[PEN-L:7743] Feer article 3: Cannibalize the domestic market! That's the ticket! (fwd)

[Stephen E Philion <philion@xxxxxxxxxx>]

By G. Pierre Goad in Bangkok, Manila and Seoul with Prangtip Daorueng in
Bangkok

June 10, 1999

Even as Asia celebrates the first tentative signs of recovery from its
shattering financial crisis, market-shaping trends that began earlier
this
decade are accelerating. Fast-moving technology is shrinking product
cycles,
while oversupply pushes down prices and profits worldwide. Both trends
challenge
Asia, which prospered by marrying imported technology with cheap labour.

But the biggest challenge is new and vigorous competition from other
emerging
markets. Mexico's exports have tripled in the last 10 years. Brazil is
tied with
China as the second-favourite investment destination for multinationals,
trailing the United States.

Gone are the days when a handful of Asian nations competed mainly with
each
other for export orders and foreign investment. "That party is well and
truly
over," says Jim Walker, chief economist at CLSA Global Emerging Markets.
Annual
export growth of 20%-30%--routine during the Asian "miracle"
years--probably
won't resume. If Asian firms maintain their share of world markets,
Asian
exports will track global-trade growth: 5%-10% in good years, much less
in bad
years.

Asia needs a new source of growth. Luckily, such a source exists and
it's right
here at home. There is a rich seam of productivity gains waiting to be
mined in
Asia's domestic economies. Asia is riddled with formal and informal
cartels and
monopolies; credit and distribution networks are not open to all.
Economies grow
when firms find ways to use their assets--people, equipment, resources
and
capital--more efficiently. The trick is figuring out how to send firms
the right
signals to dig out and refine those productivity gains.

In a deregulated economy, many of those signals come from consumers
exercising
their freedom of choice. Asia's export-led growth model sacrificed or
simply
ignored domestic consumers. Producers were in the driver's seat, and in
1997
they helped steer Asia's economic juggernaut right over the cliff.
Governments
need to put consumers in the driver's seat to sustain the next phase of
Asian
growth.

South Korea is trying to do just that. A protected home market allowed
the
biggest conglomerates, called chaebols, to build huge manufacturing
operations,
in many cases without having to develop world-class design and marketing
skills.
"Mediocre quality at a cheaper price was our strategy," says Jong Hyun
Chang,
managing partner of consultancy Booz Allen & Hamilton's Seoul office and
adviser
to the government on corporate restructuring. The strategy "worked until
China
and Southeast Asia started chasing us," Chang says. "Now we need another
one."

South Korea switched its export focus to emerging markets in the early
1990s, in
what was considered a smart move at the time. Little noticed was that
Korean
exporters were losing market share in developed countries due to quality
problems, rising costs and weak brands. Pulling back from developed
markets
deprived manufacturers of the customer feedback they needed to compete
with the
best, Chang says. They certainly weren't getting that feedback at home,
he adds:
When customers' choice is limited, they can't signal preferences.

Since the crisis, South Korea has passed plenty of legislation to
encourage
competition at home and give consumers more choice. It has allowed
greater
foreign ownership of companies, liberalized foreign-exchange
transactions and
removed import restrictions. South Koreans should be able to buy
Japanese cars
and appliances this year for the first time in more than two decades. A
series
of regulatory changes, including allowing foreign banks to enter the
market, are
designed to force Korean banks to operate for profit, instead of acting
as
instruments of government policy or open tills for expansion-obsessed
chaebols.

If all these new measures are fully implemented "it will be a complete
shift" in
Korea's approach to economic management, says M.G. Sri-Ram Aiyer, the
World
Bank's representative in Seoul. "Now comes the difficult part," Aiyer
says.
"What's needed now is a behavioural change."

How difficult that is can be seen at the Samsung Group, widely viewed as
the
best-run chaebol. It has made substantial changes: Its strongest
subsidiary,
Samsung Electronics, shed 14,000 employees last year and slashed its
debt-equity
ratio to about 170%, from 296% before the crisis. Managing for market
share is
out; managing for cash flow is in.

