View from Asia

The region is in for a bumpy ride, and high oil prices are only partly to blame.
Don DurfeeSeptember 1, 2008

As corporate growth grinds to a halt in the United States and Europe, the bosses of global companies are rediscovering their enthusiasm for emerging markets. Companies ranging from Sony to General Electric to General Motors stress that, despite gloom at home, prospects for their Asian operations remain bright. And no wonder: China continues to post double-digit growth rates, India and Korea are booming, and other countries in the region are still expanding at a healthy clip.

But don’t bank too heavily on a sustained 20 to 30 percent growth rate at your Asian division. First, it’s only a matter of time before a slowdown in the West harms Asia’s export sector, and that will affect other parts of the region’s economies. Early signs suggest this is already happening. In the most recent Duke/CFO Business Outlook Survey, 51 percent of Asian CFOs say their companies are feeling the effects of slower growth in the West, including fewer customer orders and more requests for discounts.

Inflation is on the rise. It’s worst in Vietnam, where prices have risen by more than 25 percent year-on-year, but it’s high elsewhere, too: 11 percent in India and 7.1 percent in China, to name just two. The soaring cost of fuel is one factor; high oil prices are especially problematic for a region in which so much depends on cargo ships plying the seas over great distances. But demand is slipping locally and abroad, and CFOs say that they can’t pass all of the rising costs on to customers.

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Volatile foreign-exchange rates don’t help, either. For several years most Asian currencies have been rising against the dollar, but unevenly. More recently, currencies such as the Indian rupee and the Korean won have lost value, causing trouble for companies counting on appreciation.

It all makes for a tough environment for CFOs. Consider the case of Mindtrac, a Singapore-based commercial tire maker that manufactures in China and India and sells around the world. The cost of oil — a major ingredient of tires — and the shutting down of factories by the Chinese government in advance of the Olympics have driven the company’s costs sharply higher. The depreciating rupee has also made raw material imports more costly. It’s hard to raise prices, though, since Mindtrac’s customers have cost worries of their own — many are choosing to retread tires rather than buy new ones.

Such problems don’t mean that Asia doesn’t have strong growth ahead. But they do suggest that growth will be less steady than it was. Keeping this bright spot on the global P&L from going dim will require a good deal more effort than it used to.

Don Durfee is editor-in-chief of CFO Asia.

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