Market Q&A: Winners & Losers
Andy Xie on markets, e-commerce and the future economic landscape
By MAUREEN TKACIK
April 7, 2000
Web posted at 11:30 a.m. Hong Kong time, 10:30 p.m. EST
So, Hong Kong's New Economy plays were looking like Thai banks for awhile there. And please don't doubt my sincerity when I say that. I just find it sooooo gratifying to see all those deserving GEM listings and commendable, potential-packed backdoor listings surging by the double-digit percentage points today. Hikari Tsushin International (remember, the battery maker formerly known as Golden Power) up 17%. Tom.com up 6%. And sweet relief it was, I tell you, to see PCCW finally rallying again and--hallelujah--closing above HK $15 ($1.90). I mean, how would Hong Kong's fledgling (but as I said, potentially fraught) technology sector develop if it weren't for the housewives, the bike messengers, the senior citizens and the seamstresses out there investing in the high-tech future of Hong Kong?
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That aside, I've called Andy Xie, because he happens to be an economist and not a stockbroker, and I was looking for a broader, more reasoned view of things. As it turns out, we end up talking about what B2B e-commerce means for the future of Asia. C'est la vie.
Q: So you've just returned from Korea and Japan. Now, I know Korea's Old Economy is having a little trouble keeping up with its New Economy, but in general how would you rate its economic performance?
A: Oh, the economy is zooming. We're talking an 11%-12% pace, but the risk with that, as always, is that you don't have the capacity to grow so fast and so you run into inflation problems.
Q: Don't they have an Alan Greenspan-type to stop... the madness?
A: Well, you've got elections coming up very soon, and politically it's just not easy. Because if you slow down the economy you make things very hard for the financial sector, which is relying on this economic growth to stay afloat because it still holds so many nonperforming assets. What they need to do is either raise interest rates or let the currency appreciate. You raise rates, you annoy the banks; you let the currency appreciate and you mess up the lives of the exporters. Both are very key in Korea's economy.
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Q: So what do I do? Borrow a few hundred million Korean won at their nice pre- election- low- as- you- can- go rates, convert it to euro's, and pay it back when people are lugging their currency around in suitcases it's so worthless? You think they'll check my credit rating?
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A: Nah, I still believe that after the election, in a couple of weeks' time, the government will raise rates as much as a hundred basis points.
Q: Fab. Okay, so let's talk KOSDAQ. Is New Economy craze really as bad up there as it is here?
A: Chaebol [conglomerate] reform is not happening as fast as most people had hoped, so if you want to be bullish--and everyone wants to be bullish--you have to look somewhere else. Outside from SK Telecom, Korea Telecom and Samsung Electronics, the KOSPI just isn't that sexy to retail investors right now, so they're speculating on these mini New Economy plays, like Daum and Medidas, Hanaro, Serome ...
Q: Mini companies, mega-valuations. Did you realize the average price to sales ratio on KOSDAQ is two or three times bigger than the NASDAQ average?
A: It's a supply problem in Asia; there just aren't enough New Economy stocks. But I would buy electronics stock and chipmakers like Samsung Electronics and a lot of the Taiwanese stocks. We're in the middle of a very good cycle, and North Asia is just going to continue receiving new orders because it has built itself into a very low-cost base for manufacturing those things. China is going to become a major part of that in the next couple of years, which will change the landscape a lot and make Asia an even more appealing place. But what is really going to change the landscape of the economy over the coming years is the advent of B2B e-commerce.
Q: Oh god, here we go.
A: No, I'm serious. B2B is going to be a commercial necessity for these companies, and it's going to force the inefficient players out of the market really quickly. All Asian companies try to make their operating costs very opaque; that's why there are still a lot that you don't see going public, and that's all going to change. Asian contract manufacturers are going to basically be at the mercy of a few of their distributors, say, Dell, Motorola, Compaq, NEC... it is in the interests of these distributors to choose efficient companies. With every step of the supply chain transparent and available over the Internet, it will force the inefficient companies immediately. It will also move business to China very quickly. What it effectively changes is the working capital to sales ratio. In Asia that ratio is about 20% to 30%--for American companies it's only about nine or 10. After B2B platforms are put in place, it can bring us down to about a 5% working capital to sales ratio.
Q: Break it down for me TIME style, Andy. Who are the winners and losers?
A: The losers are the go-betweens, you know, like in China sometimes factories only manufacture products for one distributor, because the manager knows someone who knows someone who owns a chain store in some province. I've spoken to a lot of garment manufacturers in my day, and most of them only have one distributor; Liz Claiborne or Levi's, Nike or Adidas. Hong Kong is full of these go-betweens. The winners, short and medium-term, anyway, are the people who create the platforms for trading online, like what Li & Fung are doing with Lifung.com.
Q: So basically, the losers are middlemen and the winners are other middlemen?
A: Or middle-persons, if you prefer. But yes, that's true. The ones that make money are the ones who catch on fast and have a lot of connections the way Li & Fung do and exploit their current customer base to make it online. Another thing Li & Fung wants to do is add value by increasing customization. For instance, you're a store in the Village and you want 50 pair of black boots with purple shoelaces; you can get it, customized online. But there are a lot of losers and a lot of people out of a job as a result of this story.
Q: So when does all this happen?
A: Over the next five years we should see a pretty impressive infrastructure develop, especially in Hong Kong where opportunists see a chance to make money while they still have some pricing power. Also in Taiwan where a lot of their partner distributors in the United States have forced them to automate a lot of their business already. Korea and Japan are under a lot less pressure to take advantage of B2B because the chaebol system cuts out the need for a supply chain--every aspect of the supply chain is under one roof. But obviously they will not become as competitive as they need to be if the system doesn't reform.
Q: Tell me what you think of Hong Kong's current economic state. Sure, the stock market rages on and GDP grew last year and the retail culture seems pretty healthy (in an unhealthy sort of way), and you don't have to tell me the job market's red-hot (ahem) ... but what does the macro picture tell you?
A: Most of Hong Kong's GDP growth has been real, not nominal. It's grown as a result of deflation, so while people are richer they don't necessarily feel richer; there's no wealth effect, there's no pricing power.
Q: So I might not have gotten a raise, but my rent is going to stay down?
Q: Okay, does the bull market stay bullish?
A: If you're asking whether the banks will come back, whether property will come back--those are all about inflation, and you have to have a lot of liquidity in the system to build the foundation of a strong market in banks and property.
Q: And right now all the liquidity is in tiny little tech stocks?
A: Right. But you're going to keep on seeing backdoor listings, you're going to keep on seeing IPO's and the focus is going to come back to China again. There are a lot of Chinese telecom assets that have yet to come to market, starting with China Unicom but it goes a lot farther than that. Those should hold the market's interest for awhile. You've got a lot of internet companies--a lot of B2B companies, I might add--that have yet to list and the whole year will see a lot of listings and reverse takeovers. It's Hong Kong. They'll find something to speculate on.
Be it overvalued tech stocks, high-profile mergers or corruption scandals, the region's stock markets can go on wild rides. Join the discussion here
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