If you listen to President Trump and as President of the world’s most powerful country, you should listen to him. One of the things he wants to do is shift the US from being the policeman of the world. Ever since WW II, the US took the role of policeman of the world and benefited from it so it kept doing it. After WW II, both Germany and Japan ability to have a defense industry was limited and the US took positions in Germany and located military basis. It encouraged Japan to shift to consumer products and for a while Japanese companies were world leaders, some still are. You may recall, the Japanese introduced relatively inexpensive cars with limited quality, but over the decades the quality improved and soon the biggest sellers of cars in the US were the Japanese. It is not hard to see Japanese cars on the roadways.

In many ways, the US has dominated the world economy for decades, President Trump talks about other countries paying their fair share and doing more, that means the US doing less. In the last month, the EU has stepped up, if the US wants to do less, Europe will do more.

In an article from Eric Reguly from the Globe and Mail, Italy’s Leonardo and Turkey’s Baykar have formed a giant venture to develop drones. Leonardo is one of Europe’s largest defence companies and Baykar is a drone giant.

The tragic part of the Ukraine and Russia war is a change from traditional weapons on the ground to a drone extensive warfare. Both sides need drones and the ability to shoot down drones.

Leonardo CEO Roberto Cingolani said the European drone market will be worth $100 billion over the next decade and will see the launch of sensor- and weapons-laden machine that will essentially evolve into unmanned fighter jets.

EU leaders met in Brussels to discuss way ways to boost their militaries and support Ukraine, as the US suspended, or put on a pause, weapon deliveries and sharing US intelligence.

If the US will not spend, and most of the money went to military contractor companies, then the European companies will spend money on defense.

Leonardo, which is 30% owned by the Italian government, makes military and civil helicopters, aircraft, defense electronics, satellites and drones. It is also a supplier to both Boeing and Airbus. In 2023, sales were $23.5 billion. Share prices are up this year.

Baykar is co-owned by Chairman Selcuk Bayraktar, the son-in-law of President Recep Tayyip Erdogan. The company is a leader in AI-enabled drones and is the world’s largest exporter of military drones. One model, the Akinci, can carry about 3,000 pounds of bombs, rockets or missiles and stay in the air for over 24 hours.

The new drones to be built in Turkey will contain the latest technology from Leonardo.

Linking to dividend paying stocks, for consumers they have options to buy from whoever they want to. As prices go up, the number of options fall because there are limited number of suppliers that would stay in business. In the military, all the major players are known to each other, but the bulk of the spending was in the US. If the President wants to cut spending to Europe, then European players will make up the difference. The big question is will the government cut $800 billion dollar budget of the pentagon? Which defense companies will lose funding? For investors, perhaps if you have defense contractors in your portfolio, you might start looking at foreign companies.

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

When you think about the US economy you have to remember 66% is related to consumer spending. How is the consumer doing and what the large retailers are doing in relationship to ensuring the consumer spends at their stores?

In an article by Siddharth Cavale and Juveria Tabassum of Reuters, the second largest retailer after Walmart is Target. CFO Jim Lee said the company was moving away from giving quarterly forecast figures for sales and profit because it expected more volatility in its business.

Consumer spending trends are yet back to normal today.

Sticky inflation and tariffs on imports is expected to temper demand for non-essential categories such as home furnishings and electronics that make up more than 2/3’s of Target’s sales.

Prices were expected to increase for groceries because the supply lines are short for seasonal produce and much of the produce comes from Mexico. A 25% tariff across the board means higher prices.

Target said it would invest about $5 billion in stores and technology this year.

Beauty, apparel, toys and sporting goods were the top performers during the holiday quarter while home decor and finishing sales were negative.

Target was aggressive with its marketing and merchandising strategies as consumers spent selectively on popular projects during the holidays. One bright spot was the Target partnered exclusively with pop star Taylor Swift and sales increased.

For the holiday sales, sales were up 1.5% but were offset by heavy discounts and promotions. Earnings fell to $2.41 a share, but it still beat estimates of $2.27.

