Joel -
If you are truly a "silly engineer", you sure know how to sling the MBA jingo.
Let me comment on just one of your statements, which I believe lies at the crux of your "thesis" regarding R & D, capital expenditures, and Free Cash Flow.
The statement was:
"Particularly in the case of semi companies, money spent on R&D, capital
expenditures, etc., is pretty much money down the rathole, because
processes and technologies change so fast."
The argument is completely self-contradicting. If processes and technologies change so fast, how does a competitive technology company stay competitive UNLESS IT INVESTS in R & D and capital expenditures? You refer to this as throwing money down a rat hole. Huh?
Intel can't go down to Home Depot and buy the materials for building the next 0.25 micron process for the Pentium PRO MMX. I know, I went down to my local Home Depot and they only carry 0.35 micron do-it-yourself wafer fabs. I ran into Jerry Sanders of AMD there, however, and helped him load a new .35 micron fab into the trunk of his chauffered Mercedes. (His chauffeur wouldn't help - not in his job description).
If the chief financial officer held on to all of a company's profits, published fascinating cash assets in annual reports, and allowed the company to expend no money on future technology and products (commonly referred to as R & D) how the h*ll will that company develop the products for the next technology cycle? IT CAN"T.
If it's competitors make the appropriate R & D investments, the company in question will sooner or later (usually sooner) lose its technology edge, lose its ability to command high profits, and thereby lose its ability to spend on future products and expansion.Very rapidly, that company will spiral DOWNWARD into technology oblivion. Of course, you seem to consider this rat hole expenditures.
So quite simply, I believe you do not understand the dynamics of a high growth, high technology industry.
As a matter of reference, please check out the US Steel industry's investment in continuous casting processes in the 1960s and 1970s. I believe you will find that no US steel company implemented continuous casting during those two decades. I'm not sure about the 80s, but check that out also.
This decline in R & D expense and deployment (vis-a-vis continuous casting) would have had a direct reduction in labor expense since it would have combined several operations into one automated one, reducing a lot of labor costs
The Japanese and Koreans made these investments in contuinuous castings, improved their productivity, kept their labor costs under control and whomped the h*ll out of the US Steel industry.
Today, many steel industries (Japan, Korea ,and US) are not faring well and have lost their lustre, so the above points are often forgotten.
But failure to invest in new technology is the death knell of technology companies.
By the way, how many milk farmers do you think still milk their cows by hand? Oh - and farmers are smart enough to feed their cows every once in a while. It sort of helps the cows from going dry. Kinda like R & D expenditures, don't you think?
Paul Engel |
