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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

Who Will Lead?

Every business sector is hurting amidst Asia's malaise, making it hard to pick a launch pad for a rebound


WHICH INDUSTRY WILL LEAD Asia out of its misery? The sad answer: none of them are looking all that vigorous. While exporters look the best and will bring in crucial foreign currency, every industry is glutted with excess capacity built up by over-enthusiastic investment in the past, and intense competition may swallow up the gains. A review of five key sectors:

ELECTRONICS
EVERYONE'S TRUMP CARD

If there is a bright spot, this is it. The global electronics and computer market is forecast to grow 17% in 1998, maintaining the pace of the last two years despite the turmoil in Asia. The region is a key supplier to the world. Everyone from the giants in Japan to the hustling memory chip, monitor and disk drive makers of Korea, Taiwan and Malaysia will be relied on to lead an export-driven recovery, especially since weak Asian currencies have boosted their price competitiveness. The trouble is, they all invested in capacity expecting the over-20% growth rates of the early 1990s to return, so expect price cuts.

The weaker yen has already helped Japan's Toshiba boost exports. Currency fluctuations added $245 million to its April-September profit. But the grass is not much greener overseas. "Price competition is fierce in the U.S. PC market now that $1,000 models have made their debut," says Wada Kozo, Toshiba's senior vice president. "The Southeast Asian market is also expected to stagnate in the January-March period of 1998." Another downside to intensifying exports is that it could re-ignite the old trade dispute between Japan and the U.S.

The picture is bleaker outside the computer arena. Not only are factories in China, Malaysia and elsewhere making more TVs and VCRs that customers want to buy, the consumer electronics segment hasn't had a big hit since CD players wiped out record turntables. Christmas 1997 was supposed to be the year for the DVD (digital video, or versatile, disc), the high-capacity disc format that could eventually replace video tapes, CDs and CD-ROMs, but that has not happened largely due to the lack of software. Now analysts are saying it may not happen until 2000 to 2003, depending on the market.

Toshiba, which launched its first DVD player in November 1996, will try pushing from the other side of the market by investing in Japan's largest video/CD rental chain, which will start renting DVD software. Wada is optimistic about the future. "Sales have been growing at a far faster pace than [for] existing media such as LD players or CD players," he says. "We expect an attractive multimedia market, steadily growing in tandem with the ongoing development of digital technology." Not right away, though. The company sees consolidated sales growing a mere 1% and profit to drop 11% in the year ending March 1998.

-- By Sangwon Suh and Murakami Mutsuko / Tokyo

CHEMICALS
SHAKEN COLLOSUS

The giant oil refinery or petrochemical plant used to be a symbol of economic development and just about every Asian nation tried to become a regional leader in chemicals and petrochemicals. Result? A glut of plants and products. The huge facilities must be kept running as near capacity as possible to achieve economies of scale. Then mix in the soft price of the main raw material, oil, and weak regional demand. What do you get? Price cuts by producers desperate to keep operating.

Ethylene prices have halved in less than two years. Pure terephthalic acid, which goes into polyester fiber, is a third of what it was 18 months ago. Salomon Brothers initially forecast some recovery in the global chemical industry by the end of 2000. Now, due to Asia's economic woes and continued price deflation, that has been pushed back to 2003. Hardest hit will be the countries with the greatest overcapacity -- notably South Korea, Thailand, Singapore and China, as well as Indonesia and Malaysia for some products. As producers try to export their way out of trouble, they will push prices even lower. Meanwhile, their costs are going up because oil, even when weak, is denominated in strong U.S. dollars.

All of that means producers must do more than cut costs and sell harder -- they have to match their products and markets like never before. Taiwan petrochemical giant Formosa Plastics expects 1998 to be a good year. Its edge is the shortage of petrochemical products within Taiwan, where it sells 90% of its output, says President C.T. Lee. If domestic demand falters, Lee sees imports suffering before local products. Formosa Plastics even has a new naphtha cracker coming on line this year, but its output will be absorbed by the company's downstream production of intermediates and end-products like PVC pipes and polyester. In contrast, Lee says, South Korean producers export half their output. Formosa Plastics is not entirely immune -- its sales of acrylic fiber, which finds half its market offshore, are likely to be hit hard.-- by Jonathan Sprague and Laurie Underwood / Taipei

AUTOMOBILES
EXPORT TRAFFIC JAM

A year ago, Malaysian carbuyers lusting after a new Proton Saga had to wait up to four months for delivery due to short supplies. Today, you can choose from 40,000 cars that sit idle in showrooms or storage lots. Perhaps Koreans would prefer a model from Hyundai, Daewoo or Kia? No waiting either. There are at least 100,000 brand new Korean vehicles with odometers stuck around zero.

A car glut of unprecedented proportions is looming in Asia. Even before the tiger economies were defanged, carmakers were grappling with overcapacity thanks to huge investments in new plants this decade. Now, as demand withers in most countries across the region, the wheels are coming off. Analysts predict the Asian car market may shrink by as much as 4% this year. Automakers are slashing production, staff and investment to cope. A multi-billion-dollar new Proton plant in Malaysia has been shelved indefinitely, while the country's other local carmaker, Perodua, expects to slash 1998 output by one-third. In Thailand, General Motors, Honda and Toyota are deferring planned investments.

