In the movie the Graduate staring Dustin Hoffman, Mr. Robinson tells the Dustin Hoffman character the future is plastics. It could be, but the real future was the transistor or what we call computer chips.

Recently read an excellent book on the subject called Chip War by Chris Miller published by Scribner, NY, 2022. The book highlights the history of the computer chip as well as adds geopolitical themes which the State Department worries about.

When Silicon Valley opened plants in the Orient, eventually companies in Japan and Korea saw opportunity and Japanese firms succeeded by replicating US rivals’ products, manufacturing them at higher quality and lower price.

Sony’s CEO Akio Morita knew replication was a recipe for second-class status and second-rate profits. He drove his engineers not only to build the best radios and TVs, but to imagine new types of products entirely. In 1979, Sony introduced the Walkman, a portable music player that revolutionized the music industry, incorporating 5 of the company’s leading edge integrated circuits in each device. Sony sold 385 million units worldwide.

In the DRAM market, Japanese DRAM firms got access to far cheaper capital. Chipmakers like Hitachi and Mitsubishi were part of vast conglomerates with close links to banks that provided large, long-term loans. Even when the firms were unprofitable, the banks kept them afloat by extending credit long after American lenders would have driven them to bankruptcy.

With this cheap capital, Japanese firms launched a relentless struggle for market share. Toshiba, Fujitsu, and others were just as ruthless in competing with each other, yet they could sustain losses as they waited for their competitors to go bankrupt. Japanese firms invested 60% more than their US rivals in production equipment. 5 years after Intel introduced the 64K DRAM chip they had 1.7% of the global DRAM market, the Japanese share soared.

In 1985, Japanese firms spent 46% of the world’s capital expenditure on semiconductors, compared to America’s 35%. By 1990, the Japanese were over 50%.

The competition changed because of a better product and a low price. The man who at one time supplied half of the potatoes to McDonald’s was the wealthiest man in the state of Idaho. Joe and Ward Parkinson had founded Micron to make design chips for Mostek and lost its contact. The brothers had a talk with Jack Simplot, who saw that Japanese competition had turned DRAM chips in a commodity market. The best time to buy commodities is when prices are low, Jack invested in Micron. That $1million investment made him a billionaire. The Micron chips were the best made, the lowest price and the engineers were both creative in terms of storage capacity and the lowest cost.

Linking to dividend paying stocks, level playing competition is rare and as an investor when you invest are you buying a commodity like product? Commodity like products are similar to the dollar store items, low cost and high margins are necessary to make money. What is the cost to make? and how much does it sell for?

There are more questions than answers, till the next time – to raising questions.