Cover Story: The Tiger and the Dragon

As Asia's dragons try to recover from the economic crisis, their ailing corporations offer a glorious globalisation opportunity for India Inc.. How should you develop an Asia strategy? Which are the hottest Asian countries to invest in? Are the risks worth the rewards? a BT- ERNST & Young asianisation roadmap.

It is a gateway to growth. An invitation to internation alise. A spring-board for strategic globalisation. Asia may lie smouldering, but glowing amidst the embers of yesterday's prosperity lies tomorrow's opportunity. With the Thai baht crashing in July, 1997, triggering off an economic calamity, and spreading the contagion to Indonesia, Malaysia, The Philippines, and South Korea, Asianisation has suddenly become a lucrative proposition for India Inc.. To the country's insular corporations, only a handful of whom have pursued the strategy of staking a claim on global markets, post-crisis Asia represents more of an option than an opening. For, it offers India's CEOs a unique chance to spread across markets, grow bigger, and become globally competitive.

Asia-where easy money, low capital productivity, huge short-term borrowings, and a well-entrenched culture of cronyism and corruption have coalesced to bring economies to their knees-is now the world's most tantalising firesale. Indeed, acquisitions in the world's fastest-growing region, which once appeared impossible even to the mightiest of transnationals because of its protectionist policies, are now within the realm of the possible for smaller companies too. Parts of over-diversified conglomerates as well as numerous insolvent banks and real-estate firms are all on the block, sporting discounts of at least 30 per cent, and, often, even 60 per cent. Points out Shekhar Datta, 60, the Senior Advisor to the Rs 4,822-crore L.M. Thapar Group: ''There are a lot of companies whose net blocks and gross blocks are the same. And they're available for a song.'' For once, Asia is offering, albeit reluctantly, a piece of its pride.

How prudent is it to buy into the Asian meltdown now? After all, a limping tiger like South Korea, notorious for its insular culture, is bound to become increasingly xenophobic. The links between government and business in Indonesia are too strong to be snapped by a change at the top. The financial systems in Thailand, Indonesia, and Malaysia are creaking under weak regulation. And political uncertainty now haunts the entire region from Seoul to Jakarta. With innumerable sandtraps dotting the Asian markets, why should India's CEOs-already shaken by a cash-crunch and a slowdown in domestic market-even look at an area where growth is grinding to a halt, and currencies are on a roller-coaster?

Therein lies the paradox, as the consultancy and audit firm Ernst & Young's SWOT analyses of 5 Asian economies (see boxes) for BT reveal. Reasons Nandan Maluste, 48, Senior Vice-President, Kotak Mahindra Finance (1996-97 income: Rs 358 crore): ''The best time to buy is when there is blood on the streets.'' So, although Asia's asset exhibition-cum-sale is strewn with landmines, if you tread cautiously, chances are that you may stumble across a goldmine. Agrees Anand Mahindra, 41, the CEO of the Rs 3,624.33-crore Mahindra & Mahindra (M&M): ''The present crisis offers opportunities for Indian business to not only procure materials and components cheaply, but also to plan for the long run, and gain (strategic) footholds in the market.''

That's also because operating in Asia offers benefits that are available in spite of-and even because of-the present crisis. Explains Ajay Shah, 32, Assistant Professor, Indira Gandhi Institute of Development Research (IGIDR): ''The strengths of these countries lie in how far up the value-chain they are than India. Competitiveness is not just about low wages; the quality of products and human resources is critical.'' Getting in now, riding the advantages of low entry-costs, will give India Inc. access to the activities higher up the value-chain. Progressively, economies like South Korea, Taiwan, and even Malaysia have moved up from being producers of low-value, low-tech exports to manufacturers of high-value, hi-tech products. Once these economies recover, they will bounce back-stronger than ever. Already, the rotting financial system, which is also laden with unhedged foreign debt, is gradually getting its act together through the stringent regulation of the International Monetary Fund (IMF).

Acquiring a strategic foothold now in what should be one of the biggest growth markets in the 21st Century is an advantage. Each country-in-crisis has its competitive strengths: South Korea is strong in ship-building, steel, automobiles, and consumer electronics. The Philippines is developing strengths in infotech, having become one of the cheapest manufacturing bases in Asia. Despite its financial crisis, transnationals have not shunned Malaysia, which has been able to develop software-and-hardware manufacturing strengths. Thailand's automobile industry will whir as soon as the markets stabilise. And Indonesia is strong in paper and textiles.

Indian companies also stand to gain from the economic dynamics of the region. As business spreads to Asia, it is bound to have repercussions on the Indian economy as well, leading to the Asianisation of India. It could provide the right draught for Indian industry to join what economists term the Flying Geese formation-economies that follow the flight-path taken by countries that have attained a higher level of technological development-just as South Korea, Taiwan, Hong Kong, and Singapore followed Japan, and were, in turn, followed by Thailand, Malaysia, and Indonesia. Even if you debunk this model, India and China are bound to be the future magnets for growth. Accordingly, economists believe that the Asian dragons will align themselves with these 2 giant markets, becoming their gateways to the countries of the Organisation for Economic Co-operation & Development. Already, Hong Kong and Taiwan have become China's gateways.

