Excerpt from a new Asia columnist:
Points East
Of danger and opportunity
investor1.com
With "Asian Contagion" rapidly becoming the economic catchphrase of the day, it might seem an odd
time to be opening a new corner of Investor1 headed "Points East". Then again, the characters for
opportunity and risk are often linked in Chinese calligraphy.
Not that the present time amounts to a real and present opportunity to make Asian investments, in
equity markets or otherwise. With the deepening crisis revealing ever more clearly a tangled skein of
interlocked weaknesses region-wide that may yet shake the world economic order to its foundations,
it's far too early to say where the bottom is, much less when it will be reached. When thinkers as
famously au fait with Asia's financial mysteries as Paul Krugman say that they are up a tree in terms of
understanding what is wrong with Japan -- the regional lynchpin -- all this writer can add is "me too".
At the same time, having experienced the late Asian economic miracle up close and personal as a result
of living and working as a journalist in Japan, Thailand and Hong Kong over the past ten years, I can
say that those who believe that the current problems amount to Asia's final hurrah have obviously never
lived there. Me, I'm betting on metamorphosis.
The same assets that created the so-called miracle -- minus the tsunami of inbound foreign investment
that caused it to ignite 10-15 years ago -- are still very much in place. Indeed, in terms of up-to-date
technology, plant capacity and trained and motivated workers, Asia is much more developed than it
was when the whole game began. Thus, most of Asia's manufacturing centres continue to have
world-beating production capability across a whole swath of sectors, from the highest of hi-tech
industries in places like Japan, Taiwan, Korea and Singapore to a vast array of low-tech,
labor-intensive factories producing everything from toys to computer peripherals to the textile and
garment industry products. What's more, the vast majority of this output has just had its price structure
cut by half -- because of the recent rounds of currency devaluations region-wide -- sharpening an
already keen competitive edge. And this process is far from finished. Okay, so demand is down. For
now. But wait a year or two.
As well, some, like Malaysia, Indonesia and Vietnam (to name only three) are built on treasure troves
of natural resources; oil, minerals, food in every form and some of the world's great rainforests -- albeit
that many of these are sagging under the assault of over-exploitation. Economic slowdown only
preserves such resources. Most Asian countries also have huge masses of highly demographically ideal
people (mid-20's excluding Japan) to help them get through the current crunch. Generally, they have
much higher savings rates than is common in the west. And at least one, China, has within its
boundaries arguably the greatest untapped consumer market in history.
So what's the problem?
Asia's banks and property companies, to put it simply. Since the boom began in the early 70's with
Japan's first export successes, property costs have soared in centre after centre region-wide, fuelled
first by property development companies recognizing a golden opportunity, and secondly by banks
bursting with all that saved cash, whether Japanese, Hong Kong Chinese or Thai. This de facto cabal
was all too willing to allow valuations, and consequently their exposure, to run apace with speculation.
This was fine in the early days, when positive re-evaluations were long overdue and were, in any case,
more or less directly related to much increased land-use earnings, for example building hotels for a
burgeoning tourist industry in Thailand, or developing a sophisticated financial service nexus in the core
skyscrapers of Hong Kong in lieu of growing rice or making cheap toys. Problem is, at some point
greed took over as the real driving wheel. And nobody was willing to blow the whistle. Everyone --
especially insiders in Asia's incestuous business and government cliques -- was getting too rich too fast.
Moreover the power elite started believing its own press releases of a rebirth of their legendary
gold-plated pasts, though nobody seemed to be able to specify exactly when that had occurred.
Whatever, it seemed true, in particular the bit about the sky being the limit.
Asia's spectacular rise owed a great deal to a new phenomenon which had arisen as a result of the
globalization of the world's economy; huge waves of highly mobile international capital unfettered by
national boundaries and regulations, not to mention various time and space limitations. This gave the
possibilities for speculation whole new dimensions.
The goal was this capital was -- and is -- the best ROI opportunities of the moment. And for a long
time, one of its favourite destinations was Asia, in particular Southeast Asia. Once there it was
synergistically linked to other unprecedented inflows, such as equally large waves of monied foreign
tourists. The result was a bonanza.
