Bye, Bye Silicon Valley — Hello, China

By: Tony_Sagami

I talked about this in my March 20 video issue, but the impact is so important that I wanted to make sure that all of you — readers as well as listeners — know about it because it is going to forever change how to invest successfully in technology stocks.

Everybody has heard of Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs), which are the big dogs at the top of the corporate totem pole, but CTOs are especially important at technology companies and often share that lofty perch with the more visible CEOs and CFOs.

Chief Technology Officers are usually the technological visionaries of the company and responsible for determining how technology can be used to implement the business strategy as well as running the operational implementation of technology. A CTO is often a founder or one of the first hires.

Applied Materials CTO Mark Pinto is bound for China.

I am telling you this because the Chief Technology Officer of Applied Materials, Mark Pinto, announced that he is picking up and moving from Silicon Valley to China. Pinto is the first CTO to actually relocate to China, which in itself is a watershed event, but also shows how important China is to Applied Materials and the changing landscape of technology investing.

I consider this to be a monumental move for the high tech industry because it signals a major shift of power.

Pinto has a young family (two boys, 10 and 11), so he isn’t making this move because he likes Kung Pao chicken. He is doing it because he and the rest of the Applied Materials management team understand the threat and the opportunity in China.

The threat stems from the fact that the Chinese are producing more engineering graduates, technological breakthroughs and opportunity because the market for 1.3 billion is so huge.

Applied Materials (Nasdaq: AMAT) is no small fish, either. It is the largest supplier of semiconductor manufacturing equipment in the world, one of the largest suppliers of materials for solar panels, and one of the top technology companies on the planet. What Applied Materials does matters.

The world’s largest non-governmental solar energy research facility was recently constructed in Xian, China.

In addition to moving Mr. Pinto and his family to Beijing, Applied Materials recently completed the construction of its newest and largest research lab in Xian, which is best known as the home of the terra cotta warriors.

This is not an inconsequential first step. This new research lab is the largest non-governmental solar energy research facility IN THE WORLD and will be one of the largest employers in the city of Xian.

Additionally, Applied Materials held its 2010 shareholders meeting in Xian on March 9. What does all that tell you about the future of China for Applied Materials? It should tell you that Applied Materials — as well as lots of other technology companies — are planting some serious roots in China.

Applied Materials is no newbie to China, either. It has had operations there for 25 years and currently gets 13% of its revenues from China, but it isn’t the only tech giant moving into the country. Intel, Microsoft, Google, Cisco, and IBM, for example, have large offices and/or research facilities in China.

China has been the center for industrial manufacturing for years, but is now making inroads into high-technology, cutting-edge manufacturing for things like semiconductors, solar panels, flat screen TVs, and cell phones.

China isn’t the only Asian country leapfrogging the U.S. as a technological center of influence. Get this: The world’s largest manufacturer of computer disk drives is Thailand! If you own stock in Western Digital (NYSE: WDC) or Seagate Technology (NYSE: STX), you need to get your head examined.

Whatever happened to American television industry is about to happen to a big chunk of the high tech industry. Remember Zenith and RCA? Those American companies pioneered television technology, but were eventually crushed by the Asian competition.

China and its Asian neighbors are going to turn many of today’s American technological kingpins into historical footnotes in a matter of years and that has painful (and profitable) implications for anyone who invests in technology stocks.

Here is the key to investing in tech stocks going forward: You need to steer clear of all tech companies that are competing against low-cost Asian competitors and get “long” any tech stocks that get most of their sales from Asia. I am sad to say that very few American tech companies meet that criteria.

Some of China’s most successful companies are focused on manufacturing basic materials.

For the last nine years, you’ve heard me talk about the opportunities in Asia, but my roots are really in the technology industry. I was one of the early pioneers of using computer modeling to select high momentum funds and stocks and I actually started my own software company in the 1990’s and sold that software to thousands of sophisticated and institutional investors.

I understand tech from the inside and I can see a clear, obvious and monumental shift going on right now. It is quiet and slow but, like a glacier, the move is unstoppable and will crush everything in its wake.

There are thousands of Asian technology companies that you can invest in and many are listed in the U.S. on the Nasdaq, NYSE, or over-the-counter market. Of course, you have to do your homework to separate the mutts from the purebreds, but I am here to tell you that I expect Asian tech stocks, Chinese tech stocks in particular, to outperform U.S. stocks by a wide, wide margin.

If you are more of an ETF investor, you could take a look at Claymore China Technology ETF (CQQQ), which includes Chinese tech giants like Bidu.com, BYD Corporation, Netease.com, Alibaba.com, and Sina.com.

The above are some of the largest Chinese technology companies, but it isn’t a list of what I consider to be the most exciting, fastest-growing ones. But that’s a subject for a different issue. Now’s the time to get your arms wrapped around the new paradigm of technology investing and that, my friends, means that you better start thinking “China, China, China.”

Best wishes,

Tony

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