More than 4000 Taiwanese businesses in Southeast Asia were among the first to be hit by the recent Asian financial storm. What is their situation? Where do they go from here?
The offices of Asia's largest industrial cooling tower manufacturer, Liang Chi, are located in a run-of-the-mill 7-storey office building on Changchun Road in Taipei. Various awards and pictures of the company's chairman, K.P. Chang, with high-ranking officials from all over Southeast Asia are displayed on the walls of the unassuming reception area. One picture in particular, taken with Thai King Bhumipol Adulyadej, catches one's eye.
One can clearly see where Chang has staked out his business' territory by looking at where his three sons are. The youngest has been sent to Thailand where he has married a Thai bride. There he runs his father's Thailand plant, as well as overseeing joint-venture factories in Indonesia and the Philippines. His second son is in mainland China where he supervises the company's five mainland factories. The eldest is in Taiwan where he helps his father at company headquarters, taking responsibility for the Taoyuan factory, foreign technical cooperation and global strategy.
When will sales stop falling?
Now just past 60 years of age, Chang started his company from scratch. He first set up a factory in Thailand all the way back in 1978 and has since developed deep feelings for the country. The recent regional financial crisis began in Thailand and, six months after the initial shock, tremors are still being felt. Chang says feelingly, "I've been involved in the Southeast Asian market for 20 years. Who would have thought that when our operations were going so smoothly, we'd hit this kind of once-in-a-lifetime financial crisis."
In the wake of the financial storm, half-finished buildings litter the whole region, their construction having been called to a halt. For Liang Chi, whose overseas plants tend to sell to the domestic market in which they are located, declining sales have been unavoidable. Orders for cooling towers are down 20~30% from their levels in the second half of last year. Even if the turmoil were to let up and the situation stabilize, this year's sales would probably only reach 1996's levels. Worse, it seems likely that the bad times may last for two or three years.
"It's not that bad, but we are retrenching." There is a note of worry in Chang's calm description.
In recent years President Enterprises, the leader in Taiwan's food industry, has also set up shop in Southeast Asia. At first, things looked good for the instant noodle factory the company set up in Indonesia in 1993. "Less than three years after opening, we were turning enough of a profit to expand. Eight production lines were running 24 hours a day. It was no mean feat," says C.Y. Kao, Chairman of the President Group, in a voice both proud and disappointed. Last year, with the beginning of price competition in the instant noodle market, the war was on. They didn't expect that Indonesia would encounter this unprecedented economic chaos, causing sales to slide. New plants, unlike old ones, haven't yet recovered their construction costs, and President is also losing money on the factory's operations.
But Taiwanese businesses have as yet been unharmed by the more recent media focus-anti-Chinese riots in Indonesia. Chen Ming-chang, assistant director of the Association of Taiwan Manufacturers (ATM), says that when Indonesia's currency fell, the cost of imported goods rose sharply and the value of people's assets shrank. In addition, a few business people took to hoarding necessities such as food. They became the objects of angry attacks. Most Taiwanese firms are different; they produce for export. It was just that with the news of the riots spreading, it was hard for these firms to feel safe. The ATM has strongly urged everyone to be prepared, but so far things have been quiet for these firms.
Caught in the foreign debt trap
Sales have dropped and revenues are down. To top it off, in the wake of the storm, interest rates have shot up all over the region, greatly increasing the debt burden. And foreign loans have many Taiwanese firms hurting even more.
Liang Chi borrowed US$1 million in August of last year when the Thai baht had fallen to over 30 to 1 versus the US dollar.
"At the time everybody thought that the baht had fallen too much and would rebound. In addition, the interest rate on a US dollar loan was only 7%, much lower than the rate on a loan in baht (then 12%, now 16%)," explains Chang. Thinking that they "could make money off a rebound in the currency and off the interest rate differential," many Taiwanese firms took out foreign loans. Nobody anticipated the baht's eye-popping fall to below 50:1 versus the US dollar.
What this means is that a company has to sell more goods in the local market to service the same foreign-currency-denominated loan. "Based on the current exchange rate, we've lost more than B10 million!" Chang admits that his moods have being swinging wildly with the movements in the baht for the last two months. For the moment, Chang is just servicing the interest on the loan, and hoping that the baht will quickly rebound.
Chang says it's fortunate that the money was borrowed from a Taiwanese bank-the Bangkok branch of ICBC-and that the loan was guaranteed by the assets of Liang Chi's headquarters in Taiwan. Because this is the case, not only has credit not dried up, but the bank is even encouraging them to borrow more.