Unfortunately, the region's indigenous bankers and political leaders were -- under their spanking new
Saville Row suits -- traditionalists, almost medieval in their thinking. Transparency and accountability
were simply not part of their modus operandi. They tended to see the rivers of money flowing into their
countries as a windfall opportunity to take an already torrid development pace up to warp speed -- and
their profits along with it. It seemingly never occurred to them that such flows were, by their very
nature, fickle and able to be directed elsewhere just as quickly. They also didn't foresee Japan, source
of much of this capital, ever getting into trouble.
Yet the writing was on the wall for years: all of the region's stock exchanges were too heavily weighted
with bank and property issues, and accountability in development finance was peripheral at best. So
when land prices and rents from Tokyo to Singapore went into the stratosphere and stalled, dangerous
overcapacity was revealed -- especially in shakier centres like Bangkok (where the contagion began a
year ago). Suddenly, valuations were painfully proven to be too optimistic (to be polite). Property
markets began to wither, taking the various bourses with them. And region-wide bank exposure began
to bite big time. There simply wasn't enough underlying real value in the various economies (despite
ongoing strength in various Asian export centres) to allow these property companies and banks a soft
landing. Result? Currency chaos.
Why did the river of international doubt about Asian economies turn into a deluge? There are almost as
many explanations are there are analysts and economists. But Singaporean Senior Minister Lee Kwan
Yew is probably not far off the mark when he suggests that while the international financial community
is largely made up of info-age people cognizant of what technology means in economic terms, a
significant portion of Asian bankers and governments are not. They simply failed to grasp the power of
the juggernaut that was coming to flatten them.
So does the past year1 tumult mean that Asia is finished? Most assuredly not, though again for the next
few months out to two or three years, it will be the kind of opportunity that is strictly for the lucky, the
strong and, most importantly, the well-informed.
Bringing it all back home
Because Investor1 is rooted in the area comprising Canada's west coast and the US Pacific Northwest,
namely the Vancouver/Seattle axis, we will also be trying to shed some light on the best Asian-linked
opportunities developing here as a result this area's being one of the largest recipients of monied Asian
emigres (principally from Hong Kong and Taiwan) as well as producing at least two of the most
in-demand, high value-added products in Asia today; 747 jetliners and computers.
We will be examining these issues from both ends of the trade and investment pipeline. Canada's new
entrepreneurial Asian immigrants were welcomed as a result of the theory that opportunity is a two-way
street. And that the best way into booming Asian markets is via Asian businessmen now resident in the
country. Similarly, that the best way to tap vast Asian capital sources is to convince them to invest, as
well as live, in their new country. We intend to see to what degree this theory has proven true. For
example, with venture capital exchanges such as the VSE and ASE presently hurting for new capital
inputs, does the meltdown seen on Hong Kong's heavily property weighted Hang Seng Index amount
to a pointed opportunity to divert funds that might otherwise have been invested there to relocate here?
Or if not, is there anything we could learn, should learn, from the reasons why they haven't?
Vancouver may be Canada's "bright lights, big city" on the Pacific Rim. But what's surprising is the
comparatively low level of Asian-linked two-way trade and investment evident on the ground in the
city. One hears many explanations why. In the post-NAFTA world, it is said, every Canadian
entrepreneur who could borrow, beg or steal a credit line was "I-5 fixated". The profits it implied for
efficient Canadian companies south of the line were too compelling -- and too easy with the devaluing
Canadian dollar -- to bother looking elsewhere. Nothing new there, of course. Merely the country's
economic history repeating itself.
As well there were persistent stories of those few Canadian entrepreneurs who had undertaken the
time, trouble and expense to try and gain market share -- or at least a beach head -- in Asia's new
economic promised land, finding, that after years of effort, they'd yet to turn dollar one in profit, sales
volumes notwithstanding.
Seattle, only a little more than 200km away, is a completely different story. Demand for its two main
products has skyrocketed in recent years as Asian airline fleets were substantially updated, almost en
masse, and Asia perhaps more than the rest of the world fell in love with Microsoft. A big boost also
came with both industries achieving substantial market penetration in China.
The fact remains that in a global economy when one important region -- such as Asia -- is afflicted by a
sharp downturn, others feel the effect. The only question is when. Moreover, with so much capital --
and particularly nervous Asian flight capital -- now flowing into US markets, the resultant marked
increase in the value of the greenback relative to other currencies, especially Asian currencies, means
that US products have already begun to experience marked sales slowdowns throughout the region.
