Asia Inc Nov 1993
ECONOMICS: Can Asean finance its future?
How Asean Must Finance Its Future
China, India and Vietnam have Suddenly become fierce rivals for Investment
Funds, Southeast Asian Nations that Want to Maintain Brisk Development Face
New Dangers--and Will Have to Seize New Opportunities
Mansoor Abdullah of the Malaysian Industrial Development Authority has been
spoiled with graphs that ascend skyward. For years he has been the harbinger
of good news, announcing foreign investment numbers that add to the size
of Malaysia's budget, revenue projections and infrastructure plans.
But the numbers flashing on his computer screen recently have been dismal:
In the first half of 1993 foreign investment in Malaysia dropped by a whopping
80 percent. "We will have to adopt a focused approach," he says. "The world
is getting very competitive. We will have to target industries and seriously
go after development funds."
Abdullah is not alone. Member-states of the Association of Southeast Asian
Nations (ASEAN) are discovering that the glorious days when foreign investors
walked in with bulging project files are receding fast. Countries that once
spurned foreign investors, ensnared them in a bureaucratic web or booted
them out -- China, India and Vietnam -- now offer bigger opportunities, cheaper
labor and in India's case, superior skilled professionals.
Thailand, the Philippines and Malaysia suffered alarming drops in foreign
investment in 1992, continuing a trend that began in 1991 when investment
fell 19 percent in Malaysia, 38 percent in Indonesia, 55 percent in Thailand
and 57 percent in the Philippines. Indonesia and the Philippines saw investments
drop by one- third for the first half of 1993. In Jakarta a somber state
minister for investment, Sanyoto Sastrowardoyo, emerged from a high-level
meeting with economic ministers in late July asserting that Indonesia will
maintain its momentum. But inside the meeting his message was different:
The going will get tough.
Can Southeast Asia keep up with growth momentum elsewhere in the region?
Most authorities seem to think it can, but agree with Sastrowardoyo: ASEAN
states will have to adjust to a world in which competition for development
capital never has been fiercer -- both from outside the region as well as
from some of the more promising or better-promoted economies within ASEAN.
The main rival for investment funds is, of course, China. Market reforms
and a subsequent economic boom, however out of control, have once again revived
the world's dreams of profits in the middle kingdom. The Chinese boom, though,
is not the only reason why new investments in ASEAN are declining. The investment-worthiness
of other nations is also altering the landscape. "We are losing out not just
to China, but also to India and even Thailand," said Asril Noer of Indonesia's
Investment Coordination Board at that Jakarta meeting. But the jury is still
out on whether the region will lose its competitive edge permanently. There's
still time for the region to regain strength by wooing investment from the
West, boosting labor skills and focusing on higher technology. And if ASEAN
can't beat out new competitors for funds, then it can join the fray and invest
in those new emerging economies to ensure market access.
The latest 1993 year-end projections for Indonesia suggest the nation will
receive no more than $9 billion in foreign investments this year, down as
much as 20 percent from 1992. For Jakarta that is bad news, since the only
revenue change its economists foresaw in this year's budget was a reduction
in foreign aid (a pragma-tic adjustment considering international protests
over the shooting of demonstrators at Dili, Timor, in 1991). But foreign
economists are skeptical about even the boom-year figures. Jakarta claimed
a 34 percent increase in foreign investment in 1992 to about $10 billion,
but foreign analysts were quick to point out that Jakarta's intrepid bookkeepers
had reclassified a 1991 $1.6 billion plastics project as "foreign" and not
"domestic" investment, thus distorting the numbers. If that project is factored
out, foreign investment in non-oil and non-finance industries in Indonesia
actually fell 22 percent in 1992.
These statistics are not trifling -- they affect the rice bowl. At an eclectic
gathering of the region's top businessmen last April, Singapore's Economic
Development Board chairman, Philip Yeo, was characteristically frank to his
Indonesian neighbors: "If foreign investments stop coming to ASEAN and go
to China, the biggest loser will be Indonesia. I have to worry about only
50,000 jobs a year; you have to worry about creating 2 million jobs a year."
The Chinese terms for crisis (Weiji) embraces the separate characters for
danger (Wei) and opportunity (Ji). For Indonesia, Malaysia, the Philippines
and Thailand, China's hunger for foreign investment represents crisis in
its first sense: danger.
