The Coming Flood: Cheap Imports

For 1999, price is the new paradigm. What do we mean? In 1998, the economy was defined by demand--too little of it in Asia, but plenty in the U.S. and Europe. For the year ahead, supply will play a key--perhaps a critical--role. Brace yourselves for a flood of dirt-cheap manufactured goods flowing out of Asia. Consumers should love it; companies already facing pricing pressures will hate it.

One of the great paradoxes of '98 was that even though Korea, Thailand, Taiwan, and Indonesia sharply devalued their currencies, they couldn't capitalize on their new competitiveness. The financial crisis was so severe that local banks were not able to extend letters of credit for exports. Asian banks are now recovering. And remember all that talk of global glut and overcapacity? Well, it's still there. Very little in the way of consolidation has occurred in Asia, and enormous factories for electronics, chips, steel, autos, chemicals, clothes--you name it--are just beginning to rev up, pumping out goods again. The quantity is enormous, and the price is, well, cheap. Manufactured goods are the new commodities. The analogy is oil and coal.

Governments throughout Asia are making tremendous efforts to cut costs even further. Singapore's Committee on Competitiveness, a joint government and business group, has requested a 15% reduction in total wage costs. In all, it will get cuts equal to 7% of Singapore's gross domestic product. Hong Kong is urging workers to take 5% wage cuts. Thailand has asked manufacturers and merchants to cut prices on 18 categories of goods. All in all, prices are falling sharply all over Asia. (The wholesale price indexes for both Japan and Taiwan were down at a 13% annual rate last quarter from the year before.) Low-priced goods will wash up on U.S. shores shortly.

This is the new world of deflation. Prices will fall. Profits will be squeezed. The corporate game will be boosting margins. Welcome to 1999.