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Sam,
Productivity is total output in units (not revenues) divided by the total cost to produce those units. Economic efficiency is achieved when output is maximized given total cost, i.e. a producer is economically efficient if he cannot produce one more unit without an increase in cost of any one of the inputs. In the short run, many of the costs are fixed, such as plant investment, and so the input mix may not be most efficient. In the long run, all costs are variable. Technology, a capital input, has allowed management to reduce all sorts of costs: labor, inventory, waste, etc.; so it's cost has increased economic efficiency by reducing other costs much more that its cost. Cost per unit has decreased. The rate of increase in finished goods prices is now lower or zero. Since the economy is expanding near maximum (as evidenced by employment), if productivity does not increase, the theory states that prices of inputs will go up and thus either output prices will rise or profits will fall. The Asian currency devaluation probably will have the effect of reducing input prices and reducing prices of finished goods. With Japan weak and Asia in the dumpster and European growth weak, IMHO inflation will continue to be tame, and so interest rates will remain low.
In IDT's case, the Hillsboro plant, largely underutilized, is a sunk cost. So production of the Winchip there depends on variable costs such as labor and transportation. The speed with which inputs are employed can affect productivity in several ways. First, if inputs are used too quickly, costly errors can result such as design flaws in the production process. This type of error is very costly because once investment is made in a production process, these costs become fixed for quite some time and the process difficult to optimize. Revenues then suffer because purchasers lack confidence in the product. Obviously management felt the need to exercise caution in the ramp up of the C6, not wanting to act hastily. It is logical to assume that the Winchip was not even ready for mass production until 1998 or the foundry agreement would have been announced in Fall of 1997. An error in the chip due to design or production process flaws would have been much more devastating than what IDT faces now, a great chip with some price competition. It is further logical to assume that, given the short life cycles of these chips, that management expects to develop much more powerful chips that will have much higher profit margins due to management's position on the learning curve attained through work on the C6.
Sorry for the rambling post,
Jackson |
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