Chips Drive Internet and Stock Prices
Despite fears that the world economy is having a long, bad winter and U.S. semiconductor electronics companies are suffering the chills, the stocks of prominent companies such as Intel, Texas Instruments and Advanced Micro Devices are selling at or near 52-week highs.
Prices of semiconductor newcomers such as Broadcom and Rambus are soaring. And electronic manufacturing companies such as Solectron, Jabil Circuit and Flextronics all hit new highs in the last week.
What’s going on? Is a high-tech illusion luring sucker bets from hopeful investors?
No, it’s not an illusion. What’s happening is a major shift in semiconductor technology. More power and speed, more capabilities--hundreds of millions of transistors--are being loaded onto single computer chips. This makes each chip a computer system unto itself, and it opens a world of uses relating to the Internet.
One advance feeds another. More powerful semiconductors allow easier access to the Internet, and business on the Internet demands ever more powerful chips. Computers next year will have memory chips with eight to 16 times the speed of chips in most computers today.
Such advances give computers greater capabilities for voice and even face recognition--meaning a computer can read your face and doesn’t need a password. Several start-up companies, with such names as Miras and Visionics, demonstrated face-recognition software at a conference last week of the Technologic Partners newsletter group.
Technologies now “are focusing on the human interface,” says Andy Rappaport of August Capital, a venture firm in Menlo Park, Calif. That means computers will become easier to use, and telephone-like devices will communicate through the Internet as well as file and retain information.
New capabilities are changing the face of industry, dispersing functions among scores of start-up companies. “The intellectual building blocks are so numerous, it would be unlikely that all would reside in a single company,” says Rappaport.
Rambus, a Mountain View, Calif., company, exemplifies the trend. Rambus designs a high-speed semiconductor that allows central processors to communicate with memory chips. But Rambus does not manufacture a chip itself or even market its own devices. It sells the intellectual property of its design to users such as Intel, which then manufacture a semiconductor incorporating Rambus technology.
In the future there may be thousands of such building-block companies.
“We’ll be as numerous as software companies, only we work with ideas in the hardware of chips,” says Ryo Koyama, president of IReady, a Santa Clara, Calif.-based firm that has developed an Internet tuner. That’s a semiconductor chip that allows telephones, televisions and fax machines to select a subject on the Internet the way television tuners select channels. IReady designs the tuner--contributing the intellectual property--but others can manufacture the actual chips, Koyama says.
Big money is backing these companies. Koyama’s firm is still private but is backed by $20 million in venture capital. Broadcom, a prominent new company based in Irvine, has a semiconductor that facilitates Internet access through telephone wires and cable. It went public in April at $24 a share and was selling last week at more than $100 a share. Similarly, Rambus, which went public in 1997 at $12 a share, was selling last week at $92 a share.
Do such prices reflect a high-tech mania? Not necessarily. Companies and stock prices can rise and fall, but underlying trends are not fragile or temporary. Properly understood, events in the semiconductor industry tell us a lot about business, investing and the world economy today.
First, the Internet is not a sudden development but something that represents an accumulation of events.
“The Internet is made up of several technologies devised over many years, including remote access computing, the World Wide Web and others,” says Richard Shaffer, head of Technologic Partners, a New York-based newsletter and research firm. Thus it is not about to fade away.
Also, the success of a technology company depends as much on “the business model” as on the technology itself, says Bill Davidow of Mohr-Davidow Ventures, the Menlo Park firm that backed Rambus in 1991. Its two founders, engineers Mark Horowitz and Michael Farmwald, had an excellent grasp of technology, Davidow recalls. But developing the company took a good business plan, including a connection to Intel, where Davidow once worked as head of marketing.
Finally, the world has changed and specialization has become the pattern for industry. This is most evident in electronic manufacturing. Ten years ago, fears were widespread that the United States would not have a semiconductor industry. The belief was that Japan would dominate because of its superior manufacturing.
But the opposite has happened. U.S. companies dominate the computer chip industry because they possess ideas that drive new capabilities. And manufacturing increasingly is done by contractors such as Solectron, of Milpitas, Calif.; Jabil Circuit of St. Petersburg, Fla.; and Flextronics of San Jose.
These companies manufacture electronic parts or whole computers for hundreds of customers worldwide. Thus they enjoy economies of scale. Contractors now account for 30% of electronic goods output, “and the business is heading toward 60%,” says Michael Marks, chairman of Flextronics.
Specialization has not slowed technology in the semiconductor industry, and it has improved U.S. manufacturing. That’s why Compaq, IBM and Hewlett-Packard are now turning to Solectron to make their personal computers. And Mitsubishi Electric of Japan is entrusting its cellular telephone manufacturing to Solectron.
Contract manufacturers’ sales and profits are growing more than 20% a year, which is why their stock prices are hitting highs.
The lesson: Many changes are occurring in stock markets and in the world economy, but despite the fears, sound reasons more than mania are often behind them.
James Flanigan can be reached by e-mail at [email protected].
