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The Tech Bubble in Asia, 20 Years Later

It was so much fun to live in the frenzy of the tech bubble in the final few years of the 20th century. The advent of the Internet was believed to bring radical changes to the way we live and do businesses. Amid possibly once-in-a-lifetime changes created by a new technology, the markets discounted tech firms’ potential cashflow way into the future, culminating in daunting valuations or a lack of them. At the height of the bubble the majority of the new companies had doubled their share prices on the first say of trading as public companies. Existing companies also surged when their potentials were identified or, more correctly, such stories were created.

East Asia was already rivaling the U.S. in memory chips and semiconductor manufacturing in general. Samsung was was overtaking Japanese firms in DRAMs (dynamic random access memories). With chairman Lee’s bold decisions to deploy capital, Samsung was beginning to set itself apart from Japanese predecessors which Mr. Lee once learned  so much from. Founded by engineers who returned from Silicon Valley, Taiwan Semiconductor (TSMC) was already shining, producing chipsets on behalf of western chip makers that have gone fabless. Amid intensifying competition in DRAMs, Japan’s Hitachi and NEC consolidated their memory chip divisions and created Elpida Memory in December 1999, at the height of the bubble. In India, Infosys was rising sharply as its business of IT services and consulting was taking off in North America. In Japan, newly created firm called Softbank was shooting up through the roof though few people knew what the company was doing. Sony experienced a meteoric rise with its combination of audio-visual equipments and media contents businesses. NTT DoCoMo had a successful launch of the iMode, the first-ever internet browser-equipped mobile handset.

20 years later, Japan has receded distinctly as a leader in technology. Semiconductor businesses lost competitiveness totally, amid an intense competition for ever-greater capital investments. These companies’ management, who came up the ladder of corporate bureaucracy, lacked visions and were unable to make bold decisions to guide their companies into the fast-charging digital age in the 21st century. Fujitsu had found, as IBM did, that mainframe computers were no longer in vogue as exponential rise of chips’ power had created a meteoric rise of PCs’ computing power. NEC had discovered difficulties to deliver telecom equipments that fit the digital age. NTT DoCoMo’s iMode did not take off, despite its initial wild popularity at home. Shortly after, the Blackberry by Canada’s Research-In-Motion became extremely popular as a forerunner of smartphones for the business market. In 2007, Apple launched the iPhone for the retail market and instantly became a wild success. Sony endured a very troubled first decade of the 21st century. It lost market share in gadgets to more cost competitive Korean and other manufacturers, and at one point sank to mere 5% of its peak market capitalization of approximately $150 billion at the height of the bubble. Sony came back in recent years, as a different company, as a conglomerate of entertainment (music, movie and games) and financials that also makes gadgets. Its market capitalization came back to over $80 billion, more than half of the peak at the bubble period. Elpida Memory failed to succeed, essentially due to weak management. Running a tech company by alternating positions by people sent from two major shareholders, Hitachi and NEC, was obviously not the best way to manage in a world of fierce competition. Elpida later filed for bankruptcy and was sold to Micron Technologies in 2012. Toshiba also suffered a near death as its bet on nuclear power generation failed spectacularly following the 2011 Fukushima disaster. SoftBank’s Masayoshi Son has been riding high, until he stumbled a big time on his investments in WeWork this summer. Now his credibility as a tech visionary is openly in question. (See the attached article below.)

Korean Chipmakers, Samsung and SK Hynix, continued to dominate the DRAM space. Samsung quickly followed Apple’s iPhone success. Its Galaxy became the best selling smartphone product line in terms of unit sales. However, while Apple still commands two-thirds of the profits in the smartphone industry, Samsung is limited to 17%. Worse, the Galaxy’s market share in units is eroded by rising Chinese competitors that include Huawei, Oppo and Vivo. Samsung still boasts of market capitalization of $320 billion, but I t has lost approximately a quarter of value since the summer of 2018. Taiwan Semiconductor remains on top of manufacturing of semiconductors, as growing number of chip makers focus on design and contract out manufacturing to a third party. TSMC is the largest pure chip maker in terms of market capitalization with $290 billion that is 10% larger than that of Intel. Taiwan’s Hon Hai Technologies rose to prominence as an assembler of Apple’s iPhone and other products on the mainland China.

It is not easy to have a clear picture about privately-held Huawei. That said, it is obvious that it is set to dominate the 5G telecom equipment market, coming a long way at the turn of the century from an up and coming telecom equipment maker and an imitator of Cisco Systems. In the non-hardware space, Chinese players have grown exponentially, taking advantage of China’s huge domestic market that was effectively shut out for foreign competitors. Nonetheless, it is still unclear how much it could grow outside of China since they would not be well received in the West for fear of data collection by the Chinese authority or perhaps even worse of spyware intrusions. It remains to be seen how businesses in the developing world would contributed to their bottom lines. Search engine Baidu may have already peaked out. There is no shortage of stories about Chinese unicorns that are yet to hit the public stock markets. However, it would take several years or maybe longer before market participants judge how they would fare over the long-term. The vast majority of them is still burning cash and has not come to the point of compensating investors for the risks they have taken.

India’s IT services firms have kept growing in the developed world. However, Indian firms’ effect on the outside world does not seem to have grown that strong beyond this point though Bangalore thrives and Indian talents crowd Silicon Valley.

About the author: Ichiro Suzuki, CFA, is an Advisory Group member at Richard A. Mayo Center for Asset Management of Darden School of Business, University of Virginia. He has retired as Senior Portfolio Manager/ Global Equity Strategist at Nomura Asset Management. Suzuki graduated with B.A. from Waseda University and MBA from UVA's Darden School of Business.

Note: Masayoshi Son: Tech visionary or robber barron?


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