Rob:
<<I guess they could, in a way, feel dooped into the "build-out big now, settle up latter">> Exactly.
I was discussing with a Korean friend of mine the S Korean malaise. He said that Korean finance system "stinks." The Korean govt basically controls the conglomerates via bank lending and is thus effectively the equityholder of Korea Inc. which has raised enormous amounts of debt from abroad to keep the enterprise going. Now, the cost of repayment has become huge: 7% (rate) + 50% (devaluation). When the companies and banks know won was getting weaker, they all rushed to convert won to US$ and the won sank further.
Obviously, the conglomerate managements had no incentive to manage efficiently and did not think about the possibility of bankruptcy of Korean Inc. When they understood the gravity of the situation, it was too late. Korea was 11th richest, and it turned 21st in a matter of months. It will take years of hard work to rise again because the interest rate has sky-rocketed. Imagine what would happen if the Fed raises the rate to 18%! Common people in the US really know very little of the financial mess in Korea.
Companies created overcapacity and underpriced products without fully understanding the true cost of their products. They were generating phoney profits. Yes, they will have to continue to dump products to get as much greenback as they can. But, given severely limited capital resources, they will have to concentrate in areas where they will profit the most since they cannot continue in all areas of operation any longer.
They will be the first who will like to raise DD prices, for example, since no other DD maker will be aggressive to match. Others (in the name of quality) may even raise prices. Koreans will continue their existing capacity as much as they can, provided the newly calculated profits from this operation is bigger than that from other operations they have at hand. They have to reorganize, i.e., curtail some operations.
I think it is erroneous to think that there will necessarily be a lot of cheap Korean exports because one has to add the high cost of capital to cheap labor costs. If the won fell and the COC did not increase (which is what most are used to think as in Japan), then the US market will be flooded with cheap imports. Now Koreans and other SE Asians will seek every possible opportunity to raise prices to the extent they can sell as long as price exceeds COC + Labor cost, because they can ignore the cost of plants with a hope to operate them as long as they can without capital expenditures. Thus, the pricing equation has changed. I know the issue of COC is omitted from most press/TV commentaries, except, e.g., in the WSJ article I had posted here.
Sankar |
