May You Live in Interesting Times
December 4th, 2007By David Barnes, VP, Strategic Analysis
Raise your hand if you remember the TV program “Connections” by James Burke, first aired by the BBC in 1979 and by PBS in the USA subsequently through 1997. Like Mr. Burke, I find my mind connects data points from many sources. Unfortunately, unlike him, I may overwhelm my audience with too much detail. In addition, I tend to assume trends will come to fruition faster than they do because I assume everyone sees the future coming as fast as I do. Sometimes, reactions occur slower than I expect. I have therefore over-compensated by avoiding this forum for too long.
Let’s review the essentials. Markets, like any complex system, react to change non-linearly. Today’s events cause reactions tomorrow or even years from now. Today’s events result from decisions made months or years ago. The median price of homes in the USA fell 13% from October 2006 to October 2007 as a result of Federal Reserve Bank decisions made in reaction to the dot-com bubble burst five years earlier. Actions the Fed takes today will influence the next market cycle. The nature of today’s credit crisis is new because the financial instruments that blew the bubble are new. The fundamentals are not new. Cheap credit created to forestall a collapse after the dot-com bust stimulated excess investment in domestic real estate, and new loan packages only made it worse. If historical patterns are any guide, the US is headed towards recession. Housing prices are a leading indicator and Fed chairman Bernanke said he hoped the housing market would “find a bottom” by next spring during testimony to Congress earlier this month. This suggests that things will get better before they get worse. If the leading indicator is still declining, we have not yet seen the complete economic reaction. It spending tends to track the economic cycle and therefore lag the housing market, what does this foretell for IT spending if Vista is half the speed of XP, as indicated by recent benchmarks run on beta releases by Devil Mountain Software?
On the other hand, IT and consumer spending trends lag the housing market trend. It looks like Santa will be busy this Christmas. Retail chain reports can be confusing but data suggests that winning business plans result in increasing sales while failing plans result in decreasing sales. Off the top of my head, I recall great results for upscale retailers like Saks, focused retailers like Staples and discounters like Wal-Mart. I recall poor results for ho-hum, mid-market retailers and downscale retailers like Sears or Office Max. The present environment is difficult for retailers with old business models but an opportunity for retailers with fresh ideas.
Black Friday and Cyber Monday sales were up from 2006. You can buy a 42” FPD TV for the price of a 32” TV in 2006. Planned spending on TFT capacity assures that large TV set prices will fall further in 2008. Consumer demand is assured in rich countries. The uncertainty lies in who will provide the funding for further capacity expansion required by growing demand in poor countries. In October, five panel makers supplied 94% of all LCD TV panel area and these suppliers plan investments in so-called Gen 8 or Gen 10 fabs ideal for making panels 50” and larger. This almost assures that the area price of large LCD TV sets will continue declining—but will prices fall far enough to satisfy consumer demand in Brazil, Russia or India? We may see new companies enter such regional markets. Unlike development of the mobile phone market, there is no significant, untapped source of 32” TV panels. Consumers in India enjoy inexpensive handsets made with older display technology and capacity but they cannot get inexpensive TV sets made with idle capacity. There is none.
Meanwhile, the CRT supply chain is breaking under the strain of LCD TV and monitor competition. This month alone brought news of Asahi Glass taking control of its subsidiary Hanguk Electric Glass, Samsung Corning Precision absorbing Samsung Corning and LG Group swapping shares with LG Micron. Hanguk Electric Glass supplies troubled CRT maker LP Displays. Samsung Corning supplies CRT maker Samsung SDI. LG Micron supplies CRT shadow masks to many CRT makers. Many households in Southeast Asia, Indonesia and other countries are happy to afford new CRT TV sets. Demand in such regions remains brisk but what if the global supply chain breaks? Demand for affordable LCD TV sets may rise further.
These are interesting times. Market bulls are getting tired after their long run but some say they’re only catching their breath for another run up the slope. Market bears are getting ready for a long sleep. They interpret the weakening dollar (with potential un-pegging of oil exporters’ currencies), declining consumer sentiment and employment (in the USA) as signs of winter. As the old curse goes, “May you live in interesting times.” We are certainly on the cusp of a major change. The Fed is learning to speak clearly. Powerful CEOs are falling (news of Ed Zander’s fall at Motorola hit the news as I write this) and sovereign funds of oil-rich countries are rescuing troubled tech firms (AMD is a prime example). Some hedge funds actually hedged their bets and are able to take positions in distressed companies, also. There is a lot of money in the system and new CEOs will search for new business strategies.
Connecting all this, I expect the display industry as we know it will expand for several more years. US consumers will tighten their belts for the next year or two, but they will feed their need for TV. US consumption of goods in general may slow, however, causing a traffic jam in the flow of Asian exports. On the other hand, sovereign funds and private equity might flow to new entrants who may build products for developing markets. The USA will remain important but other regions will increase in importance. The display market may look different five years from now. All I can do is follow the money.
