Micron Technology, Inc. (NASDAQ: MU), a global manufacturer of semiconductors, reported US$20.3 billion in sales for the fiscal year ended August 31, 2017. The company was able to derive most of this growth in China without sacrificing cash flow. A few issues stand out about Micro Technology, Inc.’s relationship with China.
First, the company is operating in an industry experiencing falling finished good prices and rising raw material prices. According to the U.S. Bureau of Labor Statistics (BLS), the import price of semiconductors and other electronic components from China experienced the second largest drop on a year over year basis of all the four-digit categories tracked. As of August, 2017, semiconductor import prices had fallen 1.1% over the previous twelve months and 2.9% on an annualized basis over the last five years. According to the United States Geological Survey (USGS), the average U.S. spot price for silicon metal in August, 2017 was 39% higher than the same month in the previous year. Despite this, Micro Technology, Inc. was able to grow global sales revenue by 63.9% between fiscal 2017 and fiscal 2016, but only incur a 20.1% increase in the cost of goods sold.
Second, the company derives more than half of its sales from customers in China, but has minimal transactions in renminbi. Sales in China reached $10.3 billion in fiscal 2017, or 51.1% of global sales. However, it only mentioned the euro, Singapore dollar, New Taiwan dollar, and yen as currencies other than the U.S. dollar that the company’s global operations have significant transactions and balances.
Third, despite selling more to Mainland China, Micro Technology Inc. reduced its net property, plant, and equipment in China on both a nominal and relative basis. Sales to customers in China increased 96.0% from the prior year and growth in China accounted for 64.2% of global 2017 growth. However, net property, plant, and equipment in China declined 7.7%, or $38 million, from the prior year. On a relative basis, 3.3% of the company’s net property, plant, and equipment was located in Mainland China as of September 1, 2016, but this proportion dropped to 2.3% as of August 31, 2017.
In the fiscal year ended August 31, 2017, Micron Technology, Inc. disproportionately benefited from new credit creation and had fantastic performance on a cash flow basis. The company’s U.S. dollar denominated sales in China exceeded the growth in the Chinese money supply and appreciation of the renminbi. Despite global sales increasing US$7.9 billion and China sales increasing US$5.0 billion in fiscal 2017, accounts receivables only increased by US$1.6 billion. On sales of US$20.3 billion, the company generated net income of US$5.0 billion and operating cash flows of US$8.1 billion. New sales did not come at the expense of higher working capital or lower profitability.
Showing posts with label U.S. dollar. Show all posts
Showing posts with label U.S. dollar. Show all posts
Friday, October 27, 2017
Tuesday, September 19, 2017
U.S. Import Prices from China Drop 0.7% in the 12 Months Ended August, 2017.
The price of imports from China to the United States dropped 0.7% in August compared to the prior year. None of the categories published by the Bureau of Labor Statistics exceeded the appreciation of the U.S. dollar against the renminbi over the same period. Chinese manufacturers were not able to pass on changes in the value of the renminbi to customers in the United States.
Chemical, plastic, and rubber product prices saw the largest increase in prices among the categories published, but only by slightly more than 2.0% over the last year. Over the last five years, plastic and rubber product prices declined 1.9% per year, so a 2.0% increase over the last 12 months was a significant increase in price pressures.
Computer and electronic product prices experienced the largest decrease in prices among the categories published, but only by slightly less than 2.0% over the last year. This was in line with its five-year compound annual decline of 2.2%. Apparel saw the largest negative divergence of prices over the last year compared to the last five years. Apparel prices dropped almost 0.6% over the last 12 months, despite increasing 0.4% per annum for the last five years.
As revenues from sales to the United States decline and input costs in China increase, there should be two effects on production capacity in China. First, entrepreneurs will not add additional capacity to China. Second, producers within China will shift their output to servicing domestic markets, where prices are generally rising. Both trends will contribute further to the de-globalization of the division of labor.
Chemical, plastic, and rubber product prices saw the largest increase in prices among the categories published, but only by slightly more than 2.0% over the last year. Over the last five years, plastic and rubber product prices declined 1.9% per year, so a 2.0% increase over the last 12 months was a significant increase in price pressures.
