A Cost For Asia's Exports
The meltdown in Asian stock prices on Friday stemmed in part from the growing realization that the heavy reliance on exports that has driven Asia's powerful growth is now turning into its worst enemy.
The evaporation of consumer spending in the U.S. and Europe is starting to hit deeply at Asian manufacturing titans that thrive on sales to the rest of the world, and that are now rapidly scaling down their capital spending.
On Friday, after reporting a 44% drop in third-quarter profit, Samsung Electronics Co. of South Korea said it will reduce memory-chip capital expenditure this year by an unspecified amount because of weak market conditions, and may also lower overall capital-spending plans for next year in line with the business environment.
Sony Corp. of Japan Thursday lowered its outlook for its fiscal year ending March 2009 and warned that the deteriorating business climate could force it to scale back capital spending, close plants and cut jobs. On Friday, Sony shares plunged 14%.
The worsening gloom in Asia comes despite the fact that on the whole the region -- site of a major economic meltdown a decade ago -- today has limited exposure to the debt now causing havoc in the financial systems of the U.S. and Europe. While some countries, notably South Korea, are reliant on funding through international credit markets that's dried up in recent months, Asia's banks haven't invested heavily in mortgage-debt derivatives or other products poisoning the balance sheets of Western counterparts.
But in the last 10 years, Asia has doubled down with another bet on exports as an economic engine, at the expense of developing a domestic consumer market many economists believe will ensure more sustainable growth. Exports accounted for 47% of gross domestic product in Asia, excluding Japan, in 2007. That is a jump of 11 percentage points from the comparable figure in 1998, during the last economic crisis in the region, notes Stephen Roach, Morgan Stanley's Asia chairman. In other words, Asia is now 30% more reliant on exports than it was less than a decade ago.
Asia 'may not be levered in the strict sense of reliance on global credit,' says Mr. Roach. 'But it's certainly levered to the global economy.'
That means just as banks in the West are expected to deleverage their balance sheets by selling assets for years to come, a similar need now looms in Asia where excess manufacturing capacity built during the boom years now has to be downsized.
'The crisis represents an unwinding of global imbalances,' says William Hess, a director of research firm IHS Global Insight in Beijing. 'It's an overall gradual deleveraging.' The fact global production is concentrated in East Asia means that's where the adjustment will be, he notes. 'The markets are saying that, outside of this financial crisis, there may be lean years ahead as rationalization takes place' in Asian manufacturing.
That adds to the challenges Asia's industries will face, especially the higher cost of credit. Japan is struggling to cope with the effects of a rising yen on its competitiveness. Lower commodity prices will likely bring some relief to parts of the region, though there will likely be a timelag.
Bad corporate news contributed to a punishing day on Friday in Asian stock markets. Seoul fell 10.6% after Samsung issued its results and spending forecast. Tokyo declined 9.6%, Mumbai slid 11% and Hong Kong fell 8.3%.
Not all of Asia is as vulnerable to the sudden trade squeeze. The Philippines and Indonesia aren't as dependent on exports. China's economy, while showing new signs of weakness, still posted 9% growth in the third quarter, and the government is starting to roll out stimulus measures that could ease some pain as more factories start to shutter.
Other places more heavily dependent on trade are feeling the pain. Singapore, a technology-manufacturing center, has already tilted into recession after GDP contracted 6.3% in the third quarter following a 5.7% decline in the previous quarter, according to the advance government estimate. In September, exports to the U.S. -- Singapore's single largest market -- fell 24.5% from a year earlier after declining 30.2% in August.
Malaysian furniture exports are expected to fall after six years growth, an official has said. The U.S. economic crisis, which has affected Malaysian sales to it, 'has shown the vulnerability of our industry's dependence on traditional markets,' Plantation Industries and Commodities Minister Peter Chin told an industry group.
In Thailand, exports of circuit boards fell 18.3% in the first eight months this year. 'I think everyone in this industry has been affected by this global economic problem in one way or another,' says Vuth Klaiphan, sales manager at Aspocomp (Thailand) Co. About 90% of its printed circuit boards go to Europe and the U.S.
For memory-chip makers, the worsening global economic slowdown is especially painful.
'The industry was in a severe winter and now I'll say it is in an ice age,' says Brian Shieh, president of Powerchip Semiconductor Corp., Taiwan's biggest dynamic random access memory chip maker by revenue, after reporting a loss of 15 billion New Taiwan dollars (US$459.9 million) for the three months ended Sept. 30. It was the company's sixth consecutive quarterly loss.
Powerchip is cutting capital spending plans and its DRAM shipment growth forecast for this year. It also said it would delay operating a new chip plant until 2010.
'Companies in this industry have stopped talking about making profits but are fighting for survival,' said Powerchip's vice president, Eric Tan. |
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