MW-51 -- Tech is Back, Sort of

J@pan Inc Magazine Presents:
Weekly Financial Commentary from Tokyo

Issue No. 51
Tuesday, November 4, 2003

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++ Viewpoint: Tech is Back, Sort of
The Bottom Line:
Top-Down: Over-the-top GDP numbers in the US contain an encouraging
recovery in IT capital expenditures.
o The stellar 7.2-percent rise in US July-September gross
domestic product (GDP) was broad based. But most important for
the tech space was the fact that business investment grew at
an 11-percent annual rate, the fastest clip since the bubble's
peak in early 2000. Moreover, US investment in information-
processing equipment and software has shown a "V-shaped"
rebound, from -15 percent year on year in the fourth quarter
of 2001 to 8.7 percent in the third quarter of this year. In
addition, growth has accelerated since turning positive in
last year's third quarter.

Bottom-Up: But the recovery for Japan's IT majors will be mixed.
o The interim results of Japan's electronic majors showed a wide
divergence in the degree of recovery. Toshiba and Fujitsu were
still recording net losses of over 32 billion yen and 58
billion yen, respectively, while Matsushita and Sharp reported
healthy net profits of over 23 billion yen and 27 billion yen.
On the other hand, stock prices have reacted like the whole
sector was due for a strong recovery. Indeed, the ironic part
is that despite the losses at Fujitsu and the subsequent
downgrades by the credit agencies, its stock is up nearly 110
percent year to date. Conversely, Matsushita and Sharp,
arguably with the best interim results, have seen much more
modest recoveries of just over 40 percent in their stock this

o This disconnect cannot be expected to last. Money Watch
expects investors to become more selective, rewarding those
companies that can deliver real earnings improvement, while
abandoning those that cannot. With the addition of a strong
yen inhibiting profits on overseas sales, this also likely
means that Japan's integrated tech majors will lag behind
their overseas peers.

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++ Viewpoint: Tech is Back, Sort of

The US economy recorded its fastest growth in almost two decades in
the third quarter at 7.2 percent. Nonresidential fixed investment in
that quarter was up 11.1 percent, following a 7.3-percent gain in the
second quarter. Investment in IT equipment and software in particular
surged 15.4 percent, the strongest showing since the first quarter of
2000 and nearly double the growth pace of the prior quarter.

US investment in information processing equipment and software has
shown a "V-shaped" rebound, from -15 percent year on year in the
fourth quarter of 2001 to 8.7 percent in this year's third quarter.
Moreover, growth has accelerated since turning positive in the third
quarter of 2002. IT investment as thus defined now accounts for over
26 percent of US private fixed capital expenditures. The recovery in
the IT industry is spreading worldwide, three years after the Internet
and Nasdaq "bubbles" burst.

Yes, the IT capital expenditure and semiconductor cycles are now on
the upswing. In August, worldwide semiconductor shipments were up 12.5
percent year on year, according to IDC, which has boosted its
forecasts for growth in 2003 and 2004 to 10.8 percent this year and 18
percent next year. According to the World Semiconductor Trade
Statistics forecast, the worldwide semiconductor market in 2003 will
grow 14.2 percent over 2002 to reach $160.7 billion. This growth rate
is larger than the former forecast announced in the spring of 2003,
which was 11.5 percent. The Asia Pacific region and Japan are expected
to lead the recovery in 2003. Moreover, the Asia Pacific region,
already the largest market since 2001, will be responsible for the
largest portion of the world's semiconductor consumption.

The performance of the larger capital stocks included in the S&P/Topix
150 has been largely driven by financials (particularly the major
banks) and basic materials. On the other hand, Japan's IT sector has
noticeably lagged behind its global peers over the last quarter,
despite being up slightly less than them year to date. The S&P/Topix
150 IT subindex is up only 3.0 percent quarter to date compared with
an 8.4-percent surge for the global IT benchmark.

In the Topix, most of Japan's IT-related stocks are contained in the
Topix electronic equipment, precisions and communications subsectors.
The best-performing IT-related Topix sector so far has been
communications. Those who remember the Internet boom in Japan in 2000
remember how far and how fast NTT Docomo, Hikari Tsushin and other
communication sector darlings went, creating a massive bubble in the
sector. After the crash, the sector had been a real dog until

Meanwhile, the electronic-equipment sector has lagged behind the
Topix, given the mixed evidence of recovery in the sector. Money Watch
believes that the slower recovery in Japanese IT stocks over the past
quarter despite an increasingly obvious recovery in global IT is
mainly due to:

a) Concern that the yen's appreciation will crimp the Japanese IT
companies' earnings recovery;

b) Mixed first half fiscal 2003 profits, where net profits at the
big six electronic firms were anywhere between a deficit of
585 million yen for Fujitsu to a profit of 340 million yen for
Sony, which was nevertheless dramatically smaller than the
previous year, to 279 million yen for Sharp, which represented
a 50-percent jump from the previous year.

c) A reduced level of international competitiveness when compared
to past upswings in the global IT investment cycle.

Japan, once dominated world Dram production but now has taken a last
stand with Elpida Memory, originally set up as a joint venture by NEC
and Hitachi. Indeed, Japanese manufacturing's share of the world
semiconductor market has shrunk to 25 percent, whereas the Wintel
combination of Intel and Microsoft continue to dominate de facto
standard architectures.

Japanese companies still do have a commanding global market share of
70 percent in chip materials such as silicon wafers, insulation and
wiring. In addition, companies like Tokyo Electron remain major
players in the semiconductor production equipment segment.

Money Watch remembers giving a speech before a group of Japanese
technology watchers at an American Electronics Industry Association
luncheon in November 1992. The title of the presentation was "Japan's
Coming High Tech Rust Bowl." The speech was met with a large degree of
skepticism at the time. But in the 11 years since that speech, Japan's
high-tech majors have yet to undergo the kind of full-scale
metamorphosis that, for example, Intel and General Electric went
through in the US. From our perspective, there is still too much
wishful thinking going on at the senior executive level at these
electronic majors given the dramatic shift in their relative
competitive position over the past 10 years.

-- Darrel Whitten

============================= EVENT ==================================
Entrepreneur Association of Tokyo - November Seminar

Lance E. Lee, President of the American Chamber of Commerce Japan
(ACCJ), IGC Japan and The Resource Group will be discussing his
experiences in doing business in Japan over the past 30 years and
how the ACCJ helped him along the way.

Date: Tuesday, November 4th
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Written by Darrel Whitten

Edited by J@pan Inc staff (


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