis. The IMF is trying to force the Asian nations to stop
subsidizing the kind of overcapacity that has hurt U.S.
companies in markets ranging from drives to memory chips
to cars, and Japan's battered banks are being forced to take
similar steps on their own. Last month, for instance,
Dongbu Group, a South Korean conglomerate, announced
plans for a $2 billion chip plant. Industry sources say the
plant will now be delayed for many months, and may never
be built.
The IMF is also bent on prying open markets that have been
partly closed to American concerns. South Korea is the
most notable example. "It is a market that is increasingly
opening up to us," says Lydia Whitefield, a spokeswoman
for Lucent Technologies Inc., the giant maker of
telecommunications equipment.
--Jim Carlton in San Francisco and David P. Hamilton in
Tokyo contributed to this article. |
