Cover Story: The Tiger and the Dragon, Pg 2

INDONESIA

Population: 198.3 million
Per Captia GDP: $130
1991-1996 GDP Gowth Forecast:
7.6 % p.a.
1999 GDP Growth Forecast: 0.4 % p.a.
1999 Export Forecast: 9 %
1999 Inflation Forecast: 8 %
1999 Currency Forecast: 8,054 rupiah/$/

Indonesia is reeling under a complete loss of confidence in its economy. The rupiah has been savaged like no other Asian currency. Between May, 1997, and June, 1998, it had depreciated by 176 per cent against the dollar. Indonesia's foreign debt, of about $133 billion, now accounts for over 200 per cent of Gross Domestic Product (GDP), up from 60 per cent. The cost of servicing the debt has gone from 5 per cent of GDP to more than 20 per cent. Private companies owe more than half of the country's foreign debt, much of it consisting of loans which were not hedged against currency risks. Companies have seen their foreign debt burden rise by 3 or 4 times, and few can now service the debt. A large proportion of companies will fold if the exchange rate stays where it is.

ECONOMIC OUTLOOK. The Indonesian economy is set for negative growth in real GDP of 3.7 per cent in 1998, before stabilising in 1999 with slightly positive growth. This represents the most severe economic setback in the last 3 decades. Domestic demand will decline dramatically, led by a steep fall in investment spending. Consumption will be affected by a large drop in the spending power of the Indonesians. This is mostly due to the surging prices of imported goods as well as rising unemployment. Investment in Indonesia will drop sharply as a result of a significant downturn in construction activity, coupled with tight credit conditions and drastically-bad business conditions.

BUSINESS OUTLOOK. In the short term, manufacturing is expected to contract, with a decline in building and construction activity and an anticipated downturn in domestic demand growth. However, a fall in the rupiah will improve competitiveness, boosting growth in manufactured exports in the medium term. Expect a major downturn in the construction sector over the next 2 years as a result of oversupplied property markets. Tourism is a growth area which Indonesia hopes to develop into its biggest foreign exchange earner.

POLITICAL OUTLOOK. The loss of confidence in the administration among Indonesians and international investors runs deep. The B.J. Habibie Administration is being hampered by the desire to insulate the business interests of those close to the Suharto family from the pain of reforms. There is a general feeling that a turnaround in confidence in the economy now requires a change in government. Two main groups could pose a serious challenge to the present regime: the Muslim Reform Movement and the nationalists in the military. Political change may of course alter the economic direction.

TECHNOLOGY ACQUISITION. Follow a route-map that helps you move up the value-addition ladder by investing in superior technologies and processes. Over the years, the dragon economies have developed design know-how and process capabilities in the areas of auto components, consumer electronics, and microchips, which have helped them become globally competitive. Since most businesses in the area have evolved as suppliers to Japanese firms, they have tailored their processes to stringent needs: on-time supply and quality. Besides, as the Japanese began to graduate to high value-added exports, the Asians quickly followed them. Even as suppliers, they manufacture high-value components today.

Thai firms, for instance, make engine heads-something that no Indian firm has been able to do on its own. The contrast is stark: while the Indian components industry needs dollops of technology infusion to bring it anywhere near global standards, the Thai industry was, until the crisis, well on its way to becoming Asia's auto hub. The obvious opportunity, therefore, is to use Asia as a short-cut to operating on a higher technological plane, compressing the usual migration into a much smaller time-frame. After all, Asia's finances may be in trouble, but its technologies have not lost value the way its currencies have.

ASSET ACQUISITION. In the present situation, an Asian acquisition can help a firm attain global scale-one of the key requisites of international competitiveness. Take the Rs 706.20-crore tyre-cord manufacturer SRF, for instance, which is negotiating the purchase of an ailing plant in Indonesia. The acquisition will make SRF-which has a ready market in Europe-one of the largest producers of tyre-cord in the world. Having perceived the benefits of scale, technology, and, of course, low price, the Rs 2,484-crore O.P. Jindal Group made a bid for South Korea's Hanbo Steel, which became insolvent in January, 1998. For the Jindal Group, the acquisition was purely strategic: it planned to dismantle the South Korean plant and ship it home to bolster its Jindal Vijaynagar Steel project. True, the bid ran into legal problems with the South Korean company's bankers and creditors, but it illustrates the strategy. The added benefit that such an acquisition will bring is a readymade market: firms may have gone kaput, but the markets they serviced are still hungry for their products.

Of course, you must find out just how efficient Asia's factories are. Remember: while they may not be competitive today because of overcapacity and huge debt burdens, money has been sunk in modern technologies and equipment. Explains Shah: ''Crisis-hit Asia has clean, well-built factories that are lying unused owing to a paucity of working capital. It is a treasure-trove for asset-strippers.'' And for Indian companies seeking manufacturing capacities that were earlier out of their reach.

