PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | SPEECHES & EDITORIALS | 1999 |BUSINESS SOLUTIONS FOR TURBULENT TIMES

Business Solutions for Turbulent Times Chote Sophonpanich Chairman, Green Spot Co. Ltd. (Bangkok) The Asian Financial Crisis Conference Los Angeles, California Monday, October 19, 1998 Let me bore you with the causes of the Asia Financial Crisis once more. Unless we are clear about the causes of the problem we will not find the right solution. Economics and Buddhism are similar, if one starts from the right assumptions then the chance of deriving the right principles becomes quite good. Looking back it is easy to see that there were several underlying causes of the Asia Financial Crisis. The first is our vision for the future-our view was out of date; we thought autarky and protectionism was the right path and we nurtured many indigenous entrepreneurs and grandiose enterprises when globalization would make them redundant. The second is our capability - we were and still are developing economies but we thought we could become developed economies overnight. The third is the incorrect perception of our capability by the rest of the world-the rest of the world thought we were tigers and invested and lent us much more money than we could manage; we were foolish enough to take their money and we wasted the money. We lost our mind, our judgement and our ability to think. Corruption and Cronyism exasperate the problems. Proper policies were not implemented and institutional infrastructure such as banking and financial market supervision were relaxed on the belief that the financial institutions were mature enough to look after themselves. There were massive inflows of hot money, euphoria, huge misallocation and wastage of resources; and we are left with much foreign currency debts to repay. Today we are all going to have huge current account surpluses because our imports have declined by about 30% as we no longer import plants and equipment, which was our largest import item. Our other imports have also declined because our domestic economies are suffering from negative growth even measured against our much-devaluated currencies. These huge current account surpluses will make our large overseas debt repayable. The figures are big. For Korea it will be about $20 billion, for Indonesia about $5 billion, for Thailand about $11 billion. Malaysia and the Philippines who were late in joining the Asian contagion will also have large current account surpluses next year. The amount of capital out-flow has also become minimal. What is left of the foreign investment in the local stock market is now very small and the foreign debts which remain are either happy to be there or because they have become delinquent loans. So the Asian currencies have appreciated against the US$ in the last few months, the stock market stabilized and the rates of interest have declined. We have therefore turned the corner and we have passed our first hurdle. The cost has been high and will be higher. Many businesses, especially small and medium size business, have become bankrupt and most companies have laid off workers. Unemployment for the affected Asian countries will be higher than 10% and in Indonesia the expected unemployment will be much higher and the total number of unemployed could be about 20 million people. Today the most important task is to cushion suffering and to reduce the chance of social unrest. The problem is critical, as we have limited social welfare facilities, Before discussing the second hurdle I would like to spend a little of your time talking about our future environment. To me the two most important issues are globalization and the speed of technological change. Globalization will reduce the number of players in any one major industry to a very few. Recently Mercedes Benz merged with Chrysler and Britain had sold all of their motor car companies of any size. In five years time there may be only eight major motor companies left. In the aircraft business there are only two companies left. In banking we have seen major mergers in the States- there may only be eight major banks left in five years time, and in the European Union the same thing will happen. There will be many niche players but industries will be dominated by a few Godzillas. This does not mean that there will be less competition. It will be a more competitive world because technological change will allow new companies to become successful and challenge the established leaders. There is also much money available to back suitable ventures. In less than five years Amazon.com has become one of the largest booksellers in the world. In less than fifteen years Bill Gates became the richest man in the world. There are many more examples. Today in the States if a company expects to forecast a decline in quarterly profit it will plan to close or spin off divisions, restructure, lay off people and find new ways to increase profits. They are setting the standard for performance. In such a competitive world there is no place for protectionism; there is no place for the cozy environment of monopolies and nurturing. If a business is to survive in the global market it has to learn to compete. A company needs to start running after it is born and become a champion within five years. In a global economy where there is surplus capacity in almost every industry and where advancement in technology will quickly leave the laggard behind it is more rational to abandon a product which one can not compete and use one's resources for something in which one hopes to excel. Today we have to restructure our financial institutions and industries with the expectation that we will have to compete and live with super lean and mean Godzillas. We will have to admit that it is unlikely many of our indigenous entrepreneurs will be Godzillas in the near future. Some countries will be lucky and have one native Godzilla, some may have a few but it is unlikely to be many. We will have new tigers but they are no match for the Godzillas and without technology the tigers will not become Godzillas. Many years ago when Britain was also down on her knees she had to give up her motor car companies for she no longer had the money to support her industries. Today she has a prosperous motor car industry with many well-paid and capable employees working for foreign motor car companies; she also has successful car component companies but no British motor car company. Today we have to make similar choice. Should we protect our indigenous entrepreneurs without concern for their efficiency or should we open our market to whoever is the most competent? Should we bet