IT WAS PAINFUL for Taiwan's political, security, and business sectors to realize that shares in high-technology firms were overvalued.
As pointed out by Manager Magazine of Germany, the "fantastic perspectives" of the Internet and electronic industries have turned out to be lies fabricated by the creation of an Internet-based economy.
These "fantastic perspectives" are:
-- ?The Internet releases employees from work place limitations, allowing them to choose between the workplace, working at home and the coffee shops.
-- At the same time, the Internet may be managed more efficiently than companies and other similar organizations.
-- Plus, Internet industry employees can all become millionaires within a short period of time.
-- The Internet will expand indefinitely, without creating any inflation.
-- The Internet can improve companies' productivity and competitiveness, as well as resolving all management problems associated with distance and space.
-- The use of Internet is a prerequisite for the improvement of industry competitiveness.
-- The future belongs to the Internet.
-- The price of Internet shares will go up forever, making investors' fantasies about becoming rich overnight a reality.
The popular daydream about striking it rich has drained the capital of society to the capital market of technology shares, destroying the balance between supply and demand, and creating the illusion of an hyperactive capital market. About 80 percent of all the capital in Taiwan's security transactions is poured into technology shares, leaving the shares of traditional industries in the cold and distorting the capital market mechanisms.
Both Taiwanese and US firms gain the capital needed for industrial development through the capital market. However, in both countries, stock investors hold wishful obsessions about technology shares. Little do they know these are highly innovative and risky businesses. The new products and financial predictions released by the technology companies are simply profitability "predictions." Yet, the investors eagerly eat them up, living up to the theory that "the mass is blind." The crowd's "profitability expectation" has disrupted and blurred the real value and price of technology shares.
The NASDAQ index for technology shares has nosedived from 5,000 points to about 1,800 points in a year, washing more than US$100 billion down the drain. The high-technology shares of the US knowledge-based economy going through free-falls include Intel, Yahoo, Sina Net, Cisco, Sun Microsystem Inc, and Giga Media.
Currently, the depth of the decline remains a mystery. The decline may effect the entire US economy, seriously devastating US investors and taking down the global stock markets. We can only hope that reconstruction, and new management strategies of the Internet, electronic, telecommunication, and bio-tech industries, as well as other industries of the knowledge-based economy will lead to concrete industrial development and economic revival, now that our glorious dream for the techno-logy shares has turned out to be grossly overvalued.
Technology shares investors are incapable of appraising the values of the shares in which they invest. Therefore, they blindly follow the alluring tune played by the technology firms during product release. This blind faith has helped technology sector overvaluation. To put damage control in place, technology firms should stop making exaggerated profitability predictions. Rather, predictions should be made based on quarterly gross revenues, so as to avoid misleading investors and injuring firms.
Taiwan's thriving technology industries helped develop the island's capital market. A unique feature of the Taiwan stock market is the dominating presence of individual investors, who hold up to 80 percent of the traded shares (whereas the figure is only 50 percent in the US). The capital market is the fastest and the cheapest channel through which technology firms can acquire capital. The rapid rise and fall of technology shares tells us that the market for technology products has entered a high-risk phase. Before the Internet shares fell so dramatically, the Internet industry made tremendous efforts to join the "security market," because it had not found a practicable yet profitable operational model, and couldn't afford the enormous and long-term operational costs. By becoming public traded firms, the firms acquired enormous wealth. The firms made up for losses sustained in the product market through an active capital market. Most business operators were unable to draft any clearly practicable business plans and make any efficiency evaluations.
Without understanding of the technology firms' products and their markets, how can the investors know what is going on? All they knew was that the technology firms had captured investors before introducing any products or services. About 80 percent of the capital in the stock market of Taiwan is in electronic shares. Furthermore, investors see repeated over-estimations of product sales, and capital-profit ratios, as well as how the respective capital of firms such as United Microelectronics Corp (聯電) and Taiwan Semiconductor Manufacturing Co (台積電) increased from NT$10 billion to 10 times that amount within five to six years. The investors thereby become more convinced that technology industry is a knowledge-, technology-, and capital-intensive industry.