Linking to dividend paying stocks, for large companies they have access to a great many options and abilities to maintain and drive market share. Most of the time they do not use all the options, but they are there. One of the reasons you want to buy larger profitable stocks is they have options to use.

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

Sometimes global politics works in favor of companies, sometimes it works against and all companies have to adjust or learn to live with the tea leaves and hopefully not leave money on the table. An example is President Trump and the Panama Canal.

The history of the Canal was it was necessary because going around the tip of Chile is very dangerous and long, a short cut was needed for global shipping. In the early 1900’s, the French government tried but failed. The US using many engineering innovations built the canal and then decided to keep the lands within the canal as a “US lands”. It was not until December 31, 1999, the US officially gave the lands back to Panama.

In an article by Didi Tang and Alex Veiga of the Associated Press, the Hong Kong conglomerate has agreed to sell its stake in a subsidiary that operates ports near the Panama Canal. The consortium includes BlackRock Inc., BlackRock’s subsidiary Global Infrastructure Partners and Terminal Investment Ltd. BlackRock is the world’s largest asset manager having $11.6 trillion assets under administration.

CK Hutchison Holding said it will sell all shares in Hutchison Port Holdings to the group for $23 billions including $5 billion in debt. The consortium will have control over 43 ports in 23 countries including Panama, Mexico, Netherlands, Egypt, Australia, Pakistan and elsewhere.

The transaction does not include the ports in China and Hong Kong.

70% of the sea traffic that crosses the Panama Canal goes to and from US ports.

Frank Sixt, co-managing director of CK Hutchison said the transaction was the result of a rapid, discrete but competitive process which numerous bids and expression of interests were received. It was purely commercial in nature and unrelated to political events.

Given that CK Hutchison recently received a 25 year extension to run the ports, you can judge whether you believe the above statement or not.

Linking to dividend paying stocks, global politics plays a role in business, Whether the government wants companies to be involved or not involved in companies in the world. Business plans are adjusted for action or delay. It is the nature of the beast.

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

Every country around the world has tariffs on something, it is used to protect domestic companies and to ensure the economy of the country is not overrun by the biggest countries in the world. Most tariffs are aimed at specific industries and leave a wide open berth for the rest of the economy. It is good to have goods and services moving around the world, it makes everyone better and it makes everyone dependent on each other. President Trump seems to want to put broad across the board tariffs on everything. Invariably it means higher prices for anything that is imported. If you go to your favorite store and check out what is domestic and what is import, it turns out many things will be imported, for a variety of reasons.

In an article by Daisuke Wakabayashi, Alexandra Stevenson, Danielle Kay and Eli Tan of the New York Times News Service, the tariffs that President Trump imposed will have significant effect on small businesses and raise prices for consumers.

For decades, American firms have designed products in the US and turned to Chinese factories to produce the goods efficiently and inexpensively. It is how Apple works, it outsources the work to Chinese firms and also how many small businesses work.

The New York Times has heard from nearly 100 companies that import from China about how the tariffs would affect them. Several themes emerged, American businesses, not Chinese suppliers were shouldering the costs of tariffs. Many companies said they would have to raise prices to offset the extra cost of tariffs.

Another theme is a feeling of business paralysis: they were afraid to make plans amid the unpredictable stream of new tariffs, fear of moving productions out of China since no country seemed immune. Most of the goods would not come from the US because the goods were inferior, more expensive and fewer options. Also to do so would be to reinvent their supply chains requiring time and expense they cannot afford.

A 10% tariff imposed on China is whether the components that are assembled in the US or finished products from China that are imported to the US. The tariff is either in a bill when they receive the item or added to shipment costs. Either way the money is coming from the US business.

Some companies have increased their inventory, but then there is a cost to holding extra inventory. If a company has been a customer for years, there may be a little wiggle room, but someone has to pay for the inventory. Often times while there may be other options, because of how the businesses in China has evolved, the best machinery, the best expertise to produce quality goods at a good price is located in China.

