How Asia's Woes Hurt US Companies
Region's turmoil may shave 1 percent off US growth - everything from beef to software.
NEW YORK AND LOS ANGELES
Both Vincent Diau and David Chang have a bad taste in their mouths. The two Los Angeles-based entrepreneurs have spent $1 million trying to sell upscale toothpaste and mouthwash to South Koreans. But with the financial turmoil in Seoul dropping the value of the won, their washroom wares aren't moving.
"We are on hold," says Mr. Diau.
The toothpaste entrepreneurs aren't alone. From textile plants in North Carolina to software firms in Silicon Valley, companies that export to Asia are suddenly starting to feel the effects of a precipitous decline in what was once one of the most dynamic regions of the world.
They are facing volatile currencies, insecure importers, and questionable financing as many of the Asian economies face recession.
The ripple effect in the US, say economists, could be significant since Asian companies buy about one-third of all US exports. The early estimates are for a reduction in the growth of the US economy of about one-half percent to 1 percent in the nation's gross domestic product - as much as $80 billion - and layoffs of workers in select areas.
"Companies will export less to the region and the region will export more to the US, which will mean more competition for American companies," says Robert Hormats, vice chairman of Goldman Sachs International, a New York investment banking firm.
On Dec. 15, the Paris-based Organization for Economic Cooperation and Development (OECD) said the slower growth will reverberate around the globe resulting in a 2.5 percent growth rate in 1998. Without the turmoil in Asia, growth might have been 1 percent to 1.5 percent higher. But the OECD said the volatility of the financial markets makes it difficult to come up with a more precise forecast.
In the US, most of the shrinkage will be in exports, which have been booming. "Our export volume will be up 18 percent this year but will only be up 5 to 6 percent next year," says Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. "That's a huge drop."
Now the good news
Yet there may be a silver lining in the problems overseas: The export slowdown will help keep the economy from growing too quickly - and thus causing the Federal Reserve to raise interest rates. Without the export slowdown, for example, the nation's GDP was expected to hit 3.5 percent - above the Fed's target.
"From a strictly selfish American point of view, having an Asian crisis is probably better than the Fed raising rates," says Mr. Steinberg. "Would you rather see mortgage rates rising or export growth slow?"
The Asian problem will likely hit the West Coast the hardest. It targets many of its exports to the Pacific Rim. According to Standard & Poor's, a rating service, Western states make up 7 out of the top 10 exporters to Asia on a per capita basis.
Indeed, the Port of Los Angeles's top five trading partners are all Asian countries - representing more than $52 billion a year in commerce. In Oregon, exports to Pacific Rim countries - everything from computers to cabinets - have been the fastest-growing segment of the economy.
The region maintains close cultural links to the region, too. One reminder: Koreatown in Los Angeles harbors the largest concentrations of Koreans outside Seoul.
Among the first group of companies to get hit from the recent turmoil have been engineering and architecture firms working on road, bridge, and other infrastructure projects. "Many of these projects were pretty ambitious, with significant money behind them - and that obviously is going to be very disappointing," says Jack Kyser, director of the Los Angeles Economic Development Corp.
That disappointment will be noticed in the earnings next year at Irvine, Calif.-based Fluor Daniel Corp., which builds large infrastructure projects. The company estimates its earnings will be about $100 million lower because of work delays. But the company says it does not anticipate any layoffs since it mainly hires on a per-project basis.
The Asian spill-over will also affect Seattle-based Boeing, which estimates it may deliver about 20 fewer planes per year to Asian airlines over the next three years. But the aircraft manufacturer has orders for 550 planes next year, so a 20 plane drop will only clip production by less than 4 percent. Nevertheless, Brian Ames, a spokesman, says, "We are taking this very seriously and continue to monitor it closely."
Because of the turmoil, Los Angeles officials are bracing for a reduction in tourism. One million tourists per year visit the Golden State from Japan and Korea. The California Division of Tourism reports visitors from these two countries alone support more than 13,000 jobs. They generate millions in retail sales, making their impact felt from Disneyland to Dunkin Donuts.
For many US companies, the trouble in Asia means difficulty in getting paid for work already done. Many American banks, for example, will not honor "letters of credit" from Korean banks.
That's the case for Diau and Chang, the toothpaste merchants. "It's very hard to do international business if the American banks won't honor a letter of credit," says Diau. (A letter of credit is a bank document that promises to pay for goods upon completion of a transaction when the buyer and seller are not known to each other.)
For some US companies, the falling Asian currencies may actually help. Los Angeles-based Mattel manufactures in Indonesia, where the rupiah is down 128 percent since July and in Malaysia where the ringgit has dropped 53 percent. "We may actually get the benefit from weaker currencies - lower cost employment and materials," says Glenn Bozarth, a company spokesman.
Even before the financial turmoil, some companies began to react to a slow down in Asia. This summer Fuller Co., a Bethlehem, Pa., firm that produces capital equipment for the cement industry, began planning for a decline in its Asian business, which represents 50 percent of sales. "We knew that the speed with which they were building cement plants could not last because there would be a surplus of cement," says Kai Lyngsie, the president of Fuller, which employs 1,000 people.
A concrete decline
By this fall, the company's business prospects began to change after it lost two major contracts in Asia. As a result, the Danish-owned company decided to fashion a business plan that involved laying-off 50 of its engineering staff. "Had we gotten these two jobs, we would have still had some lay-offs but not to this extent," says Mr. Lyngsie.
For many companies, these problems are not unlike the financial crisis that convulsed Mexico and other Latin economies two years ago. But this time, the US banking sector appears to have much less exposure. Mr. Hormats says German and Dutch banks are more likely to see losses in their portfolios.
But US banks may actually buy some Asian banks as countries such as Thailand and South Korea open up their financial sectors as part of their agreements with the International Monetary Fund.