And yet the Samsung Group is having difficulty figuring out how to
focus. It has
chosen three pillars: financial services, semiconductors and digital
electronics. But financial services is one of the broadest of all
business
categories. Nondigital electronic products and home appliances remain a
huge
business for Samsung, even if they aren't a declared pillar.

Such breadth makes it hard to keep up with technology developments and
consumer
tastes in every product line. At Anson's appliance store in central
Manila,
salesmen have shoved Samsung refrigerators back into a corner to
highlight a
newcomer--China's Haier--that has figured out what Philippine consumers
want.
Haier refrigerators, made in China with European technology, consume
less power,
an attractive feature in the Philippines where electricity is expensive.

Failure to focus also hampers brand building. In South Korea, the same
brand
name can decorate cars, apartment buildings, mutual funds, candy and
microwave
ovens. But in a competitive market, a strong brand is built around
specific
product characteristics. Nestle doesn't sell cars; Ford doesn't sell
apartments.
Lloyd D. Ward, president and chief operating officer of the U.S.
appliance maker
Maytag, says South Korean companies concentrated on building brand
awareness.
"But awareness is not enough. You need to stand for something," Ward
says. "If
all you have is awareness then you can always get trumped on price."
Maytag
became one of the best-known brands in the U.S. by hammering home the
message:
Maytag stands for reliability.

As Asia's former tigers grapple with all the implications of market
liberalization, they can look to the Philippines for encouragement.
During the
1980s, the Philippines' real GDP grew an average of just 1% a year. But
after
taking office in 1992, President Fidel Ramos improved banking regulation
and
cracked open domestic cartels. Annual GDP growth averaged 3.3% from 1990
to
1997, with almost all of the growth coming after 1992.

Consumers have been big winners. Telephone service--an essential
business
tool--was spectacularly bad in the old monopoly days. Some customers
waited a
decade for a telephone line. When it finally faced competition,
Philippine Long
Distance Telephone managed to work through its installation waiting list
in two
years.

Some Asian companies haven't waited for governments to take the lead.
They've
had to compete harder and innovate just to stay alive over the past two
years.
"This situation has taught us so many things," says Churat Pasupa, who
together
with his brothers runs Chueng Chai Hah, a steel-distribution business in
Bangkok's Chinatown. When the REVIEW last visited Chueng Chai Hah in
early 1998,
Churat was sure the family business would survive Thailand's economic
crisis,
though he wasn't entirely sure how.

"In a way it's good that business slowed down. We had time to think,"
Churat
says now. Chueng Chai Hah buys big coils of flat-rolled steel, which it
then
cuts and sells to the construction industry and makers of auto parts and
electronics components. Sales to companies that make computer cases and
PC parts
kept the company alive as demand from the construction and auto
industries
plunged.

The family didn't gamble on real estate or grandiose expansion projects
and is
on friendly terms with its banker, Thai Farmers Bank. Still, credit is
tight.
Most deals with suppliers and customers are on cash terms or close to
it. That
means Churat has to make better use of his capital by leaving less tied
up in
inventory. This lowers Churat's operating costs, and at the same time
frees up
capital in the economy for someone else.

Clone that behaviour across the Thai economy, in businesses large and
small, and
the result will be a substantial gain in national productivity--and
hence in
economic growth. Just look to the U.S. economy, booming in part because
companies such as Dell Computer decided to treat capital as a precious
commodity
with the aim of improving productivity.

Tight credit has forced another change on Chueng Chai Hah. The company's
customers, seeking to preserve their own capital, are demanding smaller
and more
frequent deliveries. In the miracle years, Chueng Chai Hah sometimes
turned down
small orders, but it can't now. "We had problems at first because our
system was
designed for big orders," Churat says. "We modified our structure and
now we
have learned how to do it more smoothly."

Giving customers what they want, when they want it is a formula for
success in
services and manufacturing, at home and in export markets. By breaking
up
cartels and other barriers to entry, governments can force companies to
be
competitive--and fuel the next Asian boom.

And when the boom resumes, then what? Churat says there will be no going
back to
the old ways. His customers are facing new competition from foreign
investors;
they--and he--will have to stay nimble. "This is the trend," Churat
says.