Penang, Malaysia (PressExposure) April 02, 2008 -- Since the surfaced of mortgage crisis and the subsequent credit crunch, many promoted the robustness and dynamics of Asian intra trade could decouple Asian exporters from the slowdown, and therefore the growth in the region is mostly unscathed. The optimism is mainly based on the continuing high demand from China and the domestic economies. However, the rising production cost and the world's slowdown, as a result of the US slowdown, cast doubt on the optimisms.
The world economy is strongly structured and networked around manufacturing and finance; the production chain and financing ran across many geopolitical boundaries. For 3 decades, Asian economies, mainly from the pacific region, were fueled by growing demand from developed countries such as US and European countries. Before 1997, the economies such as Taiwan, Hong Kong, Korea were mainly export based, and the peripheries which ride on the economic boom in 1990s are Singapore, Malaysia, Thailand and some splinters are Vietnam and Cambodia. For decades, economic activities mainly electrical and electronic, was concentrated in the region, and flagship companies from developed world, which relocated from home to enjoy the tax rebates and low cost production, have been responsible for the robustness. However, the benefits through job creation and economic linkages enjoyed by the local countries are short lived, as after 1997, these flagship companies found China provides far higher benefits than the local governments. The relocation shook the economy, especially for those countries which have not succeeded in upgrading their value chain in terms of manufacturing.
Many of these countries, during the boom years, depended very much on the import of technology and know hows from foreign countries, and local brand and tech proprietary ownerships were barely developed. For some countries, such as Korea, Taiwan, their ability to increase the value added in the import-export activities made them resilient and subsequently gained inroad to partnering with the flagship companies in design and development. For these countries, the downside risk is lower than those countries which undergoing "technologyless industrialization" during the boom years in 1980s and 1990s.
When the economies were booming, the problems remained hidden and unknown to the masses. But when the relocation intensified since 1997s from the region to China, and the recent global slowdowns impacted the global exports, these countries are again exposed with their pants down.
The mortgage crisis is not constrained to the financial market, but the difficulties percolated to every real economy; low spending, credit crunch causes slow demand and low expansion in investment, increase in commodity prices ranges from gold, wheat, grain, oil and now rice. The dropping of dollar and consequently the appreciation of foreign currencies, cause the goods exported uncompetitive, and amid this financial crisis, high price means low demand.
When the economies around the world are connected via manufacturing and finance, this problem of slow demand and high production costs can pose tremendous challenge and maybe can intensify the existing relocation process and shut down. Since the relocation of manufacturing started after 1997s, the region's economies, technology, electronics depend very much on the purchase from flagship companies in China. Many of these exported goods consist of intermediate goods, which are then processed and remanufactured to be assembled either in home country or third party countries in the region. Thus, in this sense, China remained the main mover of manufacturing sector in the region. Although the domestic demand of these goods are limited, most of the manufactured goods are then exported to developed countries.
However, the leader of the region is now being squeezed by high cost, pressured by international forces to clean up the backyard for healthier and cleaner exported products, and another concern is that the emerging economies such as Vietnam and Cambodia and Thailand pose a challenge to its status as investment magnet. For decades, the investment structure has been concentrated in China as a core, and it is as if the system achieved an equilibrium, in which the technology know how's and design are developed in the peripheries (to avoid copy right infringements ) and then intermediate goods are sold to core economy in China. However, the current inflationary worries, global slowdown in demand, and further fueled by the tighter environmental and financial regulations by Chinese government to tame overheating, coupled with the anti trust laws to protect domestic economy (at least perceived by market players) cause many foreign players start to shy away from China, this is witnessed by the surge in relocation to inner mainland China, to Vietnam, India and also Cambodia. If this relocation takes place, could the Asian economies still play the role as intermediate good suppliers?
It all depends on how well the local manufacturers have climbed the value chain and as the result how well insulated from the onslaught of other low cost producers in the region which are competing for investments. To reveal the weakness, the economies in the region, especially Malaysia, Indonesia are very much dependent on foreign technology, which has their bases here. Instead of supplying to foreign big firms with their own brand and inventions, these companies are mainly sub contractors and their competitive edge based upon their ability to produce low cost.
If this is the case, there are two main concerns, the relocation can cause hollowing out of local manufacturers to these low cost countries, and another is that the dry up of orders from foreign firms as many productions are being outsourced to the emerging producers. To make the local economy attractive, local government has thus to offer very high offers or protections to these companies, to pull them to remain in the local economy. But this step is temporary, and it is just a postponement of problems to next level; the incapability of local firms to upgrade their technological know how to compete in the world market. If these protections are not followed by subsequent freeing of market to encourage competition, the countries in the region may face a high possibility of "deindustrialization".