Monday, March 28, 2011

Japan and NASDAQ 100 Technology companies...

Japan is in crisis. We all know that, however, the NASDAQ 100 apparently less aware than it should be. What is interesting here is that there is a lot of technology manufacturing that has been completely taken off line in Japan. Much of this manufacturing is for components that are built using proprietary capabilities and hardware only available in Japan. The intellectual property and patents required to implement it are not for sale or available at this point. Perhaps over time, Japanese companies will diversify more of their technologies via licensing and non-domestic manufacturing. In any case, reproducing these capabilities is not a simple situation as it is simply not possible to recreate the facilities, manufacturing technologies or capabilities somewhere else. I is simply too expensive, not an option or too time consuming or some combination. The resulting condition brings up several important questions:
  1. Will Japanese manufactures come back online soon?
  2. Will components manufactured in Japan be considered contaminated if the Fukushima issue remains in the picture?
  3. Will companies be willing to make the required capital investments in R&D and manufacturing to bring component manufacture closer to home.
My answer is something I discussed in my posts this weekend. The Japanese government has not made it possible for companies to plan their futures. Every time a piece of information comes out it is found to be unreliable, therefore, people stop committing resources and planning based on untrustworthy data. This situation will significantly delay Japanese technology manufacturing coming back on line and ramping to normal levels for quite some time.

The Nasdaq 100 companies for example could attempt to build components themselves, but that is not a reasonable commitment for them at this time or in this economic environment. They don't have the technology patents, resources and infrastructure that Japan has built over these many years. American companies concentrated on delivery of the end-product not the manufacture of its components. They will chose to wait this out hoping that Japan or Japanese companies figure out a realistic solution...which may end up being quite some time. During this time their sales will likely be dramatically impacted and they will be forced to make significant cuts and resource adjustments. I see the technology space as extremely risky here and am surprised that dramatic optimism that people seem to have for it. It was risky anyway and people have been getting a sell-job from analysts anyway, but with the Japan issue there is simply no reason to buy Technology companies with exposure to Japanese production and manufacturing.

All in all this is going to take a long time for the technology space to come back to normal. Companies like CSCO, HP and AAPL have a lot of exposure to Japanese technologies and if things don't start to get back to normal really fast...they will not be able to cope without dramatic changes.
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