Pacific Rim News The Economy of the Pacific Rim Countries

I n most Western countries today, there is evidence of “the Chinese invasion,” with numerous commodity items displaying “made in China” or made in one of the

other Pacific Rim countries such as Korea or Taiwan. These items range from porcelain dinner services to numerous electronic devices and components. Since the invasion of Japanese cars, which brought about a dramatic change in thinking, design, and manufacture to Western car producers, the penetration of these other markets by most of the Far East countries has been somewhat less noticeable. Invari- ably, it is only when the commodity article is turned over, or whatever instructions are supplied with the purchase are read, does one see the small label reading “made in China,” etc. This is unlike the extremely visible appearance of more and more Japanese cars on Western roads.

Western manufacturers, for the last 10 years, have been seeking methods of cashing in on this growth market as their own supplied materials were becoming noncompeti- tive. Business associations, joint ventures, and wholly owned manufacturing facilities were highly sought after in these countries and with people whom they did not really understand. The cultural differences were so immense that there were innumerable problems in both understanding the people as well as operating within a society that had not really progressed for decades. Some of the major differ- ences range from the basic work ethic to language problems, from simple interpersonal relationships to quality standards. Whereas the establishment of a new business operation in Europe or the United States can be achieved in a relatively short time period, to complete a similar exercise in Chinese business circles takes considerably longer. This is due to the extended discussions, going over the terms and conditions time and time again-an exercise with which many who have ventured into this part of the world will be only too familiar. Even when it may be considered that agreement has been reached, further discussions are suddenly raised, discussing exactly the same areas that have been covered perhaps two or three times previously.

It is only because Western businesspeople have raised the issue of contracts that these people from the Pacific Rim are now familiar with this method of business agreement. They would otherwise simply continue with a new business ven- ture by word of mouth-nothing signed. Their business philosophy is based upon confidence in people. They will enter into business only with the people they can accept and in whom they have complete confidence. Their word is their bond, and to break a verbal agreement or understanding is to “lose face,” a totally unacceptable situation that would result in complete expulsion from the business and private community. Another reason for these protracted business meetings is that they are not used to contracts and the contracts are in a foreign language; therefore, every word

and line of the contract is reviewed and literally translated into their local language before agreement is reached.

Once a Western company has been established in the Far East with a subsidiary or joint venture company, they then have to comply with local tax situations and are exposed to locally prevailing economic conditions. The drive to move production to the Pacific Rim is to achieve low-cost pro- ducer status together with the hope that the local markets will be available for the products manufactured. China, with over one billion people, is a very attractive market for virtually all commodity items. Some 10 to 15 years ago, the Pacific Rim was an attractive prospect for new manufactur- ing locations with the cheapness of land and labor. China was the number one choice for new locations, with Taiwan, Korea, and Thailand following closely behind. Other coun- tries like Hong Kong, Singapore, Indonesia, the Philippines, and Malaysia were also considerations. With Hong Kong having established itself as the business center for the Far East, ideally a location as close as possible would be preferable. This would rule out Singapore and Malaysia- virtually the equivalent of a transatlantic flight from London to New York. The main centers of these countries have reasonable communication systems, but once away from the key business centers, communication systems generally be- come a major problem. Even now, in many of these coun- tries, there are no satisfactory interconnecting freeways to assist travel from one end of the country to another. The internal flight services, where available, are not recom- mended. Language is an immense barrier here and is one of the main reasons why business relationships carry no further than polite “hellos” and “goodbyes.” This is typical in situations in which the local business partner does not speak English. This is one reason why the Philippines should be the number one choice for locating a cheap manufacturing base, as many of the people are English speaking, land is cheap, and the people are willing to work. Internal commu- nications, however, are poor, there are regular power out- ages, and political disturbances rule out this location.

Korea also suffers from internal communications problems, and away from Seoul, much of the country is still very underde- veloped. Strong labor unions exist here and these unions were successful in raising the average labor rate of pay several years ago, thereby turning many overseas investors away from this country. There are also complicated import and export tax rules in Korea as well as stringent laws goveming overseas investment, all tending to complicate issues and turn away would-be investors. Korea “grew up” overnight when compared to Japan. Evidence of this can be seen with Korea now investing in multimillion dollar plants in the West. Taiwan has built up a signiticant printed circuit manufacturing base with both local and overseas companies. These are, fortunately, nearly all located near the airport, as road transport into and out of Taipei is a disaster. Construction of a new subway system now only exacerbates the problems. Taiwan is

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Mandarin speaking. a little easier than Cantonese, which is spoken in Hong Kong. (Mandarin is easier to learn than Cantonese and is spoken in many parts of Mainland China.) The key risk factor for potential investment in Taiwan is what the Chinese decide to do with this breakaway island. Recently, China has threatened to bring Taiwan back into the fold, but exactly how and what the impact of this move will be on Taiwan is at this stage diflicult to assess.

