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BWeek: It's Not Pneumonia, but Asia's Deep Chill Could Last [Recession]
By Brian Brenmer
25/7/2001 6:36 pm Wed
JULY 30, 2001
INTERNATIONAL -- ASIAN BUSINESS
Commentary: It's Not Pneumonia, but Asia's Deep Chill Could Last
In fact, Asia does face a crisis, but one of an entirely different--and
more chilling--nature. The region has insulated itself against a
1997-style financial meltdown by stockpiling foreign currency reserves,
running current account surpluses, and reducing its dependence on
short-term, dollar-denominated debt to foreign banks. But in the past
few years, much of Asia has become addicted to high-tech exports,
and it's not likely to get another major fix for several years.
Since the crisis, Malaysia, South Korea, Taiwan, and Thailand have relied
to a dangerous degree on supplying the seemingly insatiable U.S.
appetite for PCs, mobile phones, and personal digital assistants (chart).
Now, America is sated, and it's not likely to develop similar demand for
some time--if ever. Economists have come to realize that the U.S.
high-tech binge in 1999 and 2000 was an anomaly, driven by Y2K
fears, euphoria over the possibilities of fiber optics, and a rapid buildout
of the Internet. When tech spending in the U.S. recovers, it's unlikely to
reach the same level of intensity witnessed during the bubble years.
Trouble is, with this tech boom over, Asia doesn't
have a leg to stand on: Domestic consumption is anemic everywhere but
China. Banks wallow in bad loans. And many economic reforms are
stuck in neutral, or have shifted into reverse.
The numbers are looking increasingly ugly. For the first five months of
2001, global trade grew just 4.3%, compared with 12.8% last year. In
2000, the U.S. imported $150 billion worth of Asian tech gadgets, and
Europe and Japan together pulled in about as much, notes Morgan
Stanley Dean Witter & Co. economist Andy Xie. Now, exports are
tumbling regionwide. Take South Korea. Info-tech accounts for 12% of
gross domestic product--but chip exports have dropped 25%. All told,
that could cut growth in half this year, to 4%, figures Shin Dong Suk,
an economist at Samsung Securities.
The downturn could also sink some Korean companies that failed to
work down their debt during the flush times in 1999 and 2000.
Chipmaking colossus Hynix Semiconductor Inc. is getting hammered by
the collapse in memory-chip prices, and it still has debt of $8.7 billion. If
the troubles spill into next year, says CEO Park Chong Sup, "the whole
industry will collapse." The Bank of Korea reports that 38% of the
nation's manufacturers failed to make enough money to cover their debt
costs in the first quarter.
Capital investments that seemed like a sure bet just a year ago have
turned disastrous. Singapore's ST Assembly Test Services, which tests
and makes semiconductors for big customers such as Infineon
Technologies and Alcatel, spent $280 million on new equipment and
facilities last year. It is now using perhaps 30% of its capacity.
Surely Taiwan, the center of high- tech entrepreneurship in Asia, could
escape this downturn. Sorry. Taiwan's exports in June were off 17%
year-on-year, and big foundries such as United Microelectronics are
laying off workers and expecting losses in the second and third
quarters. Leading computer maker Acer Inc. is letting go 30% of its
2,300 workers in Malaysia and is expecting to post a loss for the first
Nor can the region count on much help from Japan. While
it sucks in 13% of Asian exports, the world's second-largest economy
is embarking on a painful restructuring. "We can't expect high growth
for the next three years," says Heizo
Takenaka, Japan's Minister of State for Economic & Fiscal Policy. True,
Japanese companies are outsourcing more work to Asian high-tech
suppliers. But if Japan grows at near-zero levels through 2004, it will
be a net drag on regional growth.
This trade recession will be just as insidious in its effects as any market
blowout. With the exception of China, the region won't be able to
boost living standards. And if exports fail to regain their torrid pace of
1999 and 2000, Asia's economies will not generate sufficient wealth to
bankroll tough workouts. Asia's policymakers could have used the late
export boom to get their beleaguered banks in order, rekindle their
domestic economies, and seek out new industries to develop. They
didn't. They may not have that opportunity again for a long time.