February 2001

It was the health of the world economy that rescued a Japan teetering on free fall, South Korea and Taiwan's worrying signals, and a South East Asia ravaged by the 1997 Asia crisis for the past two years. Save for that, and the export-led recovery in many countries, Asia would have been in a much more sorry state. China, on the back of a newly opening economy and the promise of entry to the WTO in 2001, did better and has been the economic star of Asia for much of that time.

While pundits were heralding the "Asian recovery" mid year, such celebrations may be short lived as Asian stock market values continue their substantive fall of the last half of 2000, and cope with the spectre of a looming global recession. This time, the rest of the world may not be able to provide the lifeline should Asia succumb to the economic decline that indicators are suggesting.

Let's first look at the stock markets, comparing their fall from 12 months and 6 months ago.

Indicative indicies like these provide a rough idea of investment confidence. Reasons for lack of investment confidence are many. Concerns on the slow rate of reform in South Korea as well as increased labor union activity, lack of direction in Japan, preceived crony bailouts in Malaysia, and a critical election in Thailand are some of these. Stockmarkets that were stars in the first quarter (Malaysia, Karachi, Taipei and to a lesser extent Bombay) were brought back to earth through the rest of the year to match and sometimes comparatively head the steady declines of other economies. Even Singapore, who seems to be doing everthing right in terms of corporate transparency, global outlook, and smart use of foreign talent, is down a long way from their year high of 2,538. A notable exception continued to be China with Shanghai posting gains of over 40% in the first 6 months and over 60% over the year. However, the late trends indicate a lack of confidence that transcends national factors. The last column in the table is our rough call of trends in the last 6 weeks expected to flow over into early 2001.

Early 2001 must be approached with caution, time must be seriously given to research and development, and running after easy money expired its last dying breath several months back. For South East Asia and South Korea, where the underlying cause was the bubble-inducing and lack of substance of "easy money", the lessons were hardly being learned before the Internet raised the hopes of not only traditional investors but many small local investors who had their dreams shattered just 2 years before. If the Asia crisis did not wake people up to the evils of easy money and speculation in fairy floss, the ramifications of the very short-lived Asian internet boom may well reinforce that principle yet again. It was a boom that was over before it started.

Early 2000 saw a rush of local investors to start-up "new economy" companies such as Hong Kong/Chinese start ups Tom.com, Pacific Century Cyber Works, and Sohu.com, eager to see the gains that early investors in similar companies in the US had gained. Even before they had started putting away their certificates, the dot Com crash magnified in the US, and spread much faster to Asia. Seeing Asia was so slow to get on the bandwagon, local dot Com's were not a place to be in 2001. The Asian dot Com crash was conceived by the same vices as the US. Greed, not enough time to do competitive market research and develop a decent business plan, and 20-something CEO's running million dollar companies with miniscule management experience and who weren't even using email 5 years ago.

The Dot Com revolution was also incestuous. Perhaps the only products that were being sucessfully sold through it, were those that provided the infrastructure - ISP's, internet software, hardware, and end-solutions. But after that, there was vey little else that sold directly off the internet. Even the great Amazon has been reduced to a trickling brook. The new economy? --- what new economy? The geneticists had it right - inbreeding leads to weakness.

It's not all bad news however. The fact is that the Internet cannot fail to take market share from other forms of information delivery, just as TV killed the radio star and forced newspapers to change strategies in other times. It is far too significant a technology. Pure internet plays are dead in the water, but the good news is that there are now more opportunities for established companies with proven management to leverage the Internet in their own markets. Internet pioneers based a business plan on the model that the Internet was self-sustaining rather than a tool. It's key advantages are information delivery, but most dot Com's continue to do that poorly. The railways didn't transform the economics of a developing USA because it sold things to itself. It did so by effectively and efficiently shunting goods from one place to the other. The early railway pioneers made less than the traditional industries like agriculture and manufacturing gained. Many Internet related companies in Asia, especially those which effectively build a local utility rather than copying US models, which are run by proven business people, linked better to actual physical product or services, and which deliver their own product or service better on the Internet than other modes, will develop in 2001 and beyond.