But for Singapore, it represents an opportunity. Singaporean businessmen
are finally getting off the slow boat and scrambling to get onto any hovercraft
that can take them to China. They can afford to. Unlike its neighbors, Singapore
reported a record $1.2 billion increase in foreign investment commitments
for the first half of 1993. In fact, there is an embarrassment of riches
in Singapore: no foreign debt, a government running surplus budgets, a strong
currency and a stable of CEOs in towering skyscrapers admiring the panoramic
Investment-hungry countries have been making periodic visits to Singapore,
trying to lure the republic's corporations to their industrial parks, free
ports and export promotion zones. But few investment officials have received
as much attention as China's tough-talking trade minister, Wu Yi. She grabbed
the pulpit at a recent conference to admonish Singaporean businessmen for
not investing enough in China, characterizing their investment (estimated
at $139 million in 1990) as "small potatoes."
Senior Minister Lee Kuan Yew and other Singapore leaders couldn't agree with
her more. They have been exhorting their risk-averse businessmen to become
entrepreneurial -- not just by investing in the Growth Triangle (a joint
development linking Singapore with Malaysia's Johor state and Indonesia's
Batam Island), nor in the investment flavor-of-1993, Vietnam -- but by taking
the big leap of faith into China.
Lee likes to lead from the front. He recently undertook two high-profile
visits to China and assessed projects Singaporean leaders are interested
in. In Suzhou, for example, a Singaporean consortium is planning to develop
a 70-square-kilometer township -- though at the moment nobody knows who will
pick up the $20 billion tab since Singapore has promised only "managerial
software expertise." Keppel Corp., a Singapore government-linked company,
will lead the project.
For the rest of the region, falling foreign investment is not the sole problem.
Domestic investment also is declining. In Malaysia and Indonesia new investments
have fallen by as much as one-third. "These economies have major downside
risks," says Mukul Asher, who teaches economics at the National University
of Singapore. "They have made no preparation to face this eventuality. If
foreign investment drops, they do not have much to fall back on."
In the meantime, ASEAN-based companies are pumping billions into China (see
page 59). According to the Bank of Thailand, Thai investment abroad rose
to $176 million in 1991, up from $24 million in 1988. Not surprisingly, last
year Thailand was the eighth-largest investor in China. With foreign investment
approvals collectively falling, economic prospects for the region are distinctly
less rosy. "The chase for foreign investment is not necessarily a zero-sum
game, but without innovative measures and specialization, Southeast Asia
could find it harder to obtain the seed capital it needs to sustain its industrialization
momentum," says Sanjoy Chowdhury, Merrill Lynch's chief economist for the
He dismisses as simplistic the view that the China fever is temporary: A
slowdown in foreign investment in China wouldn't necessarily return the funds
to ASEAN. India and Vietnam will be the logical alternatives, he says, and
China itself will remain on the main menu for several years to come.
Even recession-hit Japanese companies have been bit by the China bug. The
Research Institute of Overseas Investment in Japan surveyed 158 leading Japanese
businesses in June and found that 84 percent of the companies viewed China
as their top investment destination for 1993 and beyond. While Japanese officials
say their investment in China is not at the expense of ASEAN, statistics
reveal the exact reverse. Japanese investment in China rose 65 percent in
1991, while its investment in the region fell 9.5 percent. "A large flow
of direct investment into the ASEAN countries began in 1987 but peaked in
1990 and has since branched off toward China," says an economist at the Japan
External Trade Organization. "Foreign investment in ASEAN is declining: In
1992 it fell 17 percent."
Investment diversion from the region is more obvious in Taiwan's case. Until
1991 Taiwan was the top foreign investor in Malaysia and Indonesia. But it
dropped to the fourth and sixth positions respectively in those two countries
last year. Taiwan's investment in Thailand and the Philippines also fell
At the same time, Taiwan's investment in China grew threefold to $5.5 billion.
Cumulatively, Taiwan is now the fourth-largest investor in China, following
Hong Kong (which accounts for some 60 percent of all foreign investment in
China), Japan and the U.S.
Some of ASEAN's fears are illusory: Nobody really knows just how much is
actually invested in China. What's known is that China issues foreign investment
figures based on project cost and these figures reflect investment commitment
rather than actual inflow of foreign capital. China announced foreign investment
of $57.5 billion last year; if true, that's a 380 percent jump. And despite
an overheated economy, Chinese leaders talk of another $80 billion to $100
billion in foreign investment this year. Such figures worry investment-dependent,
populous countries like Indonesia, which fears a flood of investment in China
will mean a drought for it. "Take heart, the 80-billion figure is impossible,"
says an incredulous regional economist, who cites a recent World Bank study
as evidence backing his skepticism. According to the World Bank, China actually
received $3.4 billion in 1991 -- a far cry from the $11 billion it claimed
for that year.
