Rough Ride in Asia

Jan. 1, 2003
After the Hong Kong stock market crash, Asian markets are proving to be a bumpy ride for electrical manufacturers and marketers.Asian markets known for

After the Hong Kong stock market crash, Asian markets are proving to be a bumpy ride for electrical manufacturers and marketers.

Asian markets known for growth at the beginning of the year have taken a dizzying plunge leaving American electrical manufacturers and marketers there cautious.

Companies had sound reason to invest in Asia based on predictions of stability, including one by an economist at the annual meeting of the National Association of Electrical Distributors (NAED), St. Louis, Mo. Five months later, Hong Kong's stock market reeled under record losses equaling nearly a quarter of its value. Asian stock markets collectively lost $400 billion, according to Fortune. Still, the man who offered that forecast during his presentation at the NAED, John J. McDevitt, a 3M Corp. economist, St. Paul, Minn., says the "hiccup" in Asian markets is temporary. "The long-term market outlook still remains good," McDevitt says. "Growth rates that had been in the 7% area - they are now coming down to the 5% to 6% area. We are still, in terms of growth, substantially higher than the U.S. economy."

Asian markets are providing a bumpy ride, says John SantaCroce, COO and senior vice president of the electrical, marine and international divisions of Argo International Corp., New York, N.Y. Serving large industrials, the mining industry, utilities and the marine market, Argo has a 220-employee distributorship with 22 locations globally and $45 million in electrical product sales alone. The company has sales offices in China and Singapore.

"It's definitely slowed us down over the last few months. What has happened is the devaluation of currency and Argo selling in U.S. dollars. It has made the goods that we sell more expensive," SantaCroce says. "We've had our share of orders put on hold, orders canceled and quotations not closing."

Thirty percent of Argo's business in the Asia comes from Thailand, Indonesia and Singapore, and those economies are hurting because of the market and devalued local currencies, SantaCroce says. "Our business is down probably 20% over the past few months," he adds.

Argo is compensating by attempting to expand elsewhere, including Australia and India-locations the company likely would not have pursued had Southeast Asia continued clicking along. In addition to seeking new sales areas, the stock market decline has forced Argo to rethink plans for possibly opening offices in Indonesia or the Philippines, says SantaCroce.

"Those are probably now not as aggressively pursued as they were six months ago," he says. "We were looking at expansion to China, and probably still are ... but I am a little bit cautious about China maybe being the next one to fall. I just think that they've expanded enormously over the last few years. The money's in-flowing more than there's out-flow and I think there will probably be a devaluation."

3M's McDevitt says Asian market changes should spur increased U.S. demand for lower-priced imports in coming months, a point supported by Business Week analysts who conjectured about potential Asian deflation.

"The currency change in the area will make those Asian exports very attractive, particularly for electrical appliances and for machinery," McDevitt says. "We just need to maintain our perspective and try to separate the financial side of the picture from the manufacturing side of the picture, and the manufacturing side continues quite good."

Korea's economy, for example, has been "in the tank for some time," but sales remain solid, says Bill Barron, vice president for sales and marketing, Littelfuse, Inc., Des Plaines, Ill. Littelfuse has manufacturing facilities in Korea, China and elsewhere internationally. We are still experiencing sales growth there, even in the lousy economy, because we are bringing some Western-style marketing and production methods to the small companies that we bought, and doing some consolidating between the two of them," Barron says. "There are no efforts to down-size or cut anything there."

Korea's internal fuse consumption may rise or fall with the economy, but Barron says that's not a grave concern because Littelfuse fuses are basic components in the country's electrical exports, such as televisions and computers and related equipment. "Because our products tend to go into higher-end products that are made over there and typically exported to the United States and Europe, the current economic problems over there will have minimal effect on us," he Barron.

A huge growth market of the future, China is arguably holding its own during the economic upheaval in Asia while surrounding countries struggle. Barron says Littelfuse's China sales are in the $3 million to $4 million range.

Reports in business publications that deflation could emerge in Korea, Japan and Southeast Asia, causing major price-slashing on exports, are unlikely to come true on a major level from a practical, financial standpoint, Barron says. Twenty-five percent of Littelfuse's expected $270 million in international sales this year are in Asian markets.

"Cutting prices just to dump stuff doesn't necessarily maximize the revenue," he says. "I don't think they're going to drop prices that dramatically on exported products."

SantaCroce says Argo is used to the risks of working in a world market, having lost business following confrontations between Iran and the United States, and Iraq and the United Nations. "Devaluation, political risks, etc., are part of the excitement," SantaCroce says. "We're not going to pull back in any way."

3M's McDevitt remains convinced the region is a good location for electrical businesses. However, other businesspeople familiar with Asia are very concerned that various governments, including those in Korea and Thailand, have not shown a resolve to keep their economies on track. "This is a good time to maintain a presence in Asia either as a distributor, manufacturer or a supplier," he says. "Just because there have been some temporary disruptions in the stock market or the currency in the area, there is no reason not to stay focused on Asia."