E-commerce fever has spread from the United States to Europe and Japan. New e-commerce companies are mushrooming everywhere and new issues are snapped up even if there is no prospect of profits for years. Young men and women with a bright e-commerce idea become millionaires overnight. The feverish demand for e-commerce shares seems to some observers to be another “South Sea Bubble.” (In 1720, there was a mania of speculation in London when “the South Sea Company” proposed to take over three-fifths of the national debt. The company failed and many investors were ruined as a result).
I doubt if the situation today is comparable, but there are worrying aspects of the feverish speculation in high-technology stocks. It may well be, as some suggest, that perhaps 80 percent of the large number of new companies will never make a profit and will be forgotten in a matter of months.
The hype and mania for high-tech stocks are overdone, and those who put too much of their resources into them — many of which are already absurdly expensive — are likely to damage their wealth and the value of the funds, including the pension money they manage.
In the interim, the skewing away from “value” stocks and well-managed blue chips is likely to continue. In Britain, the banks, retailers, property companies, pharmaceuticals, industrials, utilities and insurance stocks are among those sectors out of favor. Some blue-chip prices have been halved in recent months — even companies that have increased profits and have good growth prospects. Such companies are simply not fashionable with the whiz-kids in the investment management business, not least because in the short-term the performance of such shares does not begin to match that of the new wonder stocks in high-technology.
This situation has led leading businessmen in Britain to accuse the fund managers of speculating unreasonably with other people’s money and forcing the high-technology sector to new and unjustified highs. Fund managers, they argue, should be concentrating much more on fundamentals, i.e., profits, return on equity and efficient management. It is hard to disagree unless you are an investment manager having to justify to your bosses underperforming the market.
The market has, unfortunately, been further skewed by the way in which the indexes work. Since the Vodaphone takeover of Mannesmann, fund managers, especially those who track the indexes, have had to buy Vodaphone shares to ensure that they are not underweight in what is now one of the largest European companies. To do so they have had to sell otherwise good stocks, which have consequently fallen further.
It is hardly surprising that the ordinary small investor is as bemused by the gyrations of the stock markets as by the workings of the money markets and exchange rates. Bemusement is followed by disenchantment and many investors, despite low interest rates, may decide to leave their savings on deposit in banks and other fixed-interest stocks that he or she hopes will not be as volatile.
In Japan, e-mania has sent stocks such as those of Softbank skyrocketing. Some of these new e-commerce stocks undoubtedly meet Japanese consumer needs. Others may not. Japan has been behind in the spread of personal computers, but it is ahead in mobile phones and their use with the Internet. The Japanese have a reputation of latching on quickly to new crazes.
I would not be surprised to soon see Japan among the countries with the greatest number of personal computers and access to the Internet. But to make this happen, NTT must be forced to cut access charges.
E-commerce is changing the way that business is being done. Any company that ignores the change will be dooming its employees and its shareholders to potentially serious losses as its competitiveness is undermined. Companies can and should be using e-commerce to improve their own performance through increasing use of the Internet to purchase components and to sell products. Companies also need to be conscious of the pressures arising from the Internet on prices. Rival companies and consumers can soon compare the prices of goods and services. Price transparency will be a major boon to the consumer and should quickly show up cartel practices.
The Internet should force down air fares and the prices of other services. “Keiretsu” groupings have already been undermined, through bank mergers and the need for Japanese companies under pressure from shareholders to ensure that they get value for their holdings. Companies that confine their purchasing of parts and services to other companies in the same group will find themselves at an increasing disadvantage. They will need to widen their net, and it seems likely that many keiretsu relationships will continue to wither as a result.
The Internet should also ensure that Japanese companies pay increasing attention to shareholder value. Information about companies will be much more freely available and comparisons can be more easily made. The securities companies will need to be on their toes as execution-only brokers attract online Japanese customers.
E-mania cannot and should not last, but the Internet and e-commerce should change for the better the way in which Japanese companies do business, while the individual consumer benefits from price transparency and access to competitive information.
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