Linking to dividend paying stocks, large companies have or should have many options. They should be able to adopt the latest technology using AI to determine the best routes forward. Medium sized companies are next and small business because of fewer people tend to be last. The effects of tariffs will hurt small businesses first because they have less options to deal with the tariffs. Raising prices no matter what size of company is tough, but larger companies tend to do it better because there are fewer options not to deal with them. Those fewer options are good reasons to invest in them.

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

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.

The book talks about geopolitics and why the chip makers are essentially in the Orient and is that good or bad.

The good side is US companies such as Applied Materials, Lam Research and KLA are part of a small oligopoly of companies that produce irreplaceable machinery like the tools that deposit microscopically thin layers of materials on silicon wafers or recognize nanometer-scale defects. Without this machinery, much of produced in the US, it is impossible to produce advance semiconductors.

There is a Dutch company called ASML that produces the machine that allows for the making of advance semiconductors. It is called an EUV or extreme-ultraviolet lithography machine. It costs about $100 million for each machine and has the most advanced components, the purest metals, the most powerful lasers and most precise sensors. The machine took tens of billions of dollars and several decades to develop. It not only does the job but works reliably enough to produce chips cost-effectively.

ASML also provides the software and technical support that remain on-site when the machine is installed for the tool’s entire life span.

During COVID there was a shortage of chips, but the reality it was not a shortage because of supply problems, it was shortage because of demand. The world produced more than 1.1 trillion semiconductor devices according to research firm IC Insights. The demand is driven by new PCs, 5G phones, AI data centers and our demand for more computing power.

All developed countries around the world want more chips made near them and governments are pouring incentives to do so. In Taiwan, TSMC wants to retain its central role in the world’s chip industry. The company spent over $100 billion to upgrade its technology and expand chipmaking capacity in Nanjing, China, Phoenix, Arizona, although they are not producing the most advanced chips in those locations. The most advanced technology stays in Taiwan.

East Asia produces 90% of all memory chips, 75% of all processor chips and 80% of all silicon wafers. It is broken down in Taiwan produces 41% of all processor chips and 90% of the most advanced chips. Japan produces 17% of all chips. Korea produces 44% of all memory chips and 8% of all processor chips. Singapore produces 5% of all chips. China produces 15% of all chips, most of the low-tech, but it can change with government help.

Linking to dividend paying stocks, if you read a book such as Chip War you will see different companies leading the industry and making profits. When Intel was the number one company, their product was the standard for every office and home computer, but then cellphones were invented and a new leader came forth. Now we have AI and new leaders in the chip making. The important aspect was not to see all chips as the same, they are different which means margins are different, which means continuing to do homework is a good thing.

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

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.

In part 4. since the late 1980’s there has been explosive growth in the number of fabless chip firms or which design semiconductors in house and outsource their manufacturing.

Computer graphics is one of the most important, because the office computer were designed to run microsoft programs including Word, Excel and Power Point. Graphics was a secondary aspect because the computation required to display 3D images was immense.

Making realistic graphics requires use of programs called shaders, which tell all the pixels in an image how they should be portrayed. Companies such as Nvidia GPU’s can render images quickly because they are structured to conduct lots of simple calculations simultaneously.

Nvidia realized that high-speed parallel computations could be used for purposes other than computer graphics. Nvidia released the software program CUDA that allows GPUs to be programmed in standard programming languages. CUDA was free but only worked on Nvidia’s GPU chips. Soon computational chemistry to weather forecasting were using the parallel processing. The next step is what we are in now AI or artificial intelligence.

Nvidia’s chips are build by TSMC.

When Intel decided not to supply Steve Jobs with chips, one reason was the infrastructure to use cell phones had not been developed. In 1985, Qualcomm was founded to prove a point. For the telecom providers such as Verizon, they had phone calls on a certain frequency. Irwin Jacobs of Qualcomm said no, the calls should move between different frequencies to allow more calls in the spectrum space. Qualcomm designed the modem chips in a phone to communicate with a cell network, but also the application processors that run a smartphone’s core systems. Telecom systems use Qualcomm chips. Once that was in place people could use the cellphone anywhere, anytime and they do.

All of the chips are made by TSMC or Samsung.

