Asian Blues Make Way to Distant Shores

By JOHN-THOR DAHLBURG

Aug. 9, 1998 12 AM PT

TIMES STAFF WRITER

PARIS —

The Asian crisis has begun to infect Europe: Marble quarries in northern Italy, raw-cotton vendors in Germany and cognac distillers in France are watching their markets half a world away wither or disappear.

Though Europe remains on an upward tick and does far more commerce within its own borders than anywhere else, Asia’s troubles have so many tentacles that many here are braced for a worsening economic picture.

There is particular fear about a flood of Asian products newly cheapened by the collapse in that region’s currency values--cut-rate, cutthroat competition for home-grown companies and workers.

“I’m worried because we haven’t yet felt the shock wave from the Asia crisis,” said Paolo Fresco, president of the Italian auto maker Fiat, which already competes with Japanese and Korean imports.

Meanwhile, Italian fashion designers, purveyors of such trendy status symbols as Ferragamo shoes and Prada handbags to the nouveaux riches of Bangkok and Hong Kong, have lost $570 million in export sales, the trade federation Federtessile says.

For French distillers, the Japanese and Southeast Asian market, the No. 1 consumer of the priciest cognacs 15 years old and older, has collapsed, dropping 23.7% in a single year. Lost sales of more than $165 million are forecast in 1998.

“The Charente [cognac-producing region] wine industry is a disaster zone, like textiles or steel,” said Philippe Sabouraud, member of a local grape growers association.

And last month, Bouygues, a French construction firm, stopped building a giant railway station in Kuala Lumpur when the Malaysians stopped paying. Asea Brown Boveri, the Swedish-Swiss engineering giant, has said Asia’s woes may cost it $550 million in lost or canceled orders.

European Banks Risk ‘Haircut’ in Asia

European banks’ exposure in Asia is almost five times that of their warier U.S. competitors: a total of $179.5 billion in loans at the end of 1997, according to Jerome Booth, head of research of ANZ International Bank in London.

So if the Asians do not make good on their IOUs, it is essentially the bankers in Frankfurt, Paris, London and other Old World financial capitals who will have to take what in banking circles is jocularly referred to as a “haircut.”

In the main, the Asian crisis so far has been a lot worse for the United States than for Europe. That’s because Asia absorbs about one-third of all U.S. products sent overseas but less than 10% of what the 15 nations of the European Union export.

The back-of-the-envelope arithmetic looks like this: Asia’s troubles have been graver than originally predicted. But a continuing domestic rally in Europe and increased demand in the United States and other areas of the world have been stronger than forecast.

The net result, at the moment, is roughly a wash.

The Asian downturn may slice 1.5% off U.S. growth this year, American economists estimate. In the European Union, which does nearly two-thirds of its trade within its own borders, stretching from Ireland to Finland to Greece, the punch will be much softer.

Side Effects ‘Still Marginal’ for Europe

Jacques Santer, European Commission president, predicts that the EU’s overall growth rate will be pared by no more than 0.5% in 1998. For Europe, Santer says, the side effects of what has happened in Asia are “still marginal.”

Take commercial jetliners as one illustration. Boeing Co., the single biggest U.S. exporter, had 377 orders on hand from the Asia-Pacific region when the year began--about a third of its entire order book. For its only competitor, Europe’s Airbus Industrie, the exposure to possible cancellations because of Asian turbulence was a lot less: 150 out of a total of more than 1,000 orders.

“For Europe, Asia is only a small niche of the marketplace,” Yves-Thibault de Silguy, the EU’s commissioner for monetary affairs, has pointed out.

So although some businesses and some countries may be hurting more than others, the European Union is still reported to be on course for 3% growth this year.

There’s even a silver lining to Asia’s gloom: The price of raw materials that most European nations must import has been kept low because of reduced Asian demand, with crude oil now at its cheapest in 12 years. Interest rates have also hit bottom. Both factors have given domestic European demand a boost.

“The world economy is in good shape,” Guenter Rexrodt, Germany’s economics minister, has said. “The Asia crisis can be managed without the threat of a U-turn in global economic development.”

Not everybody, though, is so sanguine. Parliament Speaker and Rexrodt foe Joschka Fischer, who may become Germany’s foreign minister if his Greens party and their Social Democrat allies win the Sept. 27 general election, maintains that “the Asia crisis is as dangerous as the Balkan conflict--just without blood.”

British Prime Minister Tony Blair, hosting a European economic summit earlier this summer, also sounded the warning siren: Asia’s crash and Japan’s recession, he said, make up “the greatest risk for the world economy in 20 years.”

In fact, what many business leaders fear is not Asia’s year-old crisis as such, but the likely medicine that countries like Thailand, South Korea or Japan may have prescribed for themselves: a big increase in exports, cresting on the lowest exchange rate of the Japanese yen in seven years and anemic values for other Pacific Rim monies.

