Cheaper Exports? Not So Fast
When East Asia's currencies started crashing last summer, Vigor International President Wang Yu-len smelled opportunity. Like many Asian middlemen who export garments and handicrafts to big retailers in the U.S., Taipei-based Vigor had been relying heavily on low-cost factories in China. With the Indonesian rupiah, Thai baht, Malaysian ringgit, and Philippines peso all suddenly trading at less than half their old values against the dollar--while China's renminbi remained stable--Wang figured Southeast Asia would be awash with bargains.
It seemed like a no-brainer. But after a swing through the region in early January, Wang returned empty-handed. Why? Most Southeast Asian manufacturers were hungry for foreign orders but so strapped for cash that they couldn't buy the imported materials needed to fill them. "Suppliers face a very embarrassing situation," says Wang.
TOUGH SLOG. To officials in Asia's most battered economies, the situation is downright depressing. They had hoped that cheaper currencies would translate into a major boost in export competitiveness in everything from toys to computer chips, allowing their countries to emerge quickly from the crisis. But for many, this silver lining is proving to be a mirage. That's because the fuel needed to power these export machines--dollars--is in short supply. Whether they are small Indonesian shoemakers or South Korea's largest conglomerates, the region's manufacturers are having a hard time raising the cash to buy raw materials. Skittish foreign banks and overstretched domestic lenders are refusing to extend letters of credit. Local suppliers, fearful of further currency devaluations, are demanding dollars up front--or are bankrupt themselves.
To be sure, Asia's exporters will register gains as the months roll on. Thai producers of computer components report surging sales, while South Korean conglomerates such as Samsung, Daewoo, and Hyundai are canceling plans to expand in the U.S. and Europe and are shifting production of some electronics goods back home in order to capitalize on the cheaper won. Factories that are either owned or financed by multinationals also stand to benefit.
But for most exporters, it will be a tough slog. Judging from the problems Asian traders and manufacturers are having so far, it seems doubtful that the increase will be enough to enable Korea, Thailand, and Indonesia to export themselves back to health. World markets for cars, chemicals, and many electronics components already are glutted. China, with its vast base of suppliers and efficient infrastructure, remains a ferocious competitor in many industries. And the new advantage of devalued wage rates in Korea and Southeast Asia is more than offset by higher import costs. Most Southeast Asian producers buy most of their raw materials and components from abroad.
Financing costs are also soaring. Interest rates in some countries have tripled, to around 30%, as panicked central bankers try to stabilize currencies. The area's currency devaluations may hurt Asian exporters much more than they help, says Toby Brown, managing director of General Oriental Investments (HK) Ltd. "The tidal wave of cheap exports isn't going to happen," Brown predicts.
Yet buyers for big stores in the U.S. have heard so much about the collapse of Asian currencies that they are already counting on huge price cuts of 35% to 75%. Manufacturers say they can't afford much more than a 10% cut. A Nike spokesperson notes that because 65% of the materials of shoes made in Indonesia are imported, prices on U.S. retail shelves won't change much. "Customers don't understand," says Lydia Hsu, a sales manager at Fairtrade Co., a Taiwan company that exports luggage and handbags made in the Philippines and China. Hsu says one of her big U.S. retail customers wants to renegotiate contracts that were struck a few months ago, hoping to get a better deal. But inflation of raw-materials costs makes that impossible, she says.
The gyrations in the currency markets are adding to the problem. Some Indonesian fabric suppliers, for example, have become so nervous about another dive in the rupiah that they won't quote prices for their products. "Every day, the prices from the mill are changing without notice," says Flor Cayanan, a merchandise manager for Hong Kong trading house Swire & Maclaine, which buys garments in Indonesia. The 70% plunge in the rupiah has actually pushed up the price of Indonesian fabric by 20%, Cayanan says, because of the higher costs for financing and imported yarn. And suppliers no longer accept rupiah.
Meanwhile, banks are pulling back on credit, adding to the paralysis. For many normally sound manufacturers, getting export financing from shell-shocked Asian banks is nearly impossible. A manager at a trading arm of an elite Korean conglomerate says his company is facing difficulty in all export areas, including textiles, electronics, cars, and machinery. Moon Kye Ho, assistant manager at furniture maker Fursys Inc., says he hasn't been able to buy any imported raw materials since December. To fill export orders, he has been drawing down inventories. "If the situation continues for one more month, exports will be hard hit," Moon says.
LENDING FREEZE. For Asia's export logjam to ease, its currencies must stabilize, and governments must make progress in cleaning up bad debts. Then they can start lowering interest rates and inject liquidity back into the system. But relief won't come soon. Many of the region's indebted banks simply can't lend because they remain far short of the 8% capital-adequacy ratios required by the International Monetary Fund as part of bailout packages. "If we don't meet the requirements, we get shuttered," explains a Korean bank exec.
Some Asian manufacturers are so starved for finances that Hong Kong trading giant Li & Fung Ltd., which buys garments and other goods from vendors across the region, says it may have to take on the burden of buying raw materials itself and delivering them to factories. "We may have to do business in a totally different way," says Managing Director William K. Fung.
Not that less-than-expected export growth in Asia will be bad news for everyone. Predictions that a flood of cheap imports will push the U.S. trade deficit to $300 billion this year may turn out to be far overblown. And China could be under less pressure to devalue the renminbi if its competitors falter. A Chinese devaluation would shake financial markets worldwide. But for many Asian exporters that are barely hanging on, time is running out.