Cover Story: The Tiger and the Dragon, Pg 3

Just what is the appropriate strategic choice for companies that lag far behind their counterparts in developed economies like South Korea, and even some of the newer dragons, such as Indonesia, Malaysia, and Thailand? Should India Inc. look at low-tech businesses, which are dependent on cheap labour? Or should it focus on hi-tech ventures, whose products are driven by differentiation? And, above all, which markets should it target from its new Asian base?

The answers are interlinked. In the context of Asia, any strategy that does not use the export platform for growth may be dangerous since individual markets are small, and domestic demand will take time to perk up. And any gameplan that is tied to low wages is bound to run into problems in countries like South Korea and Thailand, where wages have risen phenomenally. Indeed, companies that have already set up shop in Asia are relying on exports to pull them out of the financial morass in their local markets. After being hobbled by the slump in domestic demand, the Rs 3,261-crore Essar Group-which has set up a hot-rolled coils-manufacturing facility in Indonesia-is now exporting 60 per cent of its output of 80,000 tonnes. Says S.V. Venkatesan, 58, Finance Director, Essar Group: ''We are sharpening our export focus.''

Similarly, the $30-million Jakarta-based synthetic yarn-maker, Indo Rama Synthetics, has always followed the strategy of export-led growth. But never has that strategy been pursued more vigorously as now. In fact, the uncertain domestic political environment, the floundering end-user textile industry-which is bereft of funds-and the depreciation of the rupiah have compelled Indo Rama to increase its exports to 80 per cent of its sales.

On the face of it, Asia has everything to recommend itself to growth-hungry CEOs. Billed though it is as the trade bloc of the new millennium, even rivalling North America and Europe, the theatre of the world's biggest financial meltdown can singe your strategy if you are not careful. For, you are entering a region whose culture, rules, and practices you are not familiar with. And you are taking the plunge in the worst of times. Moreover, while theory says that the larger the risks, the larger the rewards, it may not be so. A 1988 study by C.D. Chase, J.L. Kuhle, and C.H. Walther, The Relevance Of Political Risk In Direct Foreign Investment, has shown that firms investing in high-risk countries are not adequately compensated; similar returns are achievable in less risky countries.

While that may, indeed, be true, Asia must be seen as a long-term bet: a strategic investment where returns are not as important as the benefits of a rub-off with a technologically-superior economy. Agrees Lando Zappei, 45, the CEO of Booz-Allen & Hamilton, which works with Indian companies scouting for business opportunities in Asia: ''All efforts at developing regional footprints should be independent of the crisis.'' However, the risk factors should not be ignored either.

CHOOSE THE RIGHT LOCATION. That's a tricky issue. It is important to scan the business clusters in the region and measure their share of exports. If you are looking for an auto-supplier, head for Thailand; if it is computer hardware, better pick Penang. Since clusters stimulate factor-creation-skilled human resources, superior infrastructure, and specialised upstream industries-Indian firms can begin with an advantage. And even if clusters are thinning-some due to rising factor costs like labour, others due to scarcity of skills-they are likely to upgrade rather than die out. It is this strategic logic of participating in a cluster that is tempting India's auto-manufacturers to look at Malaysia and Thailand.

WEIGH THE PRICE. An acquisition may appear tempting because of a fall from its pre-crisis value by, say, 40 per cent. But how does it compare with the cost of setting up a greenfield venture in, say, India? That is the critical yardstick for a firesale purchase. For instance, SRF set its sights on a tyre-cord plant in Indonesia only after its calculations showed that the cost of setting up a comparable project in India from scratch would be far higher than the acquisition.

INVESTIGATE FAILURES. Firms may have failed for various reasons: debt burden, overcapacity, fall in global demand, mismanagement, uncompetitive products, labour problems... It is vital to assess buyers' and suppliers' perceptions before venturing into any deal. Also, conduct a meticulously-detailed due diligence exercise. Poor accounting and disclosure standards across the region could put a spanner in any valuation effort. Intra-group shareholdings, and debt guarantees in the South Korean chaebol can complicate any effort to acquire an ailing firm belonging to a conglomerate. And corporate accounting practices vary from country to country. Instead of conducting an accounting due diligence exercise, it is better to carry out a strategic one. Says Zappei: ''Due diligence exercises must look at the externals, not internals.'' Just kicking the tyres will hardly tell you where the company stands vis-a-vis the competition, how it is developing its sourcing and distribution, and whether it is capable of managing the future.

TRACK THE CURRENCY. Even if the currency crisis stabilises in the short run, which it is likely to, the economic crisis and, consequently, the political fallout are risks that an Indian firm heading for East Asia should factor into its strategy. True, IMF-initiated structural reforms are unlikely to strengthen trade or investment barriers; they are bound to fall even further, especially in South Korea and Thailand. Until now, most ASEAN countries have been open economies; they can barricade themselves only at the cost of growth.