The biggest beneficiary of fabless is Apple. The company Steve Jobs built has always specialized in hardware. The first iPhones the chips were outsourced to Samsung. The hardware is put together in China by Foxconn and Wistron. Today the chips are made by TSMC.

In the book there is more about the geopolitics and the interesting role China plays summed up by a quote Our fundamental problem is our number one customer is our number one competitor.

Linking to dividend paying stocks, sometimes companies benefit from governments and sometimes they do not, it is always nicer when the relationship seems to be on the company side. There are reasons why supply chain systems develop the way they do and there are benefits to many when it happens including recurring profits.

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

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.

In 1985, Taiwan’s powerful minister K.T. Lie called Morris Chang into his office in Taipei. Minister Li said we want to promote a semiconductor industry in Taiwan, how much will you need?

Taiwan had deliberately inserted itself into the semiconductor supply chains since the 1960’s as a strategy to provide jobs, acquire advanced technology and strengthen its security relationship with the US. Companies involved in Taiwan included Texas Instruments, RCA and UMC.

Morris Chang at the time had been passed over for CEO of Texas Instrument and was looking for something new to do. Minister Li and a blank check was something he never had at TI.

The model Mr. Chang was going to do was to produce chips designed by customers. At the time, firms such as TI, Intel and Motorola mostly manufactured chips they had designed in house.

The reasoning was as technology advanced and transistors shrank, the cost of manufacturing equipment and R&D would rise. Only companies that produced large volumes of chips would be cost-competitive.

The Taiwanese government supplied 48% of the business plan Chang drew up. Dutch company Philips agreed to put up $58 million, transfer production technology and license intellectual property in exchange for 27.5% of TSMC. The rest of the money came from wealthy Taiwanese families that were asked to invest by Minister Li. The company also received generous tax benefits.

Throughout the 1990’s, half of TSMC sales were to American companies. Chang told its customers we do not design the chips, we build them for you.

By the 2000’s, it was common to split the chip industry into 3 categories: Logic – the processors that run smartphones, computers and servers. Memory – refers to DRAM; Other – analog chips, semiconductors that mange how devices use electricity. This last category is more dependent on clever design.

The biggest chip maker in the analog is Texas Instruments.

The DRAM market has been dominated by a relentless push toward offshoring production to a handful of facilities. The reason is the high cost of fabrication (in the 1980’s $20 billion). The 3 companies which dominate are Micron, Samsung and Hynix from South Korea.

Linking to dividend paying stocks, there tends to be reasons why they developed the way they did. Sometimes it is government policy, sometimes it is the most cost effective, the biggest margins, many different issues come into play. As an investor, you want to look forward to see if those good things from the past continue.

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

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.

Similar to Japan, Korea was important to the US that it develop into a market economy. Lee Byung-Chul founded Samsung. Lee was a natural businessman navigating South Korea’s complicated politics with finesse. The motto of the company is Serving the nation through business and Samsung was soon a conglomerate. Lee had a notion to break into the semiconductor field but it was not easy to jump from basic assembly to cutting-edge chipmaking.

Lee thought the environment was changing as the US government had helped fund the creation of the Korea Institute of Science and Technology and a growing number of Koreans were graduating from top US universities and being taught by US educated professors in Korea.

The South Korean government had identified semiconductors as a priority. Lee went to the US and toured plants, he wondered about secrets, but was told mere observation cannot be replicated. South Korean government promised $400 million for financial support. The banks would lend millions more. Samsung made the decision to enter the industry with a $100 investment.

Intel was worried about the Japanese influence and offered Samsung a joint venture selling chips manufactured by Samsung with Intel’s brand. The added advantage for Intel, Korea’s cost was substantially lower than Japan’s costs and wages.

Micron, which was cash strapped at the time, did a deal with Samsung to license a design for a 64K DRAM. What MICRON did, Samsung learned.

By 1998, South Korean firms had overtaken Japan as the world’s largest producers of DRAM, while Japan’s share fell from 90% to in the late 1980’s to 20% by 1998.

Linking to dividend paying stocks, all profitable companies need the help of the government. Sometimes it is directly, sometimes it is indirectly but good relations with the government is important.

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

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.