2001 will be a year of back to basics - and there's a good chance that this will be the case for most of the rest of the decade. To the world's fastest growing and most populous region, with both significant ageing and infant populations, the health care industry will remain a major opportunity, as will public facility industries like transportation and waste management.

Indo-China will continue to have problems with developing African, Latin American, and Eastern European countries providing strong competitiveness in those areas that Indo China should excel. Increasingly Vietnam, Laos, Myanmar (Burma), and Cambodia are becoming laggards in opening up their markets and decreasing barriers to investment inherited or ongoing from their communist history.

If 2000 meant anything for Asia, it was the year when the NASDAQ replaced China as the riskiest global investment. The prospect of a 1.2 Billion consumer marketplace must be tempered with not so much caution as careful prospecting and choice of partners and patience. Very few foreigners have made money in China so far, but those that are still surviving now, are way ahead of those who havent started. And look at those growth figures for China against those for established Asian markets, and it may well be the right time to take the fast boat to China.

June 1999

It has been a rocky ride since our last review. But the good news is that many positive signs have emerged in the last two months. Significant points are summarised below..

• Many signs of recovery in Thailand and Korea, hardest hit by the initial shock, and where reform-committed governments have shown by their actions that any recovery must depend on a significant change to business culture and practices. Though these two countries attract criticism from within and without for their embracing of an IMF strategy that even the IMF now admits was wrong, they are now in a great bargaining position with the IMF. IMF credibility depends on the success of the economies of those countries which worked with them at the start, and Thailand Prime Minister Chuan's negotiation with the IMF has resulted in great compromises on the part of the latter, providing for release of more funds with less restrictions. The same goes for Korea.
• It will take a long time for Japan to redirect an economy that developed a great deal of fat and inertia after their meteoric rise to the world's second largest economy a decade ago. The key to Japanese recovery remains hinged on how quickly crony relationships between big business and government can be decreased, and opportunties be given to the new management talent in Japan. Consumer spending has decreased dramatically though there are signs of a shaky increase. A stream of high profile corruption related arrests has sent out a message that the practices of old are no longer acceptable. Japan is also under pressure from their investments in South East Asia, and ASEAN countries expectations that despite their own problems, Japan is the "friendliest" of partners for the future. The jury is still out on Japan, but the worst is over...
• Indonesia is by far the worst affected Asian economy. Yet, the extreme pessimism about Indonesia is unwarranted. A smooth election in June, and transferal of power from the tired and corruption riddled Golkar to a coalition of opposition parties with ABRI still with major powers is the most likely political scenario at the time of writing.
  
  While ethnic and religious conflict has certainly characterised Indonesia in the past 18 months, smart observers will know that this has been ongoing for more than 10 years, especially in the provincial areas, throughout the Sukarno reign. It has certainly escalated with increased poverty and reduced incomes for those who do have a job, but religious and ethnic conflict in a country of 210,000,000 with many ethnic and religious groups spread throughout is absolutely nothing new. The enormous natural resources in Indonesia remain, and in a country where Reformasi is now the status-quo rather the minority veiw, the medium to long term future is much brighter than many oberservers would have us believe.
• Paternalistic or authoritarian governments seem less equipped to face up to the crisis. Thailand's democratic system has seen major improvements in their economy and the newly installed South Korean democratic government has also overseen increasing confidence in their country.
• In the last review we wrote..

  Singapore continues to demonstrate the strength of their system, with currency and stock market falls due in the main to their necessary exposure to neighbouring countries rather than domestic problems. Therein lies Singapore's weakness however. The domestic market is not large enough to support the enthusiastic Chinese entrepreneurs who have made modern Singapore, and there is no alternative but to invest in neighbouring economies. Currency devaluations elsewhere have also made Singapore's already expensive costs of doing business escalate dramatically comparatively.