Thailand has the space, low cost of land, and labor, but this is all it has. Politically, the country is unstable, the infrastructure is poor, and communications abominable. Al- though new freeways are now under construction, it will be several years before they completely link the business areas of this country. Language is a problem, as not many Thais speak English, and attempting to decipher the road and public signs is impossible. The road service around and into Bangkok is a nightmare and when it rains, which is fre- quent, the traffic literally comes to a standstill.

Indonesia and Malaysia have the attraction of cheap cost and are relatively stable politically. The infrastructure is poor and general transport communication is a major prob- lem. Vietnam is opening up by the day and provides an attractive investment possibility. Much of the country, hav- ing been devastated by war, is now being rebuilt, so the possibilities for engineering and construction investment are good. For any high-tech industries, such investments will be

a while before coming to Vietnam and will occur as the local population’s education improves and the local infrastructure provides the requirements of today’s businesses. If one is prepared to accept rice as payment for goods or services, then there is an abundance of possibilities.

Hong Kong has many of the requirements for the invest- ment community, including an excellent business and com- munication infrastructure. Many of the Hong Kong Chinese speak English, with a great majority of them having been educated either in the United States or the United Kingdom. The cost of land and accommodation is now almost prohib- itive and labor costs are no cheaper than Western rates.

With China taking over the Territories in 1997, many potential investments are on hold and the cash flow right now is out of, rather than into, the Territories.

Singapore has always been an obvious choice for off- shore manufacturing but has never realized its full potential. The rather sterile lifestyle brought about by extreme legis- lation, and vigilantly controlled by the authorities, has pro- vided a negative press for this area. The cost of land and labor is cheaper than Hong Kong.

Overall, China, Taiwan, and Korea have been predomi- nantly the number one choice for more recent investment, primarily due to their proximity to Hong Kong, which is now the business capital of the Far East.

China is one of the natural choices for investment. An

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enormous country, it is abundant with labor and cheap land. Politically, the country must be considered unstable as more time passes without the appearance of the Chinese leader. What will happen to China when he eventually dies could affect the political and economic industrial future for the whole of the Pacific Rim countries.

As the government relaxes the grip of communism, more and more of the people in China begin to grow accustomed to the taste of wealth: luxury cars, mobile phones, and apartments with air conditioning and maids.

The transformation that has occurred over the last 1.5 years in China has to be seen to be believed. Shenzhen, a border Chinese town only 30 minutes from downtown Hong Kong, has skyscrapers, luxury hotels, and is full of chauf- feur-driven Rolls Royce and Mercedes Benz automobiles. Not all these luxury cars are Hong Kong businessmen either. The same transformation has occurred in Guangjou also and is being repeated all over China. Land and labor are still cheap, but most of the labor is unskilled as more and more famrers travel down from the north to seek their fortune attempting to gain employment from the numerous indus- tries growing up in the new industrial centers.

Ironically, as the Western world slowly pulls away from recession and growth prospects emerge to enable possibly 2 or 3% targets to be achieved, the Pacific Rim countries are now experiencing a downward trend in their growth figures

and a change in the markets they serve. As labor costs have risen in the Far East and Western manufacturers have shed their excess costs, the cost of the manufactured price be- tween East and West is no longer the differential it once was. Western companies have lowered both direct and indirect costs by shedding jobs and automating wherever possible. Inflation has also been running considerably lower than in the Far East and, therefore, it only takes a few years of this to bring operating costs to similar values. Growth rates in the Far East nevertheless still outstrip those of the West. Korea still has full employment and the economy is still growing at 8.6% with heavy and chemical industries increasing by the same value.

The average growth of the 19 Pacific Rim countries, however, was 4.7% for 1994 and 3.7% for 1995, well below the target figures that were projected in 1992-93. China is the main influence in these figures, with inflation slowly coming under control at 7.4% from highs of double figures during 1994. Austerity money measures in China have slowed the economy, which has affected investment and profitability. Payment terms, not only in China but also in other countries in the region, have now extended to 90 days and more. The Chinese government has also strengthened its control over the numerous taxes imposed, which are quite complicated and varied; as well, it controls the illegal transfer of funds out of China, together with the smuggling

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activities-all impacting negatively on the Chinese econ- omy. This sudden change was not expected by the numerous importers and traders who, during late 1995 and early 1996, imported record levels of goods. These have now hit the market and the traders are having to sell well below cost to reduce high inventories and enable some cash return. In many instances, commodities are selling at levels well below internationally published prices. This situation is affecting the whole trading pattern in the Far East and will have an impact on future investment and profitability.

The overall economy of the Pacific Kim countries shows potentially higher growth forecasts than the West, and, with so much labor and land available, still presents a manufacturing challenge to U.S. and European companies. The next 2 years will bring about much change. China, with its control of internal affairs, the possible change in leadership, the takeover of Hong Kong, and its eventual policy toward Taiwan holds the key to either disaster or success in the Pacific Rim. Whatever happens will also affect the future economy of the West.

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