Get Strong by Going Long

Taking the long-term view has always been a strategy favoured by Japanese industrialists. In general, when you look at that country’s industrial and commercial performance over the past 30 years, it’s served them well.

I mention this because recently I got into a discussion about the advantages or disadvantages of the recent spate of semiconductor firms being purchased by equity companies. For some businesses, the typical equity purchase, followed by modifications of the acquired organisation, followed by the sell off (very often to another equity company, which usually occurs in three-year cycles), works extremely well. But do such shortterm strategies work for the semiconductor industry?

Personally, I don’t think so. This sector must be afforded not only long-term strategies, but also vast sums of investment to fund those protracted product-development periods, which hopefully lead to successful launches. It’s also necessary to work these long-term strategies through boom-and-bust pricing periods that regularly haunt the makers of commodity-chip products.

A good example of the Japanese long-term view is the current development of flash-memory chips as an alternative to hard disks for data storage on laptops and other portable devices. Flash brings a number of advantages. It’s more reliable and requires no power to retain data. Also, flash technology prices are steadily tumbling.

But what’s this got to do with the equity-financial-churn-the-business approach versus the long-term strategy ethos? Here’s an example of the long-term approach. Toshiba decided to commit billions of yen to the expansion of its flash manufacturing operation, and by doing so, are disregarding the pricing downturn in flash-memory products. So why pour money into something that’s seeing price reductions already squeeze profit margins? The answer lies in the long term.

The continually melting costs in flash memory will bring the technology to the point where its priceperformance matches that of hard-drive technology. When this happens, demand for flash memory in laptops and portable devices will explode. But the question is, when? Many industry analysts see the big turning point happening round 2010. At that time, Toshiba and several other Far Eastern chipmakers are ideally positioned to cash in.

Clearly, in this situation, the technologists’ long-term vision has delivered a much more lucid, enduring, and profitable perspective to the accountants.

TAGS: Toshiba
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