Half of the world's population has never made a phone call. And a large number of those undialled billions are Chinese. But that will soon change. I travelled through the Asian giant this autumn 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 labour force and, above all, political stability. Will China keep its hands off Hong Kong after 1st July? Can the nation survive the transfer of power from the ailing Deng Xiaoping without suffering a breakdown into ethnic enclaves? To my surprise, I found positive answers to both questions.
The Hong Kong Applecart
Hong Kong's younger generation seems as excited as are the Chinese about Hong Kong rejoining the mainland. Corruption may increase, but 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 it represents the US's 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 long-time Hong Kong resident, thinks Beijing will build Shanghai into a financial centre far more important than Hong Kong, rather than take any overt steps against it. The Chinese government also wants to use the Hong Kong experience 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 can probably 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.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 Corporation, Integrated Device Technology and Intel. No technology mutual funds focus on China, but 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. The marine telephone service on the Yangtze River cruise used to cost $1,200 an hour; now a government-owned cellular phone service can cost as little as $24 an hour. Cities - Shanghai, Beijing - sport cell phones everywhere.The success of Western branded goods is good news for leading technology brands like Compaq. Without a doubt, the digital revolution is about to reach China: I saw several stores with signs reading "INTERNET" in 2-foot-high letters. And the country desperately wants to be the economic power of Asia; for China, it's economic pay-back time.
All of this is good news for US technology investors. Acer trades on the Singapore exchange at a low price/earnings multiple. This is the best company for a China play. AST Research, a Nasdaq stock, is losing lots of money in the US retail market because Samsung Electronics, which effectively controls AST, reportedly won't let it exit the retail channel. As soon as this is resolved, AST should be a great investment.
China is one more reason to invest heavily in US technology companies that dominate fast-growing industries in diverse geographical areas. They aren't trapped in the slow-growth US domestic economy, so technology companies such as Microsoft, Intel, Adobe, Cirrus Logic, Integrated Device Technology and Cypress Semiconductor can show good growth for years to come.
TWIT$
The portfolio remains fully invested for the predictable technology stock rally into the spring of 1997. The China Index
The Wired Interactive Technology Fund (TWIT$)
Company Primary Business Symbol Shares Price Nov 1 Since Oct 1 Action LSI Logic Corporation Semiconductors LSI 7,800 26 1/2 - 5/8 hold Applied Materials Inc. Semiconductor equip. AMAT 4,000 26 1/8 + 1 3/4 hold The Walt Disney Company Entertainment DIS 1,500 65 1/2 + 5 hold Apple Computer Company Hw/sw AAPL 4,800 24 1/4 - 3/8 hold Tele-Communications Inc. Cable television TCOMA 4,800 13 - 1 1/2 hold Intel Corporation Microprocessors INTC 3,000 108 3/4 + 13 hold Adobe Systems Inc. Software ADBE 5,000 34 1/4 - 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 5/8 hold Diamond Multimedia Multimedia hw DIMD 7,000 11 1/2 - 2 1/16 hold Seagate Technology Inc. Disk drives SEG 300 65 3/8 + 11 3/8 hold
Portfolio Value $1,528,443.75 (+ 52.84% overall) - 3.39%
Pound sterling on Nov 11 was $1.65
Portfolio Value (£) £927,306.82
The Wired Interactive Technology Fund is a portfolio of share recommendations, which began investing a virtual stake of US$1 million on December 1st 1994. Wired UK follows its fortunes monthly.
TWIT$ is a model established by Wired, not an officially traded portfolio. Michael Murphy is a professional money manager who may have a personal interest in stocks listed in TWIT$ or mentioned in this column. Wired readers who use this information for investment decisions do so at their own risk.
Michael Murphy is a money manager who publishes the California Technology Stock Letter.