And most observers except this to get worse before it gets better. In other words, while the American
economy has, so far, eluded all but superficial damage from Asia's current woes, you have to wonder
how long this can last. And it's worth remembering that the majority of those underwriting North
America's colossal collective debt (via bonds and other debt instruments) are Asians. Better they
should find ways to solve their liquidity crises before they opt to cash our notes.
Of course, if we in Canada prove as vulnerable to these shock waves as some suggest we will, we
must bear a substantial part of the blame. Ignorance and laziness have played appreciable roles in
putting us in that position. Traditionally, BC's (and Canada's) Asian business has been a result of
supplying the region basic commodities such as coal, raw logs, wheat and so on. More recently, we
gleefully added spectacular gains in local property and tourist markets, a spin-off of new Asian
affluence. But we've been almost totally reactive. Little thought or initiative has gone into studying,
understanding and acting in our own best strategic interests beyond intermittent government-funded
trade tours notable for their lack of follow-through. Moreover, we've added precious little value to our
traditional exports over the years. We've yet to do for our own forest products what Ikea did to
Swedish pine harvesting.
To give another small anecdotal example. Most Asians, especially those with money, live in places
where one daren't drink the tap water. As a result, whole aisles of precious Tokyo, Bangkok and Hong
Kong supermarket shelf space are given over to displaying bottled water from every place imaginable;
every place but BC, that is.
This is nothing short of amazing considering the size and quality of most of BC's watershed. And it
becomes even more so when one remembers that most of the Asians settling in the area over the past
15 years or so are members of the region's entrepreneurial elite. Accessing Asian markets is no mystery
to these people. So does Canadian business have a problem of communication?
Investor1 will be looking for significant opportunities presently in the shadows. In particular, we'll be
looking at share prices of companies with seasoned management and compelling niche opportunities
overseas among their assets.
Taking a longer view
We at Investor1 believe that in future Asia will be even more important to our economic future than it is
today -- whether we like it or not.
Given that we have a lot to learn, the uncertainties in the Asian economic landscape of the present time
(and the significant danger they pose to the uninformed or unsophisticated investor) are likely to keep
most North American investor interest in the region in the deep freeze, even in terms of brand name
fund exposure. But that doesn't mean that we should tune out the various events and developments
there, however frustrating making sense of all the strange names may get.
On the contrary, we should be researching the new value created by the crisis. That's what George
Soros, whom Malaysian Prime Minister Mahathir blames for the whole crisis, is doing. He recently
bought the Nakornthai Strip Mill in Thailand for a 30-40% discount. His aim? To upgrade
management, become the lowest cost producer, and multiply marketshare now, when the competition
is melting, and returns when development gears up again.
Opportunities such as this will multiply in the months ahead: in the Japanese export sector; in the Hong
Kong banking and finance sectors; in Thai tourism -- and perhaps significantly in the country's property
sector if that market is actually opened to foreigners; in a number of regional resource sectors as the
current import drought inevitably eases. One thing my own eyes tell me. The market here in North
America must be nearing maturity. Everyone over the age of 15 seems to have at least one of
everything he or she can imagine wanting. Computers. Stereos. TV's. VCR's. Cars. Name it.
In Asia, while that might seem true of places like Tokyo and Hong Kong, the rest of this vast region,
from the far reaches of China to upcountry Thailand or Indonesia, has just had a taste of the good life.
Then the roof caved in. But that doesn't mean the desire collapsed with it. On the contrary, it's stronger
than ever.
Certainly the place needs a structural overhaul. And it will get it to one degree or another because
Asia's power elite is much less concerned about short-term pain inflicted on the body politic than is the
case here. Those with real power are seldom directly elected, though that is changing.
What entrenched Asian power groups do fear is the consequences of the development train being well
and truly derailed. For then events are likely to go far beyond polite political debate. Riots in the street,
with serious carnage, potentially region-wide could follow. Indonesia in recent weeks provides but the
prelude of an example When such conflagrations get out of hand, shaky leaders and their families and
friends tend to get brutally washed away.
So Asia will be back, probably leaner and meaner than ever. Our choice, as investors, and in particular
venture capital investors, is simple: whether to prosper or be victimized by it.
Points East would welcome any Asian business insights and tips our readers choose to share
with us, and the broader reading audience. Just drop a line to: mailto:info@investor1.com
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