India Inc.'s role in Asia will depend on how her business spans the economies of the region by investing in them-crisis or no crisis. With the Asia Pacific Economic Cooperation zone set to become a major economic bloc, after Europe and the North American Free Trade Agreement, Asianisation is a strategy whose time has come. Underlines Veena Mishra, 41, Assistant Professor, IGIDR: ''The world is increasingly being divided into trade zones, and India is getting isolated. It would be advantageous to have a manufacturing base in a resurgent Asia.'' The crisis is a reminder of what business hasn't done so far, and what it can do in the present circumstances. In a way, the Asian crisis helps Indian corporates make up for lost time by allowing them to plug into these distressed economies today at yesterday's prices. But business must first calculate where to spread its activities in the region, and how to co-ordinate them efficiently.

Doing business in Asia entails a long-term approach; opportunities have to be sifted carefully. Eventually, the crisis is expected to bottom out a year from now. Since May 1, 1997, the Asian currencies have plunged against the dollar: the Thai baht by 50 per cent, the Indonesian rupiah by 176 per cent, and the South Korean won by 145 per cent. But the slide is going to continue because of the recession in Japan, which is Asia's biggest buyer. Thus, the best time to plant your feet in the region may be now before the currencies start stabilising, and entry becomes more expensive. Moreover, making your move will ensure that you're up and running by the time the growth phase begins afresh.

An Asian acquisition that can help a business leapfrog the value-chain, by moving from low-value items to high-value products, would be beneficial since it would cut the time that a natural evolution would take. By focusing on standardised, lower technology, and price-sensitive segments in Asia, India Inc. has nothing to gain but good buys. It could well use the home-base as an export platform since the cost of manpower is comparable. Where Asia scores is in terms of the quality of the infrastructure. Points out Shawne Browne, 35, CEO, HSBC Capital Markets, some of whose clients are keen on acquiring businesses in the region: ''The costs of manufacturing may or may not be cheaper than in India. But power-generation costs are far cheaper.''

However, in technologically-advanced economies, factor advantages should not be perceived as the pillars of strategy. Asia is the most important step in an Indian firm's value-ladder, and must be perceived as such. And not just as a low-cost manufacturing base. Before you embark on a mission to take over Asia, gauge your financial and managerial strengths. Does the region fit into your gameplan? Or are Asia's cheap buys influencing your strategy? Once this audit supports Asianisation, there are several routes that you can follow to cash in on the Asian crisis.

MALAYSIA

Population: 21.2 million
Per Captia GDP: $4,634
1991-1996 GDP Gowth Forecast:
8.6 % p.a.
1999 GDP Growth Forecast: 4.8 % p.a.
1999 Export Forecast: 8.5 %
1999 Inflation Forecast: 3.1 %
1999 Currency Forecast: 3.30 ringgit/$

Currency and stockmarket plunges in the second half of 1997 were a consequence of the international financial markets focusing on serious and inter�related economic problems in the Malaysian economy. These included serious deficiencies in its banking system; property and stockmarket speculation leading to an oversupplied property market and over�valued share market; high rates of credit creation; heavily�indebted companies and mounting bad debts; weakening export markets and prices; overheating domestic demand; and a large current account deficit.

ECONOMIC OUTLOOK. An important part of managing the development process is keeping demand growth within acceptable limits. The government will be far more willing to use tight monetary policy and higher interest rates to quell exuberant demand over the next decade, compared to the past 10 years. Growth is expected to slow down as the Malaysian economy becomes more industrialised and developed. As Malaysia moves into the 21st Century, the rate of annual growth will be moderate. So, expect an annual average growth rate of 6.6 per cent per annum over the next 10 years. However, growth will be balanced and sustainable in the long-term, with the Gross Domestic Product (GDP) output exceeding domestic demand. The current account deficit is expected to continue its long-term weakness, but will be lower as a percentage of GDP, compared to the past 5 years.

BUSINESS OUTLOOK. With oversupply looming in residential, retail, and commercial buildings, restrictions on further loans to the property sector, cutbacks in public sector building programmes, and the deferral of infrastructure projects, the construction sector is set for a downturn. This follows a decade of remarkable growth averaging almost 12 per cent per annum. The main source of that growth has been civil engineering construction. In the next 2 years, the banking and the finance sectors will suffer from mounting bad debts, non-performing loans, and slow credit creation. Output is likely to decline after a decade of growth averaging 10.5 per cent per annum.

POLITICAL OUTLOOK. After international investor confidence is restored, the ambitious Mahathir Mohamad Administration is likely to again pursue policies that will help push the country towards its goal of attaining developed country status. However, Malaysia may adopt a long-term view and not attempt to attain the status by 2020, although Mahathir is very keen on that. For, if the country pushes growth too hard, demand-supply imbalances will re-emerge, causing more problems.