Liang Chi sells its products in the market in which it produces them, so a foreign currency loan is not worthwhile for it. But for Acer, which has set up a motherboard plant in the Philippines' Subic Bay, its US$50 million foreign currency loan (half denominated in US dollars, half in Japanese yen) makes sense because the company is exporting. "Our income is in US dollars and we make loan payments in US dollars. They offset one another, and we don't suffer as much [as a non-exporter]," says Philip Peng, vice president of corporate finance and investment management at Acer.
Given that Southeast Asian property prices collapsed, causing asset values to shrink just after Acer had invested a huge sum and before it had paid off loans to purchase equipment, does the company feel that it "went south" at the wrong time? Peng takes the long view. "Land and a factory are long-term investments. We won't be selling our land or our factory, so there are no losses to speak of."
Rethinking the strategic blueprint
President, Liang Chi and Acer are all alike in that they have built a tripartite domain around Taiwan, Southeast Asia and the mainland. Such an arrangement is typical of Taiwan's major firms. Southeast Asia and the mainland entice firms with their low production costs and their market potential. In addition, about 70% of the economic strength of the region is concentrated in the hands of Chinese business people who, in turn, are closely tied to Taiwanese business people. This drew many Taiwanese to the region more than 10 years ago, making them some of Southeast Asia's earliest foreign investors. Then four years ago, the government here began pushing its "Go South" policy aimed at slowing Taiwanese investment in mainland China. This policy started a whole new wave of Taiwanese investment in Southeast Asia.
As of last September, there were more than 4200 Taiwanese firms invested in the four countries hardest hit by the crisis-Thailand, Malaysia, the Philippines and Indonesia. Their investments totaled nearly US$32 billion, putting Taiwan among the top five foreign investors in each of these nations. (See chart on facing page.)
"Taiwanese firms were among those first hit by the Southeast Asian financial turmoil. The crisis has affected both their business territory and their competitiveness," says Council for Economic Planning and Development head P.K. Chiang, who led a fact-finding tour of these nations in January. He says that the purpose of the tour was not only to express Taiwan's willingness to help those countries hit by the crisis, but also, "to show our concern for Taiwanese firms [in the region] and our understanding of their predicament."
Though they are caught up in the storm together, there are great differences between firms, and what is good for some may be bad for others.
"Those who sell to their domestic markets are naturally going to suffer," states Chang. Liang Chi is fortunate in that imports only account for 10~20% of its costs and most of these imports come from Taiwan and the mainland. If this weren't the case and the company had to buy these parts from Europe or the US, with the tight regulation of currency markets right now, and the near impossibility of getting US dollars, they wouldn't be able to hold out.
Moreover, the drop in sales provides them with an opportunity to do some restructuring. The company's Thailand plant originally had 230 employees, but this number has been reduced to 200. Unsuitable employees have been fired and better candidates have been found to take their places. "Right now, there is a strong trend to cutting back on staff and so it's much easier to find workers than it was. And workers are willing to work harder," says Chang.
Who wins and who loses?
Chang, who also sits on a national manufacturers' association's council for Southeast Asian investment, understands the situation of others in his industry. He says that Taiwanese firms can be neatly divided into "losers" and "winners" based on whether they sell to the markets that they produce in or sell for export. "Those that produce and sell in the same market are drinking from a bitter cup. Those that export are smiling."
Acer is one of the lucky ones. It heeded the call to "go south" two years ago, renting a factory in the Philippines' Subic Bay Industrial Zone in which it set up a facility producing motherboards for export. At the end of last year, an Acer-built factory with a capacity three times that of the first went into production in the same area. As the financial storm has swept through Asia, Acer has been one of those profiting amidst the disaster as the crisis has greatly lowered its costs.
"The monthly salary of local Philippine labor averages 4000 to 5000 pesos. Before the crisis, the peso was more or less on a par with the NT dollar, trading at 26~27 to the US dollar. Since the crisis, its value has fallen to around 40 to the US dollar. That saves us about NT$1000 per person per month in labor costs," says Peng Chin-pin. Currently Acer employs about 1500 people at Subic Bay, which means the company is saving more than NT$1 million per month in personnel costs. With increases in production capacity in the future, the number of employees will also increase, making these savings still more apparent. Peng forecasts, "Overall production costs of motherboards may drop 20~50%."
