Holgar:
> where does Sun get the components for its machines from? Do they
> also buy a fair amount in Asia?
I wished I knew! However I do not and I have tried to find out but have not been very successful! However I do know that since last June/July Sun has increased its manufacturing production basis in Asia (especially in Japan and Korea). Exactly to what extent I do not know.
I think the following statements from their 1997 annual report maybe of interest:
European net revenues increased 20% in fiscal 1997, primarily due to continued market acceptance of Sun's network computing products and services in the United Kingdom, parts of northern Europe, and Germany. Japan net revenues increased 3% for fiscal 1997, compared to an increase of 13% in fiscal 1996. The Company attributes the decrease in the growth of revenues from 13% in fiscal 1996 to 3% in fiscal 1997 to current economic trends affecting the Japanese market, including currency movements against the U.S. dollar, which the Company does not expect to change materially in the near term. If the economic trends in Japan significantly worsen in a quarter or decline over an extended period of time, the Company's results from operations and cash flows would be adversely affected.
Net revenues in Rest of World increased by 29% in fiscal 1997, compared with 28% in fiscal 1996, primarily due to expanding markets in China, Korea, and Latin America.
A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. As a result, the Company's results could be significantly adversely affected by factors such as changes in foreign currency exchange rates or real economic conditions in the foreign markets in which the Company distributes its products. The Company is primarily exposed to changes in exchange rates on the Japanese yen, British pound sterling, French franc, and German deutsche mark. When the U.S. dollar strengthens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens. Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may adversely affect the Company's consolidated sales and gross margins as expressed in U.S. dollars. To mitigate the short-term effect of changes in currency exchange rates on the Company's non-U.S. dollar-based sales, product procurement, and operating expenses, the Company regularly hedges its net non-U.S. dollar-based exposures by entering into foreign exchange forward and option contracts to hedge anticipated transactions. Currently, hedges of transactions do not extend beyond three months. Given the short term nature of the Company's foreign exchange forward and option contracts, the Company's exposure to risk associated with currency market movements on the instruments in place at year end is not material. See "Other Financial Instruments" in Note 1 of the "Notes to Consolidated Financial Statements" for more details.
Compared with fiscal 1996, the dollar in fiscal 1997 has strengthened against the Japanese yen and most major European currencies. Management has estimated that the net impact of currency fluctuations on operating results, while slightly unfavorable, was not significant in any of the fiscal years in the three-year period ended June 30, 1997.
**************************************************************
Above is a standard cover my rear-end statement put out by every company. However there are some significant points that can be drawn (and this is of course my interpretation which can be different from someone else's):
1. Sun has already announced to the whole world not to expect too much revenue growth from Japan. In fact they have stated (see above) that any further decline in the Japanese economy and the company's net revenue may adversly be effected! In my opinion this comes from their modesty and while they are painting the worse case scenerio for the investment community, the reality is not even near to what is painted (i.e. it is NOT as bad as it is stated!). And I believe this worse case scenerio (along with what has been happening in the South East Asian markets) has already been reflected in the price. That is why the stock is in the mid 30's rather than the low to mid 50's!
2. Sun, as indicated above, has been expanding its manufacturing and production oversees (especially in Japan and Korea). Therefore it should enjoy the low cost which will neutralize any possible decline in the earnings.
3. I strongly believe Sun will continue to see an increase in its server line of products (especially StarFire) from South East Asian countries (e.g Korea), and Latin America. This is mainly due to the fact that these countries are in terrible need of modernization in their information technology infrastructure. Their immediate need is to shift from a mainframe computing model to a client-server architecture. IBM and Sun (and to some extend HP) are in an excellent position (and perhaps the only companies that can) take advantage of this situation. It is true that these coutnries may face troubles in their economy, but if they want to quickly get over their problems they need to continue modernizing their information technology infrastructure at all costs! It is sort of like the guy with broken legs who if stops or procrastonates his physical therapy, will not walk anytime soon again!
4. The current stock price reflects all possible terrible things that can happen to the revenue and earnings of Sun as a result of the South East Asian (and Latin American) markets. Even if the overblown South East Asian problems comes to be true I continue to strongly believe the US (along with other rich industrial nations such as Germany) will bail out that region of the world. The world is no longer divided into different isolative economic models.
5. One of the main reasons South East Asia (and especially Japan) is in so much of a problem has been due to their arrogance for not being more open to the rest of the world. As a result their economy is based on isolation while the US economy (and for example Germany's economy) has been based on a global economy. One of the main advantages of a non-isolative economy is the encouragment of foreign investments in the local economy. Therefore if the local economy for whatever reason goes bad, the foreign investment will be there to help it! Japan has been run on 100% isolative local economy and now they have to pay for it so dearly! However I believe they will open up their doors to the rest of the world more than ever before (including and especially to the US corporations), and this means nothing but both immediate and long term prosperity for the US corporations (and of course a long term prosperity for Japan).
A few days ago Citicorp bought the 4th largest bank in Tailand (dont quite remember which coutnry in South East Asia it was). This was unheard of before, but because of their desperation they have opened up their doors to the foreign investors. Some idiot analsysts downgraded Citicorp (along with the rest of the US financial firms) that they would be hurt because of the South East Asian bad economy, etc. But on the contrary I believe Citicorp (and soon other big US financial institutions) will become the major financial firms of the South East Asia. US financial firms (and I think soon US technology firms) will assimilate the local firms in countries such as Japan, Korea, etc. Mainly because these coutnries have no other choice but to let powerful rich US corporation to bail them out if they want to continue to survive! I only invest in the high techs and absolutely nothing else, however I have decided starting January to also consider investing in US financial firms (e.g. Citicorp, Bank of America, etc.). I think these will also be the big winners of the South East Asian temporary misery. Besides analysts are downgrading all these financial firms which means only one thing (to me anyway) that they are getting ready to load up on the shares of the firms they downgrade!
As always just my humble opinion, and sorry for this to become a bit longer than I wanted!
Regards,
Addi Jamshidi |
