Follow the Money
The China Index
Half of the world's population has never made a phone call. And a large number of those undialed billions are Chinese. But that will soon change.I traveled through the Asian giant this fall looking for signs that the biggest developing country would be a reliable producer and consumer of US technology products. I looked for a functioning economy, available power, a low-cost labor force, and, above all, political stability. Will China keep its hands off Hong Kong after the July 1 turnover? Can the nation survive the transfer of power from the ailing Deng Xiaoping without suffering a Soviet Union-like breakdown into ethnic enclaves? To my surprise, I found positive answers to both questions.
The Hong Kong applecart
In Tiananmen Square, a clock counts down the days, hours, minutes, and seconds until the government gets Hong Kong back. This would be scary, except that the younger generation seems equally excited about rejoining the mainland. Although the level of corruption in Hong Kong may increase, Beijing is unlikely to upset the economic applecart, because it values a strong economy so highly. China is the sixth-largest holder of US Treasury debt. Its biggest trade surplus is with the US. And China generally represents our largest trade deficit. The Chinese view Hong Kong as more than an asset to the country's GNP; they see it as an economic model to be replicated in Shanghai. Mark Faber, an investment manager and longtime Hong Kong resident, believes that over the next 50 years, Beijing will build Shanghai into a financial center far more important than the British-owned island rather than take any overt steps against Hong Kong capitalism. The Chinese government also wants to use the experience of Hong Kong to persuade Taiwan to return to the fold sometime in the next century.
Made in China
Given political stability, China will be a great place to produce technology products. Numerous state-owned enterprises are drowning in red ink; an entrepreneur willing to take on the payroll probably can get the building and equipment for free. Factory wages average US$80 a month. Chinese management is not expensive, and many people speak English well. Housing foreign management, on the other hand, is very expensive.
While there still isn't enough electricity, the new Yangtze River hydroelectric dam will provide a major boost all along that industrial waterway. Upriver, through the Three Gorges, the water level will rise 100 feet to 175 feet and drown several towns. People and businesses already are being compensated and relocated to higher ground.
As one of the largest producers of disk drives in China, Seagate Technology is a strong stock pick. Other companies that can benefit from Chinese production include contract assemblers such as SCI Systems and Solectron, disk-drive head suppliers like Read-Rite and Applied Magnetics, and the semiconductor packaging operations of major firms such as Cypress Semiconductor, Integrated Device Technology, and Intel. Although there are no technology mutual funds focused on China, the China Fund is a broad-based, closed-end fund listed on the New York Stock Exchange.
Motorola – 1 billion served
In addition to producing technology, China will play a significant role in consuming it. Acer Computer International and AST Research are the country's main computer manufacturers, and Motorola is a major brand. In the past, the marine telephone service on the Yangtze River cruise cost $1,200 an hour. Now a government-owned cellular phone service is available around major towns for only $24 an hour. Cell phones are everywhere in Shanghai, Beijing, and other major cities.
The success of Western branded goods such as Levi's and McDonald's is good news for leading technology brands such as Compaq, Hewlett-Packard, and others. Without a doubt, the digital revolution is about to reach China: I saw several stores with signs reading "INTERNET" in 2-foot-high letters. The country desperately wants to be the economic power of Asia. Most Chinese are acutely aware that in 1949, China and Japan were in the same low state of economic development. Chairman Mao took the Chinese down the collectivist path and the Japanese dusted them. The Chinese – 1.2 billion people to Japan's 124 million – feel they should be the powerhouse of Asia. Japan "borrowed" the Chinese written language, religion, and even bonsai. The Japanese invaded the country in the 1930s and bombed the hell out of it. It's economic payback time.
All of this is good news for US technology investors. Acer trades on the Singapore exchange at a low price/earnings multiple. This is the best company for a China play. AST Research, a Nasdaq stock, is losing lots of money in the US retail market because Samsung Electronics, which effectively controls AST, reportedly won't let it exit the retail channel. As soon as that situation is resolved, AST should be a great investment.
China is one more reason to invest heavily in US technology companies that dominate the fastest-growing industries in diverse geographical areas. Because they aren't trapped in the slow-growth US domestic economy, technology companies such as Microsoft, Intel, Adobe, Cirrus Logic, Integrated Device Technology, and Cypress Semiconductor can show good growth for years to come – at least until everyone in China has made their first telephone call.
TWIT$
The portfolio remains fully invested for the predictable technology stock rally into the spring of 1997.
The Wired Interactive Technology Fund
|
| Company | Primary | Symbol | Shares | Price Aug 1 | Since July 15 | Action
| LSI Logic Corporation | Semiconductors | LSI | 7,800 | 26 1/2 | +3 1/2 | hold
| Applied Materials Inc. | Semiconductor equip. | AMAT | 4,000 | 26 1/8 | -5/8 | hold
| The Walt Disney Company | Entertainment | DIS | <1,500 | 65 1/2
| Apple Computer Company | Hw/sw | AAPL | <4,800 | 24 1/4
| Tele-Communications Inc. | Cable television | TCOMA | 4,800 | 13 | -1 1/2 | hold
| Intel Corporation | Microchips | TCOMA | 3,000 | 108 3/4 | + 13 | hold
| Adobe Systems Inc. | Software | ADBE | 5,000 | 34 3/4 | -3 1/4 | hold
| Mattson Technology | Semiconductor equip. | MTSN | 30,000 | 8 3/4 | -2 | hold
| Euphonix | Audio sw | EUPH | 17,000 | 4 5/8 | -1 3/8 | hold
| Diamond Multimedia | Multimedia hw | DIMD | 7,000 | 11 1/2 | -2 1/16 | hold
| Seagate Technology | Disk drives | SEG | 300 | 65 3/8 | + 11 1/8 | hold
| Portfolio Value | $1,528,443.75 | (+ 52.84% overall) | – 3.39%
The TWIT$ fund is a model established by Wired, not an official traded portfolio. Wired readers who use this information for investment decisions do so at their own risk.
Michael Murphy is a money magager who publishes the California Technology Stock Letter in Half Moon Bay, California.
