Taking Stock of a Wild Week

Time for a reality check. Last week’s turmoil in stock markets around the world gave rise to more scary stories than Halloween.

One grim projection by experts said that U.S. business could write off Asia as a market for a long time because stock market losses coming on top of currency devaluations had destroyed purchasing power in the region.

That vision hit technology stocks particularly hard--Texas Instruments shares lost about 20% of their value in the last two weeks before an upturn Friday; Applied Materials, a leading maker of the equipment for manufacturing microchips, dropped 25% before recovering slightly Friday.

Yet other experts foresaw a tidal wave of cheap imports, from Asian producers desperate to make a buck, swamping U.S. markets. That could lead to a bear market, even a recession, some forecasters said.

Well, all those predictions are substantially wrong. They are typical of the panicky analysis that accompanies gyrating stock markets.

There will be no tidal wave of imports, although personal computers will probably cost less in U.S. stores next year. That’s because key computer parts, such as disk drives, are largely made in the Southeast Asian countries that have devalued currencies.

So Seagate Technology, IBM, Western Digital and other producers of the drives, which account for about 25% of the wholesale price of a personal computer, will get a break on costs, which they can either pass along to customers or use to beef up their earnings.

More important, Asian demand for computers, telecommunications equipment and the machinery to make semiconductors and other electronic goods is likely to increase in the years just ahead. That’s because the Asian economies that grew up in the last decade on cheap labor and simple manufacturing now need to upgrade their industry and their products.

So Craig Barrett, president of Intel, could say in the midst of last week’s market turmoil, “We see no reduction in demand for personal computers.” Eckhard Pfeiffer, president of Compaq Computer, concurred later in the week that Asia’s troubles were not slowing computer sales.

But for a clear reflection of how things are really moving in Asia, with implications for U.S. industry, take a look at two semiconductor fabrication plants now being built at Kulim, a new industrial complex in northern Malaysia.

The Malaysian government, which has postponed some infrastructure projects, is going ahead in support of the two plants, which are being built with financial and technological assistance from two U.S. companies, VLSI Technology and Atmel. Both companies are based in San Jose in the Silicon Valley and produce high-performance, specialized semiconductors.

The new Malaysian factories are not going to flood the U.S. with cheap goods but are part of a chain of development. Through them Malaysia hopes to teach its people to perform more valuable steps in electronics manufacturing.

“They’re following the model of Taiwan, which built high-tech industrial parks to start its people off with simple assembly, and later graduated them to higher-value-added work,” explains Christopher Greene, president of Greene Engineers, a 40-employee San Jose firm that designs clean rooms and other high-tech facilities.

Right now the work done by most Malaysian plants, and electronic assemblers throughout Asia, earns less than 10% of the value of the finished part--of the $1,000 wholesale price of a computer, they might get $50.

The higher revenues and profits are earned by VLSI, Intel, Texas Instruments and other firms that develop and design the electronic devices. There is also good business for the makers of semiconductor factory equipment, such as Applied Materials, Novellus Systems and others.

In fact, shipments of factory equipment have been so large in the last year or two that San Jose has become the U.S. leader in the export of manufactured goods, surpassing New York and Detroit.

To help its people learn such a valuable business, Malaysia is putting up almost $1 billion of the cost of the VLSI fabrication plant. The company is investing $240 million for half the output of the plant, which is scheduled to open in 1999.

VLSI is also helping to train Malaysian employees at its old fabrication plant in San Jose, which was about to close as the company does most of its manufacturing now in San Antonio. Thus, VLSI gets to add semiconductor capacity at a bargain, and Malaysia gets to learn a sophisticated technology.

Yes, but is VLSI selling a birthright? Will Malaysia steal the technology? The questions make it sound as if economic development is a zero-sum game. But it isn’t.

First of all, growing demand for semiconductors, as chips find their way into every conceivable product, promise expanding business everywhere. VLSI, a firm with $780 million in annual sales, needs all the chips it can get to supply the wireless telephone needs of L.M. Ericsson, the Sweden-based telecommunications giant.

And the market will continue to grow for a long time--from less than $200 billion a year at present to $1 trillion in little more than a decade, estimates analyst Daniel Klesken of BancAmerica Roberston Stephens.

Meanwhile, the development of Asian economies will proceed as the region’s people train for advanced work, in services as well as manufacturing. Jim Wadia, worldwide managing partner of the accounting firm Arthur Andersen, reports that his company is training thousands of new accountants throughout Asia and cannot keep up with demand for their skilled services.

Ultimately, the market grows for all sorts of goods and global suppliers--volatile and ingenious U.S. technology companies among them.

The prevailing thinking during last week’s crisis, understandably perhaps, was negative, stressing the end of an era. In reality, it could well have marked the beginning of one.

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Japan, Late-80s; U.S., Late-90s?

The Japanese stock market crashed with the rest of global equity markets in late-1987. But in part because Japan was the “model economy” of that era, the Japanese market’s recovery was swift--and in fact, stock prices nearly doubled from their post-crash lows in 1987 to their all-time peak in December, 1989. With the United States the world’s “model economy” today, could the U.S. stock market be poised to do something similar? Nikkei-225 stock index, monthly closes:

1987: 20,048.35

1989: 38,915.87

Source: Bloomberg News

Scorecard for the Week that Was

Changes in key stock indexes and other market indicators last week, and where they stand year to date:

U.S. STOCK INDEXES

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Item Fri. close Change for week Year-to-date change S&P; 500 914.62 -2.9% +23.5% Russell 2,000 433.26 -3.2% +19.5% Dow industrials 7,442.08 -3.5% +15.4% Nasdaq composite 1,593.61 -3.5% +23.4%

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FOREIGN STOCK INDEXES

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Item Fri. close Change for week Year-to-date change Britain (FTSE 100) 4,842.30 -2.6% +17.6% Malaysia (composite) 664.69 -4.0% -46.3% Hong Kong (Hang Seng) 10,623.78 -4.7% -21.0% Japan (Nikkei-225) 16,458.94 -5.2% -15.0% Mexico (Bolsa) 4,647.84 -5.5% +38.3% Germany (DAX) 3,726.69 -8.0% +30.3% Brazil (Bovespa) 8,986.00 -22.2% +27.7%

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OTHER INDICATORS

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Item Fri. close Change for week Year-to-date change Dollar in yen 120.40 -1.2% +3.7% Dollar in German marks 1.726 -2.7% +10.9% Dollar in Mexican pesos 8.37 +6.4% +6.6% Dollar in Thai baht 41.10 +8.2% +60.0% 30-year T-bond yield 6.15% -0.12 pts. -0.49 pts.

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Note: Foreign stock index changes in native currencies. Source: Bloomberg News