  
  
  Yet Singapore is going very well thank you. Singapore Airlines has just bought half of Australia's Ansett Airlines.. No cash problems there... and a massive commitment to the Internet and telecommunications means that Singapore is now much better placed to take their place in a global world than some of their neighbours whose reaction to the crisis has to become more insular. As the crisis comes to the end, Singapore will have increased their lead on their ASEAN neighbours in terms of business development and internationalism. An unstated "Look West" campaign is paying strong dividends for this small nation state whose future will always depend on their relationship with others. But Singapore's partners are now increasingly outside the region rather than inside.
• Mainly good news from the Philippines. Estrada has a lot of favours to pay still for his elevation, as has been demonstrated in his light treatment of Marcos cronies and relatives, and favourable treatment of long time friends. Despite this, the economy is showing relative health compared to others.
• China continues to thumb its nose at the West and do things their way. The world depends on China not devaluing the Remimbi any time soon.. and they are showing their power by coming down hard on dissidents and international media. However, privatisation of government run enterprises continues, despite hardship to ex employees who thought they had a governmment job for life. And massive investment in infrastructure such as telecommunications and transport is moving this enormous nation forward slowly but steadily.
• The decreasing spending power of the middle class, especially in Thailand, Malaysia, and Indonesia is being confirmed with the latest salary surveys and spending figures, suggesting caution for those businesses dependent on the previously bouyant local consumer sectors for their revenue. The plight of many Asian airlines and their new strategies is further evidence of this.
• Malaysia is showing very positive signs of growth too, using a strategy completely different from Thailand and Korea. The stock market is at least stable, there are fewer poor in Malaysia (paradoxically enough due in no small amount to Anwar's influence over poverty alleviation programs over many years in UMNO) and inflation has been kept low. Despite a lot of anti-Western bluster, there are some very smart and level heads in government and business in Malaysia.

May 1998

Since our last capsule review key significant developments include:

• Significant losses of confidence in the Japanese economy, always seen as the stable rock of Gilbrator that could potentially stem the Asian crisis. Japan remains the second largest economy in the world nonetheless, but many excesses of management and international business that have brought angst to its smaller neighbours have been exposed in an even more institutionalised and entrenched form in Japan. Cozy government-business deals, high level corruption, and almost inert organization structures, after years of warning,are coming home to roost.
• Indonesia's escalating "crisis monitor" is no longer limited to the economy, but has become a political crisis, as Indonesia's ruling elite prove themselves incapable of any significant fast change as is required..... ....with or without the IMF.
• Paternalistic or authoritarian governments seem less equipped to face up to the crisis. Thailand's democratic system has seen major improvements in their economy and the newly installed South Korean democratic government has also overseen increasing confidence in their country.
• Singapore continues to demonstrate the strength of their system, with currency and stock market falls due in the main to their necessary exposure to neighbouring countries rather than domestic problems. Therein lies Singapore's weakness however. The domestic market is not large enough to support the enthusiastic Chinese entrepreneurs who have made modern Singapore, and there is no alternative but to invest in neighbouring economies. Currency devaluations elsewhere have also made Singapore's already expensive costs of doing business escalate dramatically comparatively.
• Mainly good news from the Philippines, though there is major concerns that Estrada's almost certain elevation to President in yesterday's elections may lead to an old style populist leadership style that could put competitiveness at stake.
• China's increasing attractiveness due to recent Communist leadership changes that suggest a more global-aware style. China to some extent has supplanted Japan as the hope of the region, at least while the Reminbi remains fixed to the US dollar.
• The decreasing spending power of the middle class, especially in Thailand, Malaysia, and Indonesia is being confirmed with the latest salary surveys and spending figures, suggesting caution for those businesses dependent on the previously bouyant local consumer sectors for their revenue. The plight of many Asian airlines and their new strategies is further eveidence of this.

January 1998

The last 12 months has seen major changes in the Asian market. Last year at this time, the Asian market was protected from serious questions about sustainability of growth, competence of its corporate management and political leadership, and adequacy of economic and financial controls by 10 years of ever increasing growth and massive profits for local and international investors. Asian political leaders used the blunt edged sword of an illusory set of "Asian values", credited for the growth in economic power, to bash over the heads of detractors in the international diplomacy arena, and international investors continued to invest at least short term in a region where easy and seemingly assured profits were to be made where no other regional market could come close.