‘Asian Export Boom’ Expected in 1999

In Europe, that would make made-in-Asia goods a lot cheaper, threatening European companies on their home turf and other continents as well. And for makers of South Korean color television sets or Thai silk ties, Europe has suddenly become a much more crucial market because buying power at home has plummeted.

Deep discounts in import pricing are already being seen in some sectors, such as steel, market watchers report. But it is only in 1999, according to Flemings Research, the London-based investigative arm of a British investment bank, that Europe will be swamped by an “Asian export boom.”

Dominique Strauss-Kahn, France’s Socialist finance minister, notes that this would hit the continent just as France and 10 other European nations are heading toward the uncharted waters of their new common currency, the euro.

Japan has a $4.2-trillion economy that outstrips Europe’s two wealthiest countries, Germany and France, combined. The Asian giant’s resolution of its profound troubles is the key to Asia’s recovery. If the Japanese do not take steps to soak up more of Asia’s output, a good deal of it will end up in Europe, specialists here say.

Meanwhile, the plunge on Wall Street has generated jitters that the U.S. market, even more vital because of Asia’s infirmity, may be catching cold itself--a turn of events that would be a calamity for Europe.

For all the threat from Asia, though, the crisis has also given Europeans an abundance of opportunity to strike bargains. Crashed currencies mean they can buy a lot more Korean wons or Indonesian rupiahs for their British pounds or German marks, inflating their buying power.

When Asian economies, currencies and real estate took a dive, Boots Inc., a major British drugstore chain, sensed an opening. It is opening four stores in Tokyo as part of a grand plan to expand in the Far East.

“Even in a recession, or especially then, people still get headaches,” said Francis Thomas, an executive in the drugstore group’s corporate affairs division.

Gucci, the Italian fashion group, had been exporting 44% of its designer-label goods to Asia and has seen a 10% to 15% drop in overall sales. But it has also jumped at the chance to grab direct control of distribution, buying back recession-rocked franchises in South Korea, Taiwan and Guam.

Such bottom-fishing means that Asia’s woes have not been all gloom for Europeans--far from it.

“The collapse of the stock market [in some Asian countries], the collapse of the absolute values of companies in these areas are also creating opportunities for purchases and renewed interest by Italian investors in acquiring stocks and properties in countries like Hong Kong,” said Franco Pavoncello, professor of political science at John Cabot University in Rome.

Capital flight from Asia has also been a boon for Europe’s stock markets and a shot in the arm for companies hungry for investment so they can grow.

With foreign funds flooding in, the Paris bourse’s benchmark CAC-40 index, just to take one example, has set 52 record highs since Jan. 1. The Canard Enchaine, a French weekly, reported last week that foreign pension funds, essentially American, now own nearly a third of the stock of France’s 40 largest publicly listed corporations.

Some Europeans see little in the Asian crisis to worry about. Daniel Beaumont, a consultant at Associes en Finance, a Paris-based consultancy, calls it the bursting of distant real estate and stock market bubbles:

“If I’m a small or medium-sized business in France, whether a square meter of Hong Kong real estate costs 300,000 francs, 400,000 francs or 100,000 francs [$50,000, $66,600 or $16,600] makes absolutely no difference to me.”

Wrong, at least for Britain’s slowing economy, Jason Elles would say. Elles is head of the corporate recovery sector at the London offices of Ernst & Young, a large accounting firm. Clobbered by a mix of the high British pound, rising interest rates and evaporation of sales to Asia, many British manufacturers, especially small and medium-sized companies, are predicting losses for the second quarter running. Among the hardest hit are upscale retailers and makers of car components.

“We are seeing some orders dry up completely,” Elles said.

It has also spread to the northeast of England, a hotbed of the Industrial Revolution now fallen on tough times. A year ago, Queen Elizabeth II visited Tyneside to inaugurate a microchip factory. For 1,100 people in one of England’s most depressed areas, the new plant meant a job and hopes for a new life.

About a week ago, they were out of work. Siemens, the German firm that owned the plant, shut it down.

“The long and severe downturn in the global semiconductor market, which has been greatly exacerbated by the crisis in the Asian economy, has forced us to make this tough decision,” Chief Executive Alan Wood said.

Times foreign bureau assistants Janet Stobart in London, Maria DeCristofaro in Rome, Christian Retzlaff in Berlin and Christine Winner and Sarah White in Paris contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Asia’s Tentacles

Europe has fewer ties to Asia than does the U.S. but remains vulnerable. Latin American growth is expected to slow abruptly.

Europe

* Europe trades less with Asian nations than the U.S. and except for banks, the crisis’ impact on the continent so far has been offset by Europe’s growth.

* Percentage of total merchandise exports to Asia in 1997

European Union: 9.8%

U.S.: 31%

* Outstanding orders for airliners from Asia-Pacific countries

European Union (Airbus): 150 planes

U.S. (Boeing): 377 planes

* Source of $381 billion lent to Asian banks at end of 1997

European Union: 47.1%

U.S.: 9.7%

Latin America

The Asian crisis is having a direct effect on growth in two key economies:

1997