SOURCING OPPORTUNITY. Opportunities exist for Indian firms to relocate their upstream activities to Asia. For instance, Indian business is dependent on inputs like edible oils and electronic components, which are imported from Indonesia and South Korea. As much as 80 per cent of India's imports from Asia is accounted for by commodities. Since cheaper currencies translate into cheaper imports, shifting your sourcing-base to Asia is a starting-point for decimating costs drastically. In the case of manufactured goods-such as auto components-the price differential can be as high as 20 per cent. That is why the Rs 919-crore Eicher Group and M&M plan to increase their imports of auto components from Thailand. Points out Mahindra: ''Our farm equipment and utility vehicles businesses could benefit from the lower procurement costs in South Korea and Thailand, which have highly-developed ancillary bases.'' Even if the benefits shrink with the imposition of the Special Additional Duty (sad) of 4 per cent on imports, it is too small to neutralise the impact of the currency depreciation.

BACKWARD INTEGRATION. In Asia, trading offers a launch-pad for integrating backward into manufacturing. If you're already an active trader in the region, your knowledge of markets must be high. Now, you can start manufacturing your own products in the region to capture more profits along the value-chain, and take advantage of the fact that these manufacturing operations do not have to be set up from scratch, but can be acquired relatively cheaply.

Several Indian corporates have already enhanced their trading operations in the region. Tata International, which has wholly-owned trading subsidiaries in Hong Kong and Singapore, is now increasing its exports of auto components and commodities to South Africa. Explains H.H. Malgham, 60, Executive Director, Tata Exports: ''The currency devaluation in the region has helped us boost our trade with other markets.'' Similarly, the Rs 814-crore Greaves, which has a trading subsidiary in Singapore, intends to fan out to newer markets in the region. And companies like them could now scout for manufacturing operations instead of relying on external suppliers.

MARKETING OPPORTUNITY. One of the best ways to squeeze more out of your value-chain is to get closer to the customer. By acquiring distribution channels in Asia, Indian companies can increase their market-penetration levels substantially. Independent distribution and marketing networks are available at between 30 per cent and 50 per cent of the cost of setting up new channels which, in any case, take at least 5 years to build. That explains why M&M, for instance, is combing the region for distribution channels to sell its farm equipment.

THE PHILIPPINES

Population: 71.9 million
Per Captia GDP: $1,210
1991-1996 GDP Gowth Forecast:
3.4 % p.a.
1999 GDP Growth Forecast: 4.6 % p.a.
1999 Export Forecast: 35.5 %
1999 Inflation Forecast: 8.8 %
1999 Currency Forecast: 44 peso/$

As with many countries in the region, a cloud looms over the economic and political future of The Philippines, too. Continuing concerns about a deteriorating current account deficit, rising external indebtedness, and political uncertainty have led to a crisis of confidence, resulting in a significant depreciation of the country's exchange rate. Despite this, the fundamentals of the economy remain healthy. The present challenge for the authorities is to achieve currency stability and stimulate Gross Domestic Product (GDP) growth without stoking inflation or incurring unsustainable external indebtedness.

ECONOMIC OUTLOOK. Under the Fidel Ramos Administration, a host of economic reforms was implemented to contain the currency turmoil. No major economic slowdown is expected, with real GDP growth of 3 per cent and 4.6 per cent forecast for 1998 and 1999, respectively. Strong export growth will underpin GDP growth, offsetting weak consumption and investment expenditure. GDP growth in the medium term will strengthen. The biggest blight on the Philippine economic scorecard is the widening of the trade deficit. The economic problems will result in a cyclical reduction of the trade deficit during 1998 as strong exports growth-thanks mainly to the peso's depreciation-coincides with weaker import growth.

BUSINESS OUTLOOK. Industrial activity will pick up in 1999 as domestic and overseas demand improve. Driving the activity in the sectors over the next 2 years will be strong export demand growth. The manufacturing sector will grow marginally in 1998, before improving strongly in 1999. The electronics sub-sector has been affected by a general weakness in world demand and a glut in the world semiconductor market. But the unwinding of oversupply will boost the prospects of the electronics sector in the medium term. Four years of rapid growth in the construction sector has resulted in oversupply in a number of industrial sectors. Weak construction activity will impact the manufacturing sectors supplying inputs to the construction process.

POLITICAL OUTLOOK. The Philippines has put the Marcos era and the tumultuous revolution years behind it, and a level of stability has emerged. The Ramos Administration was consistent in its pursuit of economic reforms. But will the new Joseph Estrada Administration ensure continuity? Business, which is nervous about the actor-turned-politician's lack of economic knowledge, fears that the reforms programme will falter and lose direction. That poses a risk. .