Computer and electronic product prices experienced the largest decrease in prices among the categories published, but only by slightly less than 2.0% over the last year. This was in line with its five-year compound annual decline of 2.2%. Apparel saw the largest negative divergence of prices over the last year compared to the last five years. Apparel prices dropped almost 0.6% over the last 12 months, despite increasing 0.4% per annum for the last five years.
As revenues from sales to the United States decline and input costs in China increase, there should be two effects on production capacity in China. First, entrepreneurs will not add additional capacity to China. Second, producers within China will shift their output to servicing domestic markets, where prices are generally rising. Both trends will contribute further to the de-globalization of the division of labor.
Sunday, August 20, 2017
Corporate Demand Deposits in China up 16.8% in July, 2017.
Corporate demand deposits in China rose to CNY44.3 trillion at the end of July, according to the People's Bank of China. This is an increase of 16.8% over the previous year. Currency in circulation increased 6.1% over the same period, to CNY6.7 trillion. Both of these rates of increases are higher than the devaluation of the Chinese renminbi to the U.S. dollar and the increase in the Chinese consumer price index over the same period. This means that newly created money is mostly remaining within China, but is not flowing into consumer goods.
Over the last five years, the compound annual growth rate of corporate demand deposits has been 13.7% and the compound annual growth rate of currency in circulation has been 6.2%. July’s number for the growth of currency in circulation was slightly below the longer-term average, but the number for the growth in corporate demand deposits was higher than the longer-term average. This means that firms are receiving the majority of new credit creation, and this is being put into excess capacity creation, not consumption.
Over the last five years, the compound annual growth rate of corporate demand deposits has been 13.7% and the compound annual growth rate of currency in circulation has been 6.2%. July’s number for the growth of currency in circulation was slightly below the longer-term average, but the number for the growth in corporate demand deposits was higher than the longer-term average. This means that firms are receiving the majority of new credit creation, and this is being put into excess capacity creation, not consumption.
Saturday, August 19, 2017
Chinese Export Prices to the U.S. Fall 0.9% in July, 2017.
The aggregate prices of products imported into the United States from China across all industries in July declined 0.9% over the last twelve months, according to the United States Bureau of Labor Statistics (EIUCOCHNTOT). The U.S. dollar appreciated 1.4% against the Chinese renminbi over the same period. This means that, broadly speaking, producing in China and selling into the United States is more profitable on a renminbi-basis than it was a year ago.
On a five-year basis, the compound annual growth rate of aggregate Chinese import prices into the United States has also been 0.9%. Over the same period, the U.S. dollar has appreciated against the Chinese renminbi 1.2% per year. Despite massive amounts of artificial credit creation in the Chinese banking system over the last five years, that new money has not flowed into domestic consumption that would drive up the prices of exports. Instead, that new money has flowed into excess capacity to supply a greater amount of goods.
The artificially suppressed price of money within China has funded a decades-long expansion of capacity within China far and above the needs of China’s domestic market or the international economy. In order to inhibit further expansion of capacity, the price of products exported from China will have to fall faster than the depreciation of the renminbi. Existing firms will not add capacity and new firms will not be created to supply markets with declining prices. The adjustment process will require a decline in the value of the renminbi to increase input costs for Chinese producers. As goods become less profitable, firms will supply fewer goods to the market. At the same time, prices within China need to fall further to allow consumer surpluses inside and outside of China to soak up the excess supply.
On a five-year basis, the compound annual growth rate of aggregate Chinese import prices into the United States has also been 0.9%. Over the same period, the U.S. dollar has appreciated against the Chinese renminbi 1.2% per year. Despite massive amounts of artificial credit creation in the Chinese banking system over the last five years, that new money has not flowed into domestic consumption that would drive up the prices of exports. Instead, that new money has flowed into excess capacity to supply a greater amount of goods.
The artificially suppressed price of money within China has funded a decades-long expansion of capacity within China far and above the needs of China’s domestic market or the international economy. In order to inhibit further expansion of capacity, the price of products exported from China will have to fall faster than the depreciation of the renminbi. Existing firms will not add capacity and new firms will not be created to supply markets with declining prices. The adjustment process will require a decline in the value of the renminbi to increase input costs for Chinese producers. As goods become less profitable, firms will supply fewer goods to the market. At the same time, prices within China need to fall further to allow consumer surpluses inside and outside of China to soak up the excess supply.
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