our future on one or two hopeful and indigenous Godzilla or should we diversify and rely on many Godzillas? The rational choice will be to follow Britain and Mrs. Margaret Thatcher and sell or close down our inefficient companies and open our industries to foreign investment and invite the Godzillas to invest in our countries. There is actually no choice. Currently many companies need to be re-capitalized otherwise they will be closed down and the workers become unemployed. Foreign investment is the only viable alternative. Let us come back to the second hurdle. First we will have to re-capitalize and restructure our banks and financial institutions. Out-side of Japan and China it is unlikely there will be more than three large indigenous banks in each country so we will have to merge many into these three; sell those which foreign financial institutions want and close down those which no one wants. We will have to print money to re-capitalize the banks, and improve the management so that they will once again be able function and provide liquidity to business. In order to allow tax money to be used in bailing out the banks we will have to write down their capital to an acceptable value. We will also need to re-capitalize and restructure our industries and privatize most of our public corporations. In the short term there will be more unemployment and we need to increase our expenditure on public infrastructure to minimize the number of unemployment. Fortunately our governments could run budgetary deficit for the next few years and The World Bank, the Asia Development Bank and the OECF encouraged and agreed to support these "safety net" programs. In the long term we will need additional foreign investment to provide employment opportunity. For entrepreneurs who are lucky enough to have some business which has survived the financial crisis then they will have to work even harder to survive in the tougher global market. They will need to focus and concentrate only on the core business. It will be difficult enough to survive in the global market with one business and there is no need to handicap ourselves by spreading our time and efforts over many businesses. If we have business, which was affected by the financial crisis, and we are unable to raise capital to remain independent then we will need to accept a Godzilla as a strategic partner and become their distributor or sell out to a Godzilla and work for them. Sometimes it is not necessary to sell to a fully-grown Godzilla, a budding Godzilla or a nimble tiger, which has survived, is equally acceptable. If we have businesses to which no banks will lend money and no Godzilla will buy then we should declare them bankrupt, provide proper burials and do something else. There will be many opportunities to become suppliers and distributors to the Godzillas when they increase their investment in the region. Asians are innovative and will be successful again. Innovation and not protectionism should be the base of successful business. Earlier I mentioned that one of the causes of the Asia Contagion was the inflow of "hot money". Many of my business friends were courted by leading international financial institutions to borrow money. The terms and conditions were so attractive that they succumbed to the temptation and they are now suffering from the over expansion in businesses which they had little knowledge and experience. We and our optimistic international bankers were blinded by tariff protection, forecasts of high rate of economic growth to expect fat margins to repay interest and loans. In a global market there will be no fat margin but there will be much competition and uncertainty. Everything will become impermanent. We will need to set internal borrowing guide lines so that we will not become victims of inexperienced international bankers whose central banks and other supervisory organizations allow them a double standard when their banks lend to Asian borrowers. Most major companies in the West have a gearing ratio of less than one but in Asia many have gearing ratio of more than three. Most technology companies in the States have no borrowing but in Asia most high tech companies borrow much money. In the West most banks do not lend to finance companies in their own countries but they lend to finance companies on an unsecured basis in Asia. In the West consolidated accounts are required but not so when they lend in Asia. We will need to be most conservative in managing our financial affairs if we are to survive the future. Many people suspected that corruption was a major cause of our crisis. Certainly the wrong policies were adopted and these were caused by both ignorance and corruption. Sometimes no policy was adopted for the same reasons. We will need to make sure a policy is adopted for each important issue and that the policy is rational and will be effectively implemented. We will also need to have transparency in the management of government and ask for the publication of minutes of government agencies within a short period of time after the decision has been taken so that we can monitor our governments. A free and open market needs much discipline, and draconian supervisory and regulatory authorities. Without an agreed code of ethic and the rule of law the law of the jungle will prevail. We will need to make sure that the government will serve the need of the people by making our countries pleasant and livable and also attractive for investment. Once again the Asia region is a good place in which to invest. There are once again abundant educated workers who are ready to learn and work hard. The governments are being restructured towards the right direction. The cost of investing is much lower than before. Income is low when compared with the capability of the people. I would just like to mention here that the major Japanese companies have taken a very responsible and long term approach for their investments in Asia. They have re-capitalized their subsidiaries and gone out of their way to help them export their products. In Thailand many multi-national companies have also bought into many businesses. In banking, ABN AMBRO had purchased 75% of the Bank of Asia and the Development Bank of Singapore had purchased 51% of the Thai Danu Bank. 25% of three cement companies are being sold to leading cement makers in Europe. Tesco, a leading British supermarket chain had also purchased 25% of local retailers. Many multi-national companies have also taken the opportunity to buy market share in Asia. With so many Godzillas investing and the governments responsive to their needs Asia will be a very much more efficient production center.