HONG KONG --The meltdown in Asian stock prices on Friday stemmed in part from the growing realization that the heavy reliance on exports that has driven Asia's powerful growth is now turning into its worst enemy.
The evaporation of consumer spending in the U.S. and Europe is starting to hit deeply at Asian manufacturing titans that thrive on sales to the rest of the world, and that are now rapidly scaling down their capital spending.
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On Friday, after reporting a 44% third-quarter profit drop, South Korea's Samsung Electronics Co. Ltd. (005930.SE) said it will reduce memory chip capital expenditure this year by an unspecified amount due to weak market conditions, and may also lower its overall capital spending plans for next year in line with the weak business environment. Japan's Sony Corp. (SNE) Thursday lowered its outlook for its fiscal year ending March 2009 and warned that the deteriorating business climate could force the company to scale back capital spending, close plants and cut jobs to shore up profit. The news sent Sony shares plunging 14% in Tokyo on Friday.
The worsening gloom in Asia comes despite the fact that on the whole, the region - site of a major economic meltdown a decade ago - today has limited exposure to the debt that is now causing havoc with the financial systems of the U.S. and Europe. While some countries, notably South Korea, are reliant on funding through international credit markets that have dried up in recent months, Asia's banks haven't invested heavily in mortgage-debt derivatives or other products that have poisoned the balance sheets of their Western counterparts.
But in the last 10 years, Asia has doubled down with another bet on exports as an economic engine, at the expense of developing a domestic consumer market that many economists believe will ensure more sustainable growth. Exports accounted for 46.7% of gross domestic product in Asia, excluding Japan, in 2007. That's a jump of 11 percentage points from the comparable figure in 1998, during the last economic crisis here, notes Stephen Roach, Morgan Stanley's Asia chairman. In other words, Asia is now 30% more reliant on exports than it was less than a decade ago.
Asia "may not be levered in the strict sense of reliance on global credit," says Mr. Roach. "But it's certainly levered to the global economy."
That means just as banks in the West are expected to deleverage their balance sheets by selling off assets for years to come, a similar need is now looming in Asia where excess manufacturing capacity built up during the boom years will now have to be downsized.
"The crisis represents an unwinding of global imbalances," said William Hess, a director of research firm IHS Global Insight in Beijing. "It's an overall gradual deleveraging." The fact that global production is concentrated in East Asia means that's where the adjustment will happen, he notes. "The markets are saying that, outside of this financial crisis, there may be lean years ahead as rationalization takes place" in the Asian manufacturing sector.
That adds to the challenges Asia's industries will face, especially the higher cost of credit. Japan is struggling to cope with the effects of a rising yen on its competitiveness. Lower commodity prices will likely bring some relief to parts of the region, though there will likely be a lag in the time it takes to help the bottom line.
Bad corporate news contributed to a punishing day Friday in Asian stock markets. Seoul fell 10.6% after Samsung issued its results and spending forecast. Tokyo fell 9.6%, Mumbai fell 11% and Hong Kong fell 8.3%.
Not all of Asia is as vulnerable to the sudden trade squeeze. The Philippines and Indonesia aren't as dependent on exports. China's economy, while showing new signs of weakness, still managed to post 9% growth in the third quarter, and the government is starting to role out new stimulus measures that could ease some of the pain as more factories start to shutter.
Other parts of the region more heavily dependent on trade are feeling the pain. The city-state of Singapore, a tech-manufacturing center, as already tilted deep into recession after GDP contracted 6.3% in the third quarter following a 5.7% decline in the previous quarter, according to advance government estimates. In September, exports to the U.S. -- Singapore's single-largest export market -- fell 24.5% from a year earlier after declining 30.2% in August.
Malaysian furniture exports are expected to fall after six consecutive years of growth, a government official recently said. "The current U.S. economy crisis, which has affected our export to the U.S. market, has shown the vulnerability of our industry's dependence on traditional markets," Plantation Industries and Commodities Minister Datuk Peter Chin told an industry group recently.
In Thailand, exports of circuit boards fell 18.3% in the first eight months of the year. "I think everyone in this industry has been affected by this global economic problem in one way or another," said Vuth Klaiphan, Sales Manager at Aspocomp (Thailand) Co. Ltd. About 90% of the company's printed circuit boards are exported to Europe and the U.S.
For memory-chip makers already struggling with an industry shakeout, the worsening global economic slowdown is especially painful.
"The industry was in a severe winter and now I'll say it is in an ice age," said Brian Shieh, president of Powerchip Semiconductor Corp., Taiwan's biggest dynamic random access memory chip maker by revenue, after reporting a loss of $15 billion New Taiwan dollars (US$459.9 million) for the three months ended Sept. 30. It was the company's sixth consecutive quarterly loss.
Powerchip is now cutting its capital spending plans and its DRAM shipment growth forecast for this year. It also announced that it would delay operating a new chip plant until 2010 due to tepid market conditions.
With oversupply and weak demand, "Companies in this industry have stopped talking about making profits but are fighting for survival," said Powerchip's vice president, Eric Tan.
-By Peter Stein and Carlos Tejada, The Wall Street Journal Asia
(Ting-I Tsai in Taipei, Wilawan Watcharasakwet in Bangkok and Celine Fernandez in Kuala Lumpur contributed to this report)