Hyundai, the top carmaker in Korea and one of the largest in Asia ouside Japan, cut its 1998 domestic sales target by 26% compared to 1997, the first year-over-year reduction in its history. To move inventory, the company has resorted to leasing schemes and no-interest financing, despite the burden on its own bottom line. Hyundai also suspended some model lines and plans to cut its workforce by 5,000 over the next two years. One sector the company is counting on to be bright is exports -- if the plunging won settles at 1,200 to the dollar, it figures its price competitiveness will improve 10%-15%, and plans to export 720,000 units in 1998.

But is there salvation in exports? Probably not too much. Devalued currencies mean Asia-built cars will cost less in other markets, but within the region sales will be stifled by tariffs as well as the economic malaise. Competition will be fierce in the U.S. and Europe, the world's top two markets, and new plants are mushrooming in Latin America and Eastern Europe; by 2002, factories worldwide will be capable of churning out 20 million more cars a year than markets can absorb. Asia's ambitious automakers will suffer from sticker shock in reverse for years to come.-- By Jim Erickson and Laxmi Nakarmi / Seoul

CEMENT
HARDENED HOPES

Not so long ago, Asian builders were using so much cement that Mexico's Cemex could ship its product across the Pacific Ocean and make money. That was then. Now, after cement industries throughout Southeast Asia pumped up their production capabilities to fill domestic demand, infrastructure projects are being put on hold and the demand for cement, which had been growing 20% annually, suddenly looks weightless.

Indonesia is typical. Since late 1993, Indonesia's cement industry has increased its capacity 55%, and builders still had to import cement in 1997. Not this year. The managers at Indocement, the Salim Group unit with about 35% market share in the country, will have to use all their business savvy -- and advantages like efficient operations and good plant locations -- to prevent sales from congealing in 1998. The outlook isn't bright; domestic construction is slumping. Indocement is hoping to boost sales to Singapore, Vietnam, Myanmar, Bangladesh and Sri Lanka this year. Analysts add the company has debts nearly double its 1996 pre-turmoil sales.

Indonesia's cement industry is still adding capacity -- 15 million tons over the next two years -- but analysts expect a surplus of 12 million tons in 2000, nearly 20% of the total. John Rachmat of Schroder Securities says 1998 will be a year of scrambling to find markets: "Sales volume will be nowhere near enough to make all the excess capacity turn profits." The question for the coming year: "Who will not go bankrupt?"

The same question holds in Thailand, which is suffering from a terribly glutted supply of new buildings. Two years ago, it had a cement shortage. In 1997 the surplus was 5 million tons. That could well rise to 9 million tons by 2000 given recession and abandonment of ongoing construction projects. The list may stretch to Malaysia and the Philippines. But it does not include China, which accounts for more than half of Asia's entire cement production and is so far using 97% of its capacity. It also doesn't include India, at least not yet. -- By Tim Healy and Joel Tesoro / Jakarta

AIRLINES
TAKE-OFF DELAYED

Asian airlines' hopes used to fly one way -- up. Now, slowing economies and surging costs have brought them down to earth. It may be years before things look up. "The worst is yet to come," says Peter Harbinson, head of the Center for Asia-Pacific Aviation. "We will see more over-capacity, lower yields, bigger losses, more price cutting and even fewer passengers."

Economic worries at home mean fewer people traveling for pleasure -- especially to countries where their money is now worth less. Korean, Japanese and Taiwan tourists used to fill most of the seats. Now only the Taiwanese are still traveling. In the beginning of 1997 airlines expected the number of passengers to grow some 12% a year for the next five years. Now they hope for 6% annually up to 2001. Airlines are particularly vulnerable to the currency devaluations in the region. Around half their revenue is in local currency, but they have to pay U.S. dollars for fuel and aircraft. Most airlines are already feeling the cash crunch. Korean Air said in December it will sell five passenger aircraft to its creditors, and lease them back. And Cathay Pacific had to hold off buying several Boeing 777s.

Weaker currencies in destination countries may eventually get tourists to travel, but some airlines are not waiting. After Cathay's revenues fell 17% below target in October, the Hong Kong carrier launched a "Super Offer" including two-for-one fares to the territory plus hotel rooms. The deal was a hit in Taiwan, Australia and the U.S. but failed to lure back many Japanese tourists, and its benefits are still being figured. "We did not expect immediate profit," said spokesman Kwan Chuk-fai. "But we expected it to bring long-term positive effects." More efforts are on the way. In January, Cathay is bringing the Takarazuka Revue, the Japanese all-female variety troupe, to Hong Kong. "The troupe has a huge loyal following in Japan. Wherever the revue goes, a small army of fans is sure to follow," Kwan says.

-- By Susan Berfield and Law Siu-lan / Hong Kong

With additional reporting by Assif Shameen


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