In November, when corporate credit assessor Standard & Poors (S&P) downgraded its rating for Korean chip maker Samsung Electronics, it neatly summed up the whole South East Asian economic crisis in one short statement. Samsung, the Wall Street firm’s Tokyo office suggested, was no longer the ultra-safe bet it has once been. To back up its long-term A minus rating on the semiconductor and computer memory giant, S&P offered a laundry list of what has gone so horribly wrong in the high-tech Asian market. Firstly, Samsung, like many Korean conglomerates, has become uncomfortably exposed by the way it has secured capital for rapid expansion over the past decade. The company was an active issuer of foreign currency debt, and the crisis of confidence in the ability of such companies to repay those kind of loans was a major contributor to the collapse of domestic currencies and the resulting economic turmoil. In the case of Korean companies, the depreciation of the Korean Won by one-fifth against the dollar this year was enough to signal a debt crunch. The cash raised through those high levels of debt was all channeled into ever expanding empires. Samsung has been geared for double digit expansion when the domestic economy is barely growing at 6%. And S&P points out that a business slowdown in Korea is also likely to undermine Samsung’s ability to thrive. The weakening of the general Korean economy will adversely affect domestic demand for electronics products, says S&P. Furthermore, turmoil in the Korean economy and financial markets could increase funding costs [a critical aspect in the capital-intensive semiconductor industry] and reduce the financial flexibility of the company, it added. None of this has been helped, of course, by the continued erosion of prices in the DRAM (or memory chip) market. Samsung, along with fellow Korean giants Hyundai Electronics and LG Semicon, controls 35% of the global market for DRAMs. But, Samsung’s position is not unique. Many debt-burdened high-tech companies across South East Asia, from Malaysia to Indonesia, from Singapore to Thailand, have been caught out as currencies have weakened and domestic economies turned downwards. But not all. Analysts point out that in some countries, most notably Taiwan, semiconductor industry expansion typically has not been reliant on foreign currency debt. It’s a tale of two industries in one. Outside of [Korea and Japan] there is a low currency risk, and a healthier profile of the semiconductor industry, Morgan Stanley Dean Witter’s Jay Deahna told Dow Jones wire service. In fact, economic pressures in the region could have some positive effects for the chip industry. The falls in the value of local currencies have been making businesses with a large proportion of non-domestic sales much more competitive – at least those businesses that are not saddled with high levels of debt. (Among these are multimedia peripheral maker Creative Technology, of Singapore, and Taiwanese firms Semiconductor Manufacturing and PC maker Acer.) And Goldman Sachs analysts point out that the lower costs arising from the turmoil will also result in technology companies accelerating sub-contracting work to the region. In contrast to the liquidity crisis that is pounding Korean companies, the biggest beneficiaries will be Taiwanese electronics companies. They feature low-leverage, self-financing and niche-based manufacturing, the Wall Street firm says. Any contraction of investment by Korean chip companies might also stabilize the DRAM business. In fact, Goldman Sachs goes as far as to predict the consequence will be a boom in the memory chip market. Certainly, the new economic order for South East Asia’s high-tech companies promises to upset what has for a long time been a well nurtured and closely-controlled development model. But with the impact being very different on different countries, the question is which major technological companies will be left standing tall after the upheaval is over.
Eastern promise?
For the past two years, database software company Oracle has looked to its Asia Pacific business unit to add some sparkle to its international operations. While sales in Europe have chugged along at around 20% to 30%. Oracle Intercontinental, as the company calls the region that covers Asia Pacific, has been growing at between 35% and 70%. That means it now accounts for 15% of Oracle’s total global sales. But the economic problems in the region suggest Asia Pacific is not going to be able to make up any shortfall experienced elsewhere and that US and European computer companies will see their forthcoming revenues dented by an Asian slowdown. Analysts think the potential problems are widespread. The networking equipment maker 3Com also generates about 15% of its revenues in Asia and industry watchers at Deutsche Morgan Grenfell are concerned about a slowing of the company’s business there as corporations postpone IT infrastructure investments. More specifically, Hewlett-Packard is saying that its days of 20% growth in the region are over for now. It expects a more modest 10% revenue rise in Asia Pacific business this year. But not all technology players are convinced that the years of rapid expansion in the region – where the IT market was worth $159bn in 1996, according to IDC – must necessarily stall. Intel CEO, Andy Grove, speaking at the Asia Pacific Economic Cooperation Forum in San Francisco in November, acknowledged that the growth in the PC industry had slowed as a consequence of the economic crisis in that region, suggesting some dilution of the 30% of total revenues that Intel has derived from Asia Pacific. But Grove also encouraged executives in the region to use technology purchases to grease the wheels of an internal economy by spending their way out of the problems as a matter of survival rather than luxury. Such comments might seem self-serving, but analysts have consistently marked down the stocks of technology companies deriving a significant proportion of their revenues from Asia. Clearly, they think the full impact of Asia Pacific’s El Nino has yet to be felt.
This article first appeared in Computer Business Review.