Nevertheless, China's seductive appeal is strong. Toh Thian Ser, who teaches
management at Nanyang Technology University in Singapore, explains the dilemma
succinctly: "On one hand, China represents a large market. But on the other,
its very attractiveness gives rise to the danger that investment in our home
countries could decline rapidly and lead to the hollowing out of the industry."
Although the region may lose out to new investments at home, it does have
one critical advantage in ensuring its market access to China: the overseas
Chinese diaspora. Ethnic Chinese in the region presumably go armed with the
prized guanxi (connections) when they pound the pavements of China's Putian
and Pudong. Some ASEAN companies also possess the expertise and technological
competence to find niches in China. Says Loy Hean Heong, chief executive
officer of MBf Holdings Bhd.: "There is tremendous opportunity for trade."
However, being Chinese in Southeast Asia implies treading on a minefield
of sensitivities. So the region's rich hua qiao or overseas Chinese -- Robert
Kuok and Vincent Tan of Malaysia, Dhanin Chearavanont of Thailand, and Liem
Sioe Liong, Mochtar Riady and Eka Tjipta Widjaja of Indonesia -- appear to
be following a trend already set by their Hong Kong-Taiwan cousins (see "Homeward
Bound," Asia, Inc., August 1993). These billionaire investors' plans for
China attract visibility because some of them haven't launched similar projects
at home, even when their countries are crying out for foreign investment.
By doing so, they are providing fuel for their enemies in the political arena.
On a hot May afternoon in Kuala Lumpur, Malaysian opposition leader Razaleigh
Hamzah seized upon the issue: He resurrected ghosts from the past when he
questioned the loyalty of Malaysian Chinese businessmen investing in China.
Leo Suryadinata, a Singapore-based expert on Southeast Asia's Chinese, describes
the politics succinctly: "Old passions are difficult to eradicate. If the
economy does well, nobody will complain. But if it does badly, there can
be serious repercussions." He points out that just last year PT Sinar Mas
got embroiled in controversy when it decided to hire hundreds of Chinese
technicians to build a power plant in Indonesia. It led to a huge outcry,
forcing the government to cancel the work permits of the mainland Chinese.
In Hong Kong, the Political and Economic Risk Consultancy ominously referred
to "ethnic fault lines" in a recent report: "Potentially adding insult to
injury is the perception that ethnic Chinese who have built their fortunes
in Southeast Asia now may be using their wealth to develop business in the
mainland at the expense of local economies."
Hamzah's question retains potency in Malaysia, where, despite two decades
of affirmative-action policies favoring indigenous Malays, the Chinese continue
to prosper under Ali-Baba partnerships (where an ethnic Malay nominally heads
a business that the Chinese partner actually runs). Of the 172 industrial
companies listed on the Kuala Lumpur Stock Exchange, Malaysian Chinese control
more than one-third, including prominent groups like Berjaya, Genting, Hong
Leong, Sungeiway and YTL Corp.
In response to Hamzah's charges, Prime Minister Mahathir Mohamad led a jumbo-jet
load of Malaysian businessmen to Beijing, where Malaysian companies signed
several deals. In Singapore, too, China fever is running high, with company
after company drawing up grand plans to develop ports, roads, power plants,
breweries and real estate. For example, the prize deal of developing the
Shenzhen airport went to Ng Teng Fong's Far East Group. And in Indonesia
President Suhartoe went out of his way to support ethnic Chinese businessmen
wanting to invest in China.
The magnetic pull of China is only one reason why investment is falling in
the region. Pollution, labor shortage, a paucity of skills and the global
economy's faltering growth are other equally valid reasons. In addition there
are continuing infrastructure bottlenecks: Energy continues to be a major
worry, for example. Thailand, the Philippines, Indonesia and until recently
Malaysia have seen severe power shortages limit their growth. Warns Robert
Booth, a joint regional coordinator for a major World Economic Council energy
study: "The Pacific region, excluding South Asia, will need access to over
$510 billion over the decade to finance its power sector alone."
In order to meet such challenges and prepare for the Pacific Century, the
region's governments and business leaders must adjust to a more competitive
and demanding investment scene. However, they may console themselves with
the thought that if enlightened policies prevail, ASEAN will not lack investor
"If we look at price-earnings ratios and how they compare with economic growth
rates, there's no question in my mind that (this region has) the growth stocks
of the '90s," says Thomas Robinson, Merrill Lynch's chief international equity
strategist. "And yet they are not priced like growth stocks. They're not
priced to the (region's) level of economic growth. We're going to see that
as one of the key driving forces (in financing) Asia to the year 2000."