Iris, there are no "naive" or "stupid questions", there are only stupid answers, so you bear with me if my economical savvy is less than your expectations.
Now to your questions. The governments of Taiwan, Malaysia and South Korea have made long term political decisions to be heavily involved in the semi business (just as MITI in Japan did some 15 years ago).
When producers produce more products than the market can absorb (lack of sufficient demand), they will lower their prices to compete with each other for the shrinking market. They do this to keep the operations running, they try and keep at least their overhead costs or operate at breakeven, but once price defaltion sets in, it can be murderous (look at the current situation in DRAM). That is nice for the consumer, but only at the beginning, since after some time some of the producers are no longer able to operate at losses and are forced to close shop, this put the same consumers (who are the workers) on the unemployment line. This causes decline in demand which exacerbate the already existing oversupply picture, and in the old days, this spiralling downward pressure could develop from a simple deflationary bout to a full fledged depression.
I will not go into the reasons why I do not think that a full fledged depression is feasible (too much space required), but we do have in some segments of the industry overbuilding of capacity and thus deflationary pressures could develop. This picture is not only in the semis, I read somewhere that the world demand for cars is about 45 MM units annually, but the capacity is closer to 60 MM annualy. Not surprising therefore that this year's model are actually lower in price than last year.
When a deflationary period is looming the respective government can take appropriate steps to cushion the effect by adopting monetary or fiscal relaxation policies (or both). Currently, however, Germany and the US are maintining tight monetary policies (namely long term interest rates are maintained at much higher levels than necessary), and while I do not know the details of the fiscal policies in Europe, both the US and Japan are still maintaining tight fiscal policies (namely, money is soaked out of the economies rather than injected into the economy). The big rally in the Yen was precipitated by rumors that Japan might reduce taxes (relaxation of the fiscal policy, since by taking less taxes, more money stays in the economy). It is interesting to note, that Japan has, on the face of it, a very relaxed monetary policy (very low interest rates), but this is actually a weakness and miscalculation (and thus they have been in a bear market now for almost 10 years) in which only the monetary tools were used to try and revive the economy and they kept lowering interest arets without these having an impact on their end demand, this is a unique proble, which I think is tied to Japanese xenoparanoia.
Why is all this economical garbiage is important to semi investors, because, deflationary pressures in this segment will have an impact on profitability of this segment.
My opinion is, however, that whatever imbalances in supply and demand currently existing, these will rapidly evaporate within 6 to 18 months. The reason is the growth of a middle class of new comnsumers in the less developping countries (such as China and India). A very small growth in the percentage of these population's middle class can go a long way to balance declines in the tiger's economies. This is one reason that long term, I am quite a staunch bull, and I believe that WFR will be a $100 stock by the end of year 2000.
Zeev |
