|TAIPEI (Reuters) - CMC Magnetics may have big paper profits from investments in nearly 300 Internet start-ups, but the Taiwan-based compact disc maker says it's just a way to nose out new manufacturing business.
"We're not really venture capital," CMC vice president Andria Wong told Reuters in an interview.
"While we're doing investment we're looking for CMC's major business of the future," she said.
For example, CMC began shipping MP3 digital music players last year because it sees a bright future for portable devices that combine MP3 players, digital cameras and personal digital assistants, she said.
"The MP3 players are just to let everyone know that we have the ability to make these machines," Wong said of the new product line for CMC, which makes 56 percent of the world's floppy discs and is a leading manufacturer of optical media.
CMC's heavy venture capital profits have nonetheless caught the market's attention. Wong said an original T$800 million (US$26.3 million) earmarked for Internet investments has swelled into T$10 billion spread across four investment funds.
Wong said Internet service providers such as America Online caught their attention eight or nine years ago by placing large orders for discs carrying free installation software.
"As they grew we realized 'Hey the Internet is growing very quickly' because their order volumes were growing very quickly," she said. "We thought: this could be our future business."
"New Economy" Doubts
But some analysts have begun to doubt CMC's "new economy" investments amid a persistent correction in the tech-heavy Nasdaq, which has shed 35 percent from its March peak.
"Personally, I think CMC should invest less in Internet content and more in firms that actually produce something," said Jackie Chen, electronics analyst at National Securities in Taipei.
Chen maintains a "hold" rating on CMC and calls T$200 fair value for the stock. CMC shares fell T$12, or 6.74 percent, to T$166 on Saturday amid a broad decline in electronics shares.
But Wong said CMC was far from a free-spending Internet firm with no regard for the bottom line. "CMC is a very conservative company. We don't burn money. We start very small and we don't merge big companies."
She said CMC had sold off enough stock to cover initial investments would see returns as long as their shares in listed Internet firms didn't fall to zero.
"You might see assets shrink a little in our annual report. But we'll keep our investments out there and see what happens."
As for CMC's core optical disc business, Wong said the company was set to weather a spell of overcapacity in recordable compact discs, as their equipment could easily be converted to making high-margin digital versatile discs (DVDs) once demand took off.
"It's true that too many people bought CD-R production equipment because demand was far too hot in the last two years. Our CD-R margins could go from 58-60 percent to 40 percent," she said.
But Wong predicted prices of DVD players would begin to fall by the end of 2000 and stimulate demand for the discs, which carry six times more data than conventional CDs.
"Once DVD hardware prices fall, things are going to get fun," she said, predicting DVD sales -- which command 90 percent margins -- to hit 10-20 percent of turnover in 2001, up from one percent in 1999 and three to four percent this year.