"When costs drop, prices become more competitive. That means more orders. More orders bring costs down another step, creating a 'virtuous cycle' which brings economies of scale into play," says Peng optimistically. Since motherboards account for about 25% of a PC's production costs, when Philippine production is sold back to the parent company in Taiwan, it will help Acer cut prices on its PCs. Last year, the trend in the US computer market was to sub-US$1000 PCs. This year, prices will drop to US$800. "This new pricing strategy will stimulate demand in the US PC market. But it is also a major challenge for manufacturers' operational management." At this time, Acer's long-term strategy of distributing its production throughout the world to lower risk and simplify planning will bring in a further harvest.
A loss and a gain
Another question of interest to many to come out of the crisis is where to get a really good deal. Even before the government's call for "mutual benefit and increased investment," Taiwanese firms in Southeast Asia were already quietly taking action of their own. Liang Chi, an old hand in the Southeast Asian markets, knew exactly what it should do and acted quickly.
Chang says that Liang Chi's Thailand plant was originally co-owned by another Taiwanese business person. After the first wave of the financial crisis, this partner needed to sell his stake to bail out another venture. Around the Lunar New Year, Chang bought out his partner for 70% of the value of the shares. Not only was he able to help out a friend, he was also able to take full control of the company's Thailand operations. It gave him an instant feeling of relief.
"If you ask around, there are deals everywhere," says Chang. He says that what he did, taking full control of his company, is the most common sort. There are other Taiwanese firms buying up factories and equipment from others in their own industries, paying 80% of the original price in baht. When the 50% depreciation of the baht versus the US dollar is factored in, the buyers are getting a 60% discount. It's a steal.
Though a small number of Taiwanese firms have gotten burned by their previous investments in Southeast Asian property, now seems like a good time to enter this market. For many years, Liang Chi has wanted to find a piece of property in downtown Bangkok on which it could put both a factory and offices. But property prices in the city were just too high, so there was no way to make this dream a reality. Now, however, it may be possible to bring the com-pany's dream into being. Luckily for Liang Chi, it has these other opportunities which make up somewhat for its declining sales.
Waiting for the dawn
Whether suffering or profiting amidst the ruin, those Taiwanese firms which are invested in Southeast Asia are all hoping for a return to stability, and that their businesses get back on track.
"In the final tally, a company's operations are not only dependent upon its apparent costs," says C.Y. Kao. If the turmoil continues, the economies and governments of these nations will be shaken, inflation will sky-rocket, and social stability will deteriorate. . . . Together these would create unpredictable risks. With elections in March in Indonesia and in May in the Philippines, there are challenges immediately before us. These will be surmounted only if the financial situation stabilizes.
In mid-February, anti-Chinese rioting began in Indonesia, where Taiwanese businesses have invested most heavily. At the same time, the International Monetary Fund has threatened to cut off the US$40 billion aid package it has put together for Indonesia. A crisis which had looked as if it might be nearing its end now seems to be gearing up for a new beginning. When will these hard-working Taiwanese business people be able to put aside these cares? They are waiting patiently for the answer.
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In the aftermath of these financial shocks, many nations have seen large numbers of companies bankrupted, explosive growth in unemployment and sky-rocketing prices. The photo shows Indonesians lining up to buy food on a Jakarta street before prices rise. (courtesy of Agence France-Presse)
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Taiwan's Investment in Southeast Asia
Amount of Taiwanese investment (US$100M)Rank among foreign investorsMajor areas of investmentThailand99.55Hardware, information technology, plastics and rubber, textiles and chemicalsMalaysia80.12Electronics, textiles, rubber, lumber and wood productsPhilippines7.65Cement, textiles, electronics and chemicalsIndonesia131.46paper pulp, textiles, non-metals mining and agricultureSources: The Thai BOI, the Malaysian MIDA, the Philippine BOI, the Indonesian BKPM and the ROC's CEPD.
Graphics by Tsai Chih-pen
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Liang Chi has been operating in Southeast Asia for 20 years. In the midst of losses associated with the financial turmoil, it is also making gains. In spite of the chaos, the company hasn't lost its feeling for or confidence in the region. (photo by Diago Chiu)
Liang Chi has been operating in Southeast Asia for 20 years. In the midst of losses associated with the financial turmoil, it is also making gains. In spite of the chaos, the company hasn't lost its feeling for or confidence in the region. （photo by Diago Chiu）
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