Asian Business Leaders Are Optimistic On Growth Despite U.S. Slowdown
January 10, 2001
Business and Finance - Asia
Asian Business Leaders Are Optimistic
On Growth Despite U.S. Slowdown
By JASON BOOTH
Staff Reporter of THE WALL STREET JOURNAL
Will a slowdown in the U.S. derail Asia's unfinished economic recovery? Not according to Asian business leaders.
Instead, executives from around the region who control corporate spending and borrowing seem concerned, but not yet scared. Orders are down, prices are starting to fall in some sectors, and investment plans may be delayed, executives said in a series of interviews conducted since the U.S. Federal Reserve announced a surprise interest-rate cut last week.
"Everyone will be taking a cautious stance until things become more clear," says Jeffery Lam, managing director of Forward Winsome Industries Ltd., a Hong Kong-based toymaker with production plants in China and Thailand. Mr. Lam also chairs the Hong Kong Exporters Association.
The consensus in the region isn't that the American economy is about to collapse, taking Asia and the global economy with it, executives say, but rather that the U.S. is cooling off from past excesses. Last week's rate cut helped confirm that belief, they say.
So far, Asian investors seem to agree with the executives that Asia will enjoy a soft landing. So badly mauled last year, the region's stock markets have largely held on to the advances made following the rate cut, while U.S. markets have given up most of their much larger gains since last week.
Supply Hangover
Through the first half of 2000, the U.S. economy was expanding at breathtaking speed -- more than 6% in the second quarter. That translated into a surge in demand for Asian exports of everything from computer chips to sneakers.
"2000 was almost too much," says Erik Christensen, managing director of Modern Terminals Ltd., which runs port facilities in Hong Kong and China. He describes how rapid growth in volume combined with high oil prices pushed up freight rates and stretched capacity in the ports.
"U.S. importers were speculating on a hot Christmas, so they put huge volumes through to the U.S. retailers," he said. Instead, retail sales at stores such as Wal-Mart and The Limited were flat in December, compared with last year. More ominously, Sears, Roebuck & Co. recently announced plans to close 89 stores in the U.S. in first quarter of this year.
That supply overhang puts pressure on Asia, starting with electronic-component makers and spreading to nearly all sectors of the region's economies. For example, export growth in Taiwan has been slowing for the past three months.
Timothy Siddik, chief executive of Andover E-pulppaper Ltd., whose pulp plants in Indonesia and China produce raw material for product packaging and shipping boxes, says prices in his sector are falling due to the U.S. economic slowdown. He doesn't expect them to come back until midyear.
Some companies are reacting by cutting production. Faced with slackening demand overseas, United Microelectronics Corp., Taiwan's second-largest chip manufacturer, recently reduced output to 90% of capacity. If that still seems to reflect comparatively strong demand, it's worth remembering the slowdown follows a period of red-hot growth.
"We were at 100% capacity for a year and a half," says Alex Hinnawi, UMC's director of corporate communications. "That was a very unusual situation." He recounts how as recently as a few months ago customers were double-booking their orders to ensure supply needs were met. But now those customers are wading through excess stock, and UMC will be slowing production until the oversupply is worked out, Mr. Hinnawi says.
Cautious Spending
It's the same story at toymaker Forward Winsome. "I don't expect a good first quarter," says Mr. Lam. "Because all that extra [product] left on the shelves is going to take time to move." For the year, Mr. Lam sees export growth out of Hong Kong slowing from 18% in 2000, to around 5% this year.
That will put manufacturers in all fields on their guard. While companies will continue to make investments in equipment that might improve efficiency and reduce costs, Mr. Lam doesn't see businesses spending money on new plants or staff.
In addition, a slower U.S. economy will impact not just Asian exports to the U.S. market but also trade within the region. Paul Baek at South Korean LG Electronics Co., who handles shipments of electronic components from South Korea to China, says the slowdown in demand for computers in the U.S. will cut into LG's sales of components for computer monitors being built in China. "The whole computer industry is not happy right now," he says.
Mr. Baek sees hope, however, in the continuing weakness of the South Korean won against the U.S. dollar, which should make Korean exports more competitive compared with its neighbors.
Lower U.S. interest rates are also likely to lead to lower rates throughout the region, cutting trade financing costs for both LG and its clients. And that should help keep business moving.
Mr. Christensen of Modern Terminals agrees that last week's rate cut will ease the pain, even if it isn't enough to stave off an economic slowdown in the U.S. and in Asia. He points out that most exporters and importers are buying goods on credit, so lower interest rates will help ease the financial pain if these traders have a harder time offloading their merchandise.
Preparing for Recovery
Despite the uncertainty, none of the businesspeople questioned for this story anticipates a U.S. recession, especially after last week's rate cut. And some of the companies, particularly those in the electronics sector, say they will maintain last year's level of investment in plants, equipment and research. Indeed, UMC last month announced plans to build a new production facility in Singapore.
"For our industry the product cycle moves so fast that if you don't invest you will fall behind the curve, " says Victor Lo, chairman of Hong Kong-based electronics firm Gold Peak Industries (Holdings) Ltd.
Some Asian companies even see themselves benefiting from a weaker U.S. economy. Indian information-technology company Wipro Corp. derives more than 35% of its revenue from outsourced business from U.S. firms. If the U.S. is indeed facing tough economic times, says Suresh Senapaty, Wipro's corporate executive vice president for finance, then his company will get more such business. The logic: Tough economic times will push U.S. companies to farm out their information-technology needs to lower-cost Indian firms.
"In fact, some U.S. companies that have recently given earnings warnings have come to us seeking more of our services." says Mr. Senapaty.
Meanwhile, Frosts Food & Beverage (Pte) Ltd., a Singapore-based company that imports meat produce and wine into Asia from the U.S., New Zealand and Australia, says a weaker U.S. dollar brought on by the economic slowdown, will cut the price of beef, which is traded in U.S. dollars. "For us, this might all be a blessing in disguise," says Managing Director Graham Stephenson.
Despite the talk of a U.S. recession, Mr. Stephenson says he's gearing up for a strong first half. His favorite economic indicator, fine wine, is still looking bullish, particularly in China.
"With the Chinese people you can watch the economy go up and down by what the businesspeople drink," he says. "I've noticed that when things are looking bad they order $100 bottles of wine. These days they are drinking $200 bottles."
Write to Jason Booth at jason.booth@awsj.com1
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