Technology industries such as the semiconductor, computer, Internet, and telecommunication industries are on a path of no return. It takes enormous capital to construct fab and TFT LCD, so as to accomplish economy-of-scale production, decrease costs and maintain productivity and competitiveness.
Technological, knowledge-based industries highlight an ethos most representative of the 21st century, as well as provide the fastest ways to wealth. Since 1995, the Ministry of Economic Affairs and the Council of Economic Planning and Development have strongly recommended the use of the Internet by traditional industries to improve productivity and competitive-ness. The government cautioned that companies unable to become completely computerized in management, production, and marketing by 2000 would have a hard time surviving in the 21st century. Even the government itself is becoming computerized. The concept being pitched by the government is that in the future "information communication and management" would closely integrate management and marketing needs. Dreams about how information communication will improve the quality of life and work for mankind, and provide the quickest path to fortune have become bubbles.
With such great expectations and lofty goals, the technology industries began launching waves of investments on various electronic, telecommunication, and Internet products. Before one factory site can fully operate and profit, the construction of more sites has begun, reflecting management's faith and aggressiveness and inspiring the heart of society. Before a technology firm meets target profitability, the firm's shares are already hot items in the capital market, bringing in large sums of capital. Simultaneously, capital is being withdrawn from traditional industries, making them weaker. With the strong capital support, the rise of capital market for technology shares, and the enormous profitability from such a capital market, operators and investors of technology firms over-estimate the developmental value and profitability of the technology industries.
The Internet industry is most representative of the commercialization of the technology industries. It should be selling "information communication" products -- abstract goods. By contrast, the "printed information" products include newspapers, magazines, and books. Business and classified advertisements constitute the added value of newspapers. Internet newspapers furnish news free of charge, while other commercial by-products are the newspapers' added values. What the electronic newspapers need to know is what kind of added value will make readers purchase the newspapers' commercial by-products. Now that the techno-logy shares have fallen, the Internet businesses should be thinking about how to improve product strategies and where the added values of the Internet lie. What kind of products do the readers need? How to plan the commercialization of products? Answers to these questions will prevent an reenactment of the fate of the Internet newspaper Tomorrow Times. A total of NT$140 million was poured into that newspaper, yet the newspaper was shut down after earning a mere NT$40 million for the entire year. Therefore, designing commercial products with sufficient added value is the most fundamental issue.
Although the technology shares have fallen, it is not the end of the Internet, electronic, and telecommunication industries. The technology shares fell because the technology industry entered a matured phase, just like the traditional industries. Now is a crucial moment for the restructuring of technology industries. The focus of the restructuring should be on product strategies, that is, determining the product needs of the consumers. Previously, the Internet industry was unable to introduce any competitive product. In addition, these products must be commercial.
The falling of technology shares has triggered the relocation of traditional and technology industries overseas. With the industry relocation and capital drain to China, the health of the Taiwanese industries further deteriorates, injuring the greater economy of Taiwan. Can business relocation overseas help relieve the pressure of economic depression? An answer is impossible.
The business sector must realize that the technology shares fell because of two problems. First, the drain of capital into technology shares caused severe hemorrhaging of traditional industries, weakening their competitiveness and productivity. Second, the technology industries have entered a maturer phase in which revival must follow the footsteps of traditional industries. Furthermore, the phenomenon tells us that the technology industries are the same as other industries in Taiwan, although technology industries remain the heavyweights. However, new thinking and readjustment of organizational strategies are needed for the technology industries. Strategies for product research, development, and marketing, are needed to revive businesses and keep business roots in Taiwan. Change the operation and management of the businesses in Taiwan. This way, technology will not only be the industrial heavyweight of Taiwan, but also the industrial champion of the global village.
Before their fall, the technology industries sucked in nearly NT$100 billion in capital. We should not channel this capital into new overseas investments -- so as to avoid further shaking up the home economy. Channel it into product research and development strategies and improve productivity and competitiveness. Do not adopt the previous risky, "innovative management model;" and search for solid and market-able commercial products to revamp knowledge-based economy, social and cultural values, and the right management direction for technology industries.
Lee Chang-kuei is the president of the Taipei Times
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