The massive shock which followed the falling stock markets and currencies is now only exceeded by the morass of negativity which has gripped Western (and to a lesser extent local) investors and commentators alike.

Change it is, ... a massive change indeed... And as always, in times of change, opportunities arise where others fade..

But these opportunities are more risky than they were for the past decade. No longer can "easy money" based on unbridled speculation, fast growth and a unique position as the only emerging market worth investing in make up for poor management, government inefficiencies and worse, less than even casual market positioning, and gross cross-cultural marketing blunders. In the hothouse atmosphere of ASEAN especially, and Asia in general, even major mistakes could be glossed over by profits that could be made regardless.

But some companies were certainly aware of coming problems, were adapting to the coming opportunities as well as threats of globalisation, and enhancing their management and marketing to weather the oncoming storm. Those bear like corporates and industries who built up their cave and gathered their provisions in a distracting idyllic summer for the coming winter of discontent are now best prepared to survive.. .. and yes.. even prosper...

There is more bad news to come for sure, as effects of the financial mess knock on, but there may even be a slight hint of a smile on the faces of some battle wounded tigers as the last week saw the first signs of recovery amongst the bad news, as the Tokyo market bounced back and ASEAN showed significant gains in currencies and markets since Monday.

This is no end of the Asia-Pacific Century as is the conventional wisdom of many analysts who 12 months ago were predicting almost unstoppable growth in the region.

...But it will be two to three years for ASEAN in particular to rebound, and there will be no repeat of the halycon days of the early to mid 80's. The Asian renaissance will be built by men and women of temperance and substance.

In the meantime we characterise the Asian market as a whole thus:

• The local Asian consumer will be relatively poorer, the previously rising middle class most severely hit. And the expanding middle class of Asia is where a lot of companies were targeting their products and services. The market for luxury goods will diminish.
• Lower exchange rates will provide a competitive advantage for Asian exporters to Western countries. Lower relative salaries and property values will make it less costly to manufacture and set up a regional office in the region, though of course the quotient of imported machinery and services needs to be considered.
• In contrast, importing into Asia faces the twin threats of unsympathetic exchange rates and lower real wages of consumers/lower affordability of corporates.
• China, and Taiwan seems so far to have weathered the worst of the storm, and many companies, for example in Japan, are changing their targeting to industrial and consumer targets in these countries. Singapore has a small and fairly saturated market despite its economy being stronger than others, but remains a good option for a regional HQ if you can afford it. Indonesia and Thailand are looking squarely in the face of negative growth this year, and the Philippines and South Korea are tipped to be the first of the ravaged economies to recover.
• Longer periods of ROI must be built into business and marketing plans, use the slow market growth period in the next 2 years to research your market and business more carefully, and develop your management and professional staff ready for the early millennium surge in growth.
• In the case of Western companies, be aware that while you benefited from the "rich uncle" syndrome where everything "Western" was viewed with affection in the past, the last year has seen the perception of the uncle change. Asian leaders consistently blame the West; in Mahathir's case he has blamed everybody except himself. Western goods have certainly benefited from this in the past. Indonesian immigration officials are not the only ones "who help you if you help them". It is a world wide phenomenon and the West at present is not seen as helping. There are major initiatives going on to encourage intra-regional trade. Expect demand for cheaper goods from neighbors to increase and demand for Western goods and services to decrease markedly.
• The domestic markets for IT products is expected to be less affected than others. The world has shown some disaffection for Malaysia's MSC project since a high profile launch 2 years ago, US Industry leaders are not rushing as fast to Mahathir's table than they were then. But for various reasons, IT has a healthier prospect than many other industries.
• The exit or downgrading of some multinational operations that will now prefer to do their market elsewhere opens up the business they leave behind for local businesses and other foreign businesses.
• Finally remember we have long memories, Asian civilization far exceeding in age Western civilization! We will well remember those that just came to the party and left, and those that stayed to clean up and plan the way to the next one...