Typically, financial risks can multiply in a currency meltdown. With their values gyrating, it is difficult for exporters to estimate the price of imported inputs. So, until currencies show a semblance of stability, the bets had better be off. Also, since dollar-financing has become an impediment to Asian firms, the right thing to do is to identify a business that earns dollar revenues. Country choice is critical for a firm that wants to avoid the initial financing hiccups. Points out K. Srinivasan, 45, the Executive Director of the Rs 287.75-crore Woolworth Group, which has manufacturing bases in both India and Thailand: ''Currency depreciation should not be the only reason for acquisition. A firm also needs markets and profits.'' Counsels Bhaskar Ghose, 43, the Vice-President & Chief Representative (India) of the Bank of New York: ''While scouting for acquisitions in Asia, firms must ensure that the import content of their final product is zero. The region is still too volatile to make accurate predictions about input prices.''

BE PREPARED FOR TROUBLE. Political instability is something that Indian firms will have to live with for at least the next 5 years. Although Asia has had its share of political problems in the past-in 1966, an armed uprising in Indonesia brought General Raden Suharto to power, but cost the country half a million lives; Thailand had a military coup as recently as 1991-economic growth doused the political tinderbox. Now, a recession could ignite political and social unrest. Both Indonesia-where strongman former President Suharto's recent departure from power could lead to a new political dispensation that is pro-Islam and pro-protectionist-and South Korea-where resentment against foreigners could spur a backlash against reforms-could derail any gameplan.

For export-oriented investors, the financial risk is higher, but political risk matters more for companies focused on domestic markets. But the risks are attached to a package that is a reservoir of technology; boasts of strong links with developed markets; and has high quality standards. Although Asia may not touch the heady growth rates of 8 per cent-plus that it clocked in the 1980s, a sustainable growth rate of 5 per cent is a powerful magnet for business

Even if Asia's resurgence is assured, India Inc.'s success in Asia isn't. For, the biggest impediment before Indian industry is its lack of exposure to globalisation. Indian CEOs must gather the requisite knowledge about diverse markets; grow the managerial talent to run global operations; and learn how to graduate from being suppliers to marketers. Asianisation may be a gamble, but the rewards-in the form of economies of scale, superior processes, design capabilities, and newer markets-are worth the risks. For India Inc., the Orient will reveal its riches but once. If ignored in this hour of opportunity, Asia may close up for ever.

SOUTH KOREA

Population: 45.5 million
Per Captia GDP: $10,650
1991-1996 GDP Gowth Forecast:
7.1 % p.a.
1999 GDP Growth Forecast: 3.4 % p.a.
1999 Export Forecast: 8 %
1999 Inflation Forecast: 3 %
1999 Currency Forecast: 1,200 won/$

The world's 11th-largest economy, and the newest member of the Organisation for Economic Cooperation & Development, has been brought to its knees by corporate collapses and virtual insolvency in the financial sector. It is now at the mercy of the International Monetary Fund (IMF), which has bailed out the financial system and put in place a scorched earth programme of reforms, which will crush the life out of the economy in 1998 and beyond. So far, 8 of the largest 30 chaebols have collapsed, and many others are on shaky ground. Their access to cheap loans has always been guaranteed by a collusion between the government, the public servants, and the chaebol leaders. As a result, chaebols have built up massive debt to capital ratios and invested heavily in areas which turned out to be oversupplied-such as property-or unprofitable.

ECONOMIC OUTLOOK. Inflation is expected to fall over the next 2 years, in line with the significant weakening of demand. The IMF package imposes an inflation target of 5 per cent or less. This should be easily achieved, since it has been done for the past 3 years. There is likely to be an improvement in real Gross Domestic Product (GDP) growth in 1999 to 3.4 per cent. This still represents one of the poorest growth years of the past 2 decades, but will not be achieved easily. Expect average annual GDP growth of around 5.5 per cent over the decade to 2008, compared with the annual average growth of 8.5 per cent over the last decade.

BUSINESS OUTLOOK. Exports should be reasonably strong over the next 2 years, after weak growth in 1996, which was associated with the major downturn in the world electronics market. The electronics sector is improving as oversupply is absorbed, demand growth in the developed economies remains fairly solid, and the fall in the value of the won has greatly improved competitiveness. The major negative factor impacting exports is the slowdown in demand from the rest of the Asian region. The biggest threat, of course, comes from the Chinese renminbi. If it is devalued, South Korea's export competitiveness will be severely hit.

POLITICAL OUTLOOK. The policies of the major parties-the New Korea Party, the National Congress for New Politics (NCNP), and the United Liberal Democrats-are broadly similar, and a change in the government will not greatly affect the broad economic direction of the country. The President, Kim DaeJung, who belongs to the NCNP, has consented to all conditions of the IMF rescue plan, and is pushing enabling legislation through the National